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Element Solutions Inc  (NYSE:ESI)
Q1 2019 Earnings Call
May. 01, 2019, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, ladies and gentlemen, and welcome to the Element Solutions 2019 First Quarter Financial Results Conference Call. This call is being recorded. At this time, all participants have been placed in listen-only mode and the floor will be open for your questions following the presentation. (Operator Instructions)

It is now my pleasure to turn the floor over to Yash Nehete, Senior Associate, Corporate Development and Investor Relations. Please go ahead.

Yash Nehete -- Senior Associate, Corporate Development & Investor Relations

Good morning, and thank you for participating on our first quarter 2019 earnings conference call. Joining me this morning, our Executive Chairman, Martin Franklin; CEO, Ben Gliklich; President & COO Scot Benson, and CFO, Carey Dorman. Please note that in accordance with Regulation S-T 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 Element Solutions' is strictly prohibited.

During today's call we will make certain forward-looking statements that reflect our current views about the company's future performance and financial results. These statements are based on certain assumptions and expectations of future events that are subject to risks and uncertainties, please refer to Item 1A of our most recent Form 10-K for a discussion of the most significant risk factors that could cause actual results to differ from our expectations and predictions. Please note that in the earnings release and the supplemental slides issued and posted today, Element Solutions 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 financial measures, please refer to the release and slides which can be found on the Company's website at www.elementsolutionsinc.com in the Investors section under News & Events.

It is now my pleasure to introduce Martin Franklin, Executive Chairman of Element Solutions for opening remarks. Martin?

Martin E. Franklin -- Executive Chairman

Thank you, Yash. And good morning everyone. Thank you for joining our call. My -- introductory remarks will be brief, but I felt it important to make a few comments about our team's accomplishments during the first quarter. We had a very productive quarter. Our transformation is well under way and Ben and his team are doing all the right things internally to laid the foundation for a bright future.

Our new leadership team is bringing the fresh-thinking and the energy we expected and our people around the world are reacting enthusiastically to these changes. Given the new office of the Chairman structure, I have a much closer view of our commercial, functional and strategic activities. You will hear more specifics bout progress throughout the call. And I believe we are moving in the right direction. Whereas in most focus is people and culture and we're really making strides there as well. Our new leadership team has gelled nicely and we are very pleased with the additions to our Board announced last week. Chris Fraser, Former Chairman and CEO of KMG Chemicals is a deeply experienced chemical industry executive who brings a great background and ability to contribute to our Board. I'm delighted to welcome him to our ranks. We're also very happy to add, our President and COO, Scot Benson to our Board.

So after the close of the Arysta transaction, we repurchased 37 million shares or approximately 13% of our shares outstanding at the end market price. We were happy to be able to buyback that many shares in a single transaction and believe that transaction will translate to material long-term value creation. This buyback for our leverage up to our Cap of 3.5 times. So between our cash flow generation and earnings growth over the balance of the year, we believe leverage should be at 3 times or below again by the end of the year borrowing any further buybacks.

We will continue to be buyers of our own stock at these valuation levels should that opportunity arise as our leverage improves -- our leverage ratio improves. As you'll hear, our end markets have been quite challenging and our progress exceeds what the numbers show for the first half of this year. Our time horizon here is long and we believe we are doing the right things foundationally to set this company up for long-term success and to maximize benefit from end market recovery.

With that, I'll let Ben, Scot and Carey take you through the quarter and will rejoin for the questions at the end. Ben?

Benjamin Gliklich -- Chief Executive Officer

Thank you, Martin. And good morning everyone. Starting on Slide 3, as Martin said, we had a very productive quarter from the close of the Arysta transaction on January 31st and the subsequent launch of our new Company together with our share repurchase this was an active three months in addition to our ongoing commercial operations. We made progress on many fronts. We solidified our leadership ranks with an internally organization, most notably with my stepping into the seat, as where -- in the CEO seat, as Rakesh Sachdev retired and Carey Dorman, promotion to CFO and we added to our Board. As Martin mentioned, we are excited to have Chris Fraser and Scot Benson joined us on the Board as of last week.

Our reorganization also materially contributed to our cost savings which are coming along the one. We realized an additional $3 million of cost savings in the quarter, and that delivered $8 million cumulatively in the last three quarters. We are well on our way to our goal of $25 million in annualized cost savings that we committed to in the context of the Arysta sale. Since February 1st, we spend a lot of time on the road communicating our vision for the Company. Our strategy and our cultural priorities internally to our colleagues around the world and to investors. We were pleased by the receptivity and look forward to seeing more of you and going into more detail at our Investor Day in New York on May 20th.

Our end markets did not help us this quarter. The softness we saw toward the end of last year persisted into Q1 with mobile device industry shipments continuing to be down in the mid-teens and the automotive market, particularly in China remaining quite weak. These are two of our biggest end markets and their softness translated into a weak top line. We offset this weakness through cost actions resulting in adjusted EBITDA growth of 1% year-over-year on a constant currency basis. Despite our topline being down 3% organically. The resilience that our variable cost structure provides is a hallmark of our businesses in periods of macro weakness, like the one we are in right now.

Cash flow generation was strong. Excluding the impact of our capital structure for the month of January and transaction costs, the business would have generated $54 million in free cash flow on an adjusted basis in the first quarter. We believe the cash flow characteristics of our businesses and the returns on capital are a real distinguishing factor which unfortunately were obfuscated by debt service and the legacy platform structure, balance sheet and Arysta working capital requirements.

This will change this year. Even with the challenging market environment and we look forward to that cash flow showing up on the balance sheet. We do not expect a recovery in Q2, but we are optimistic for the second half as our customers and the overall industry tone are positive looking toward that period. In that context, we are reaffirming our full year adjusted EPS guidance of $0.82 to $0.87. But moderating our organic top line expectations given the persisting pressure we see in our end markets.

On Page 4 you can see more detail on our first quarter 2019 financial results. We reported net sales of $460 million and adjusted EBITDA of $99 million. Net sales declined 3% on an organic basis year-over-year while adjusted EBITDA was up 1% on a constant currency basis. We anticipated the continued softness in higher end mobile and automotive markets as well as lagging industrial production across Europe and Asia and during the year. And we do believe our business is meaningfully outperformed these end markets. Our electronic segment experienced an organic sales decline of approximately 5% in the quarter, with another 4% headwind from FX translation.

Semiconductor solutions realised modest organic growth while assembly solutions are 2% organic net sales decline. Our Circuitry solutions business accounted for most of the organic net sales decline in the segment at, it is more directly tied to higher end mobile markets which saw the most severe demand softness in the quarter. Our semiconductor solutions products continued to perform well in the electric vehicle, defence and telecom markets despite a broader slowdown in ship growth in Q1. We've introduced new products and continue to gain traction in the advanced packaging market within the semiconductor space. Assembly Solutions experienced more mixed end markets, but its diversification helped offset some of the negative volume trends that more directly impacted our circuitry business.

Most of the softness we experienced within our Asian business and we believe some of that is driven by the ongoing trade tension, which we hope will be resolved soon. Our Industrial and Speciality segment organic net sales were flat year-over-year with growth and energy solutions and some volume softness in Graphics, driven by a slow start to the year in that market, particularly Europe. Our Industrial Solutions vertical experienced flat organic net sales has share gains and increasing pricing offset negative trends in automotive related products. This lead to overall organic net sales growth in the Americas and Europe and declined in Asia, primarily China due to automotive units.

Adjusted EBITDA was up 1% year-on-year on a constant currency basis. The negative $6 million impact of FX translation this quarter was consistent with our prior guidance and driven largely by the yuan, euro and pound. We drove margin expansion, despite a declining top line through successful execution on our corporate restructuring plans containment of variable operating expenses and certain procurement and supply chain savings initiatives.

As we progressed through the year, we anticipate these cost savings will increase, as many of the actions were mid quarter or have been actioned, but not yet realized into the P&L. Our supply chain actions list continues to grow, and many of the markets where we are seeing or expecting growth are higher margin opportunities for us. This should also provide an expected margin tailwind. We'll provide more detail on this progress at our Investor Day.

GAAP loss per share this quarter was $0.02 impacted by FX and one-time items associated with the Arysta sale and offset by reduced interest expense and a lower share count. Adjusted EPS of $0.20 this quarter represents a significant improvement over the prior year adjusted EPS of $0.04, due primarily to the improved balance sheet and our share repurchase. This first quarter demonstrated the resiliency of our businesses against dramatic swings in end markets. We believe our highly variable cost structure and our sticky customer relationships help mitigate challenging macros and preserve margins and cash flow. We know how to navigate challenging markets and what levers to pull in those times to deliver financial outperformance.

With that, let me turn the call to Scot to provide more color on our activities and the end markets. Scot?

Scot R. Benson -- President & Chief Operating Officer

Thanks, Ben, and good morning everyone. In the electronics segment, we have seen a continuation of Q4, 2018 industry volume trends. The most impactful to us has been weakness in higher-end mobile phone supply chains in China and Korea. However, this is not just been the share shifting story to lower priced devices, as overall mobile units were down double-digits year-over-year in Q1. We believe that this has both macro drivers like trade tension and slower global GDP growth as well as replacement cycle drivers, as model over model innovation is slowing and consumers await 5G phone launches.

We have also previously discussed the increasing electronic content in automotive there is an important growth driver for our business, which of course is also been impacted over the past few quarters by lower auto production, despite content per unit continuing to increase. Ultimately we believe most of these cycles will reverse and we believe our businesses will be well positioned when they do. One major initiative we have undertaken in the past several quarters is the integration of our former electronics and assembly businesses under a new MacDermid Alpha brand. We have taken two powerful businesses with similar end markets and related customers and combine them into one product portfolio, commercial organization and supply chain. This new business offers a broad product offering and electronics expertise to our customers and to OEMs.

Our objective is to provide a single touch point for electronics chemistry solutions and we are already working on several needle moving initiatives that benefit from the combination of products, technologies and our development capabilities. As new technologies and smartphone features such as larger display screens and newer camera modules, drive the need for more complex printed circuit boards and assembly materials, MacDermid Alpha should benefit in a meaningful way.

The ongoing trade tensions with China are disrupting certain customers production and pushing several key electronic manufacturers to transfer production to other countries. As we have highlighted in prior calls, we have a highly adaptable supply chain and have been investing in growth markets outside of China to meet this demand. We continue to monitor the situation and we'll work directly with our customers and tier ones to ensure our part of their global manufacturing process is as efficient as possible. As we look to the rest of 2019, we currently have cautiously optimistic view toward a second half pick up, which aligns with the phasing of our financial guidance for the year.

In our Industrial and Specialty segment, we experienced relatively flat organic net sales in the quarter as we were able to benefit from certain pricing initiatives and share gain opportunities in Industrial Solutions. This helped to offset some declines in automotive markets, specifically in Europe and Asia. We continue to work on new product development across our Industrial Solutions portfolio as evolving technologies in automotive markets required greater reliability standards for our surface treatment chemistries.

In Graphics Solutions although we experienced slower market conditions in the first quarter, we expect recovery in the balance of the year and have seen green shoots in April. Our primary focus has been in emerging markets, such as China and India, where we are still seeing a transitional shift of analog to digital within the flexographic printing space itself. We have also successfully launched several new products to meet the increasing demand for flexo print quality. Energy Solutions grew during the first quarter, but we expect the rest of 2019 will be negatively impacted by the loss of a piece of business in March. Overall our commercial teams have embraced Element Solutions and have a clear focus on our operational strategy of driving growth through innovation and service. We believe our end market weakness is cyclical not sector specific and that we will be well positioned to return to above market organic growth once the markets recover.

Now let me turn the call over to Carey, who will discuss cash flow and our balance sheet. Carey?

Carey Dorman -- Chief Financial Officer

Thanks, Scot. On page 6, we provide an update on our cash flow and our balance sheet for the first quarter. We completed the sale of Arysta on January 31st. So this quarters reported cash flow burden by one month of interest expense from our prior capital structure. If we were to assume that the Arysta transactions had closed, and our new capital structure have been in place at the January 1st would have generated approximately $54 million of free cash flow for this quarter, in line with our full-year annualized expectation. This includes, cash taxes of $14 million and net capital expenditures of $7 million.

Our 2019 outlook for both cash taxes and CapEx remain unchanged and we continue to drive tax documentation activity to materially reduce our future cash taxes. While we typically invest a moderate amount of working capital, throughout the first two or three quarters of the year. The investment of this quarter was minimal. We should expect this when revenues are down sequentially.

As we indicated by reaffirming our financial guidance. The anticipated demand recovery in some of our key end markets in the second half. And therefore expect working capital investments to grow sequentially, albeit modestly throughout most of the year. Importantly, the seasonal patterns are significantly less volatile than our legacy business for most of the volatility and intensity was driven by the Agricultural Solutions segment. With our new capital structure in place, cash interest for the year should be around $80 million. The interest rate on our debt is substantially fixed due to swaps. So we will not be any material impacts from fluctuating underlying interest rate.

Overall, our cash flow characteristics had markedly improved post the Arysta transaction and we've demonstrated that this quarter, despite challenging market backdrop. Our net leverage ratio at quarter end was just under 3.5 times adjusted EBITDA. We had $1.4 billion of net debt, which reflects the funding of our share buyback in Q1 and the partial settlement of a contingent consideration associated with our previous acquisition of MacDermid.

We enjoy liquidity of over $450 million at quarter end. We are also working to efficiently repatriate cash to U.S. In order to further reduce our gross debt and related interest charge. I should also note that our balance sheet does not reflect the expected positive impact of the final post-closing adjustments related to the Arysta transaction which should be finalized by the time of our next conference call. As we generate cash and growth Adjusted EBITDA throughout the year. We expect to continue to consider opportunistic capital allocation, including for the share buybacks to drive long-term value creation. We picked up capacity to invest, but we will be measured, I mean, focused on our goal of keeping our net leverage ratio below 3.5 times adjusted EBITDA.

With that, I will turn it over to Ben, to provide an update on our financial guidance for 2019 and to closing remarks. Ben?

Benjamin Gliklich -- Chief Executive Officer

Thanks, Carry. On Slide 7, we discussed our expectations for the remainder of the year. We are reaffirming our full year adjusted EPS guidance of $0.82 to $0.87 and adjusted EBITDA guidance of 5% to 8% year-over-year growth on a constant currency basis. Given continued soft market trends in the first quarter. We are tempering our organic net sales growth expectations for the year to a new range of flat to 2% growth. However, we believe we have cost measures to compensate for that change that allow us to hold our adjusted EBITDA, adjusted EPS guidance.

Our March sales were roughly in line with the average of January and a weaker February driven by Chinese New Year and April is trending similarly. Our expectation for the second quarter, is that these levels will continue. Our top line guidance is predicated on a recovery in demand in Asian electronics in the second half of the year. Growth in content per unit and market share opportunities should both help our organic growth in electronics, but this market recovery is important.

In Industrial and Specialty, we continue to progress on share gain opportunities, product launches and pricing initiatives across our verticals to offset uncertain market trends. Based on exchange rates at 33.1 (ph) on a full year basis, we still anticipate about $15 million of FX translation headwinds to adjusted EBITDA. We expect in Q2 a headwind similar to the $6 million headwind we experienced in Q1. Overall we believe achieving our guidance for 2019 will be a strong accomplishment in light of our end markets. We expect the Element Solutions businesses to grow net sales organically in the longer term at mid-single digits. This will not necessarily happen every year given the cyclicality of our end markets. Nonetheless, we do expect to deliver above-market sales performance and stable margins every year, which is what we expect these results would translate to in 2019.

Finally, turning to Slide 8, you can see an outline of our key priorities for the year. I've been telling my colleagues around the world and our investors that I've one single objective this year, which is the successful launch of Element Solutions. Of course this objective has many components, several of which are on this list. The successful launch of Element Solutions entails establishing or recognized identity with all of our stakeholders. A strong performance based people centric culture of ownership and integrity that take hold in the business. And progress toward building our reputation as a high performing leading specialty chemicals company. I'm hopeful that our Investor Day on May 20th will contribute materially toward this objective. The successful launch of Element Solutions also requires delivering on our financial commitments and key strategic initiatives, which should in turn demonstrate and deliver strong free cash flow generation. For many years we have chartered the cash flow characteristics of these businesses, but that cash was absorbed by debt service. We're looking forward to that cash showing up on the balance sheet in the quarters to come.

Finally, we've many opportunities to deploy our robust cash flow to uses that will compound shareholder value. Our buyback earlier this year was one and we look forward to the ability to be flexible and opportunistic in deploying our capital with the aim to deliver attractive returns to shareholders while remaining within our leverage target of 3.5 times adjusted EBITDA. Before opening the call of the questions, I'd like to thank my colleagues around the world for their contributions in this quarter and for embracing Element Solutions and their optimism and enthusiasm for our future.

Operator, please open the line for questions.

Questions and Answers:

Operator

The floor is now open for questions. (Operator Instruction) Thank you. Our first question is coming from Daniel Jester with Citi. Your line is open.

Daniel Jester -- Citi -- Analyst

Yeah, hi, good morning everyone. So, first a couple of questions on the revenue outlook. First, could you be specific about where the cut was in the organic revenue growth outlook for 2019. Is that the lost business that you referenced in energy or is there something else driving that slowdown. And then secondly on revenue throughout your prepared remarks in your slide deck, you talked a lot about market share opportunities. Can you just talk about what gives you the confidence that you're going to be able to take share given some of the challenges you talked about.

Carey Dorman -- Chief Financial Officer

Sure, absolutely we'll take those questions in order. So first, with regard to the cutting our revenue guidance, it's simply the persisting weakness we've seen across many of our end markets. We anticipated weakness given what we saw in the back half of last year, but it's been, I'd say a little bit more dire in a little bit longer term, based on what we're seeing right now. We do however has some real confidence in the back half as we've articulated in our prepared remarks and in the slides that we provide, it's got anything you'd say with regard to the revenue cut or guidance change?

Scot R. Benson -- President & Chief Operating Officer

No, I think, Carey just we'll confirm what you're saying that the slowdown then with bit more persistent than we had anticipated, Yeah.

Carey Dorman -- Chief Financial Officer

With regard to your second question about market share. This is an area of real focus and one we've been putting technology and discipline behind our selling process and it's been an area that we've been investing in materially, we have a Chief Sales Officer is implemented technology and process that's given us a lot more data around our sales process and our sales targeting. So we've got insight into that, what our key accounts or how we're tracking along toward winning those accounts. And so we feel pretty good about our ability to add major customers and gain market share over the balance of the year, which is something that gives us comfort in addition to an expected recovery in the back half in the market sentiment driving that -- that we're going to be able to outperform and grow.

Operator

And our next question comes from Duffy Fischer with Barclays. Your line is open.

Michael Leithead -- Barclays Capital -- Analyst

Hey guys, it's Mike Leithead on for Duffy this morning. I guess first question for Ben tying in a little bit to the last question. You have embedded a second half recovery in your EBITDA guidance, I was hoping maybe you could just talk through in size, two or three the factors, they expect to be better in the second half versus the first half year?

Benjamin Gliklich -- Chief Executive Officer

Sure. So I think the place to start this is the back half of last year was quite soft. And so the comps as we roll through the second half will be much more favorable. The second is that and I'm sure you've heard this from many of the industry participants around us, but the tone from the industry from our supply chain, from our customers is that the second half will be better. We have optimism and we've seen optimism around product launches in the second half and mobile phones and also around semiconductor market recovering. From a data perspective, we don't have too many empirical data points that support that second half recovery, but we don't have any evidence to the contrary. Ultimately, as we think about this we can't control volumes in our end markets, but our EBITDA guidance can sustain a flat top line due to our flexible business model and variable cost model and our ability to control costs is something that we prided ourselves on and something we're very focused on. We're hoping for the best, but preparing for the worst from a cost perspective to enable us to deliver our guidance.

Michael Leithead -- Barclays Capital -- Analyst

Got it. That's super helpful. And then second question for Martin. It seems like with the change in portfolio as well as leadership your role in the Company has evolved somewhat. So I was hoping you could just touch on one or two of your new areas of focus with the company and how you see the longer-term story for element of developing overtime.

Martin E. Franklin -- Executive Chairman

Sure. I mean, we created this office of the Chairman structure. I'm spending a lot of my time with Ben and Scot. We've gone, really around the planet visited pretty much every corner of our major business segments. And it's all about cultural building. So at the end of the day, I'm there to -- if you like to provide a lot of support and guidance to Ben, take a lot of the experiences that I've had over the years in culture building at the business, that I build in Jarden and applying those types of approaches and disciplines to Element. I think that, it's been very enlightening, we had a lot of great conversation and come out with a lot of -- if you like priority list of things that need to be done and opportunities that exist, but overall, it's really more of what I did in the past, but being a lot closer to it, if you like, and really giving Ben some insights on to some of the -- if you like, points is about being the CEO.

Operator

And our next question comes from Josh Spector with UBS. Your line is open.

Josh Spector -- UBS -- Analyst

Yeah. Hey, guys. So in electronics, you talked about some of the trade tensions may be shifting the production days. I was wondering if you could kind of walk us through in your customers process when they're looking at moving production from one country to another. How they were called us selecting a new supplier and kind related to that, how element could benefit?

Scot R. Benson -- President & Chief Operating Officer

Yeah, hi guys, this is Scot. There's a lot of factors obviously, I can't really speak to all the decision process that our customers go through, but generally speaking we see. We do see the opportunity to follow the supply chain and the fact that we are truly global and we've invested in all these growth markets has helped us because they can't get the same processes in these new countries without having to make any changes within their supply chain, so specification etc. So our ability to give them exactly the same thing, they're using in one country in any country they choose to move to really factors into how we can follow that supply chain.

Carey Dorman -- Chief Financial Officer

The real opportunity for us. The competitive dynamics in some of these markets outside of China or better and favorable for us relative to the domestic Chinese market.

Josh Spector -- UBS -- Analyst

So then who would you say you're winning share from there, would it be more local producers then? Or would it be some of your global peers?

Scot R. Benson -- President & Chief Operating Officer

Well, as they move into newer countries, generally it's global competitors, the local competitor situation is less for us in those areas. So we competent in the emerging our growth markets more against the global competitors.

Carey Dorman -- Chief Financial Officer

As opposed to in China, where (Multiple Speakers) domestic producers.

Operator

And we will take our next question from Steve Byrne with Bank of America. Your line is open.

Steve Byrne -- Bank of America -- Analyst

Yes, thank you. Wanted to ask first a little bit about the share count, was it at the end of the quarter, is it fair to assume that is incorporated into your reaffirmation of EPS guidance for the year, that the lower share count and do you have any view on potential timing of taking action on the remaining portion of the share repo authorization?

Carey Dorman -- Chief Financial Officer

Hi, Steve, it's Carey. Good morning. So, on a GAAP basis at the end of the quarter, we had 268 million shares outstanding both basic and diluted. On an adjusted basis we are using a number of 262 million for the quarter, that's fully reflective of the 37 million shares that we repurchased from Pershing earlier in the year.

Benjamin Gliklich -- Chief Executive Officer

And we updated our guidance to reflect that buyback when we made it. And I would say that, and I think we made this comment in our prepared remarks, in the back half of the year depending on availability and depending on where our share price is, we're buyers of our stock at this price at these levels, but we will wait until we have plenty of room in our stated leverage cap to exercise that. But if we did no buybacks, we'd be around three times or below three times leverage, which would give us capacity to second half obviously to execute -- share repurchases, should market conditions be appropriate.

Steve Byrne -- Bank of America -- Analyst

And Ben you talked a little bit about share gains in some of your end markets and wanted to just drill into whether you have some visibility on your product share within potentially new devices or next generation products that are either getting launched in electronics or in autos, are you already in on those new devices, such as in 5G? Is your share going to be larger with those new products?

Benjamin Gliklich -- Chief Executive Officer

Yeah, so -- you know the general comment, we tend to have outsized share in the higher end innovative new platforms than we do in lower end electronics, particularly in the circuitry business. With regard to new launches so the new launches that we see coming toward the end of the year, we generally know what our businesses on new launches, well in advance. What we don't know is the production rates that translate into sales. So we've got a good sense of where we are going to be playing and what our shares on those products, but we don't have visibility into units, which translates into the top line. We do see ourselves is taking market share through the new platforms that are coming out. We also on the automotive side of the business have been investing quite a bit in building our presence and being a solutions provider on multiple touch points and we'll talk about this much more at the Investor Day across electronics, displays and plating in automotive, which is driving market share for us as well.

Operator

And our next question comes from Robert Koort with Goldman Sachs. Your line is open.

Goldman Sachs -- -- Analyst

(Technical Difficulty) Sorry, guys, sorry this is (inaudible) on for Bob. I just had a question on your visibility. So you're expecting in second half rebound. What kind of gives you the confidence here and do you have the specific visibility on customer behavior like out a few months or quarters or how does that shape out.

Benjamin Gliklich -- Chief Executive Officer

As we were just talking about, we do have line of sight into our share our scope on new platforms that are launching in electronics also on automotive, but we don't have direct line of sight beyond our customers, which speaks to production rates which translate to the top line. So as we said the tone from the industry from the supply chain from our customers is very positive with regard to the second half both in terms of new platforms that are launching in terms of the semiconductor market recovery, but from a data perspective, we don't have much in terms of empirical data that supports this. We also don't have any evidence to the contrary. So while we can't control volumes, we can control costs and we're focusing on preparing for the worst and hoping for the best and through cost, we believe we can still deliver on our guidance.

Operator

And we can take our next question from Yefremov Aleksey with Nomura Instinet. Your line is open.

Yefremov Aleksey -- Nomura Instinet -- Analyst

Thank you. Good morning, everyone. On free cash flow, you generated pro forma $54 million in Q1, you mentioned there were some, maybe more favorable working capital -- more favorable working capital this quarter for the full year, can we roughly annualized this Q1 results?

Benjamin Gliklich -- Chief Executive Officer

So, Aleksey. Good morning. I think in general, if you were to take our EBITDA guidance today and items that we've given you on CapEx, cash taxes and cash interest, you would get to something close to annualizing this Q1 normalized number. As we mentioned in our prepared remarks, we do expect with the growth in the back half to see some incremental working capital investment relative to Q1. So, it wouldn't be necessarily normalizing for annualizing networking capital number. But on a full year basis, you should see effectively an annualized Q1.

Yefremov Aleksey -- Nomura Instinet -- Analyst

Thank you. Understood. And you mentioned several times that you'd expect recovery in the second half and that's embedded in your EBITDA guidance for year, is that recovery does not come. How should we think about sort of the downside case for this year. Again, similarly is sort of the Q1 a good run rate and maybe somewhere around $400 million is that downside case absent recovery?

Benjamin Gliklich -- Chief Executive Officer

No, likely that's not where we would point you toward. As you know, this is a highly variable cost model. There's more we can do from a cost perspective, to protect margins and to drive earnings up. We've got a long list of actions that we're prepared to take, if we don't see that recovery materialize and I would also note that in the first quarter you've got the Chinese New Year, which deflates the run rate if you will on the quarter. So there are few factors that would drive us again as I said closer to our guidance range even without that recovery really driven by cost.

Operator

And our next question comes from Jon Tanwanteng with CJS Securities. Your line is open.

Jon Tanwanteng -- CJS Securities -- Analyst

Good morning, gentlemen. Nice job on the margins. First, can you tell us if you're feeling any potential for Chinese stimulus efforts, particularly into our own consumer spaces into your guidance number one. And number two, what do you think, normalized margin growth look like? If trade tensions ultimately resolve and if you add a good proxy for 2020 performance.

Carey Dorman -- Chief Financial Officer

Yeah, it's a good question, John. So I think the place we started is in our prepared remarks, I mean the comment that April was looking roughly like March at the moment and March was about an average of January and February. So we are seeing a stabilized level in April, we haven't seen an uptick associated with the stimulus you've spoken to, but obviously we've heard about it, and that's part of what's giving us confidence in the second half recovery. With regard to our progress in our margins and steady state growth -- we have many reasons to believe we have margin expansion that we can deliver over the coming quarters and years from corporate cost savings that we've been delivering well on other functional cost opportunities we've identified in general mix we see a path toward several points of margin expansion over the next couple of years.

With regard to growth, as we talked about visibility isn't terrific certainly not for 2020 at this point. But we do believe that sort of normalized growth rate through the cycle is low to mid-single digit GDP plus we talked about a couple of points better than the market, so call it 4%, 5%. And we do anticipate being able to deliver that on a through the cycle basis. In addition to the margin expansion, we've talked about.

Jon Tanwanteng -- CJS Securities -- Analyst

Okay. Great. And then just a follow-up. Ben and Martin, with the notchier new Board appointments. Can you give us an update on your marketing competitive positioning against consolidating peer group and the electronic chemistry markets?

Benjamin Gliklich -- Chief Executive Officer

Yeah, it's a good question. We've obviously seen some of the strategic activity and consolidation in electronics materials that activity doesn't really impact us. We are leaders in the markets in which we participate in that consolidation is and damaging our market position and our ability to provide value and grow in our markets. So, we're very comfortable with where we are and from a strategic perspective M&A around us isn't changing our strategy.

Martin E. Franklin -- Executive Chairman

Yeah, no -- I completely agree with that there is definitely activity that's going on around us. We are keeping our heads down and driving our business internally, as we said that before. You'll hear that on the Investor Day. Obviously, we have one, if you like, potential comp which would be as I said, which we don't know whether that's the company that's going to go public or be sold its owned by private equity. In a way would be nice to see it as a public company, because I think it would enhance the multiples for how this company is perceived in trade. If we have to go it alone and gets the most profit this business probably does, we'll take, we'll do it on our own with U.S.

Operator

And we will take our next question from Jim Sheehan with SunTrust. Your line is open.

Pete Osterland -- SunTrust Robinson Humphrey -- Analyst

Good morning. This is Pete Osterland on for Jim. On energy prices, have you seen the higher oil prices translate into increased volumes in the offshore and market so far in the second quarter and how much growth do you think it is possible in that vertical this year, if you assume oil prices stay around where they are?

Benjamin Gliklich -- Chief Executive Officer

So our offshore business has much longer lead times than onshore energy markets. And so that is one business where we have pretty good visibility associated with new production coming online in drilling activity increasing. We have seen CapEx increased from our customers, which does overtime translate into growth for us. But it's not as instantaneous as you see onshore. We made a comments in our prepared remarks about that business having had a loss this quarter which will impact growth and we will see that business declined modestly this year. But it's a great business and the secular growth trends outside of this specific instance are very compelling, we should see growth in that business over time.

Pete Osterland -- SunTrust Robinson Humphrey -- Analyst

Thank you. And in the automotive end market could you quantify how your organic volume growth currently compares to the underlying market and how do you expect this to trend this year, if underlying unit production improves in the second half?

Benjamin Gliklich -- Chief Executive Officer

Yeah. So for us obviously units are very important -- content for unit added bonus. And we are seeing material increase in content per unit which impact both the electronics business and our industrial surface coatings business. We see those two things combining to allow us to out perform units and we should continue to see that for many, many years to come, that's a mega trend that's very exciting for us.

Operator

This does conclude today's Q&A session, I'd like to turn the program back over to Mr. Benjamin Gliklich for any additional or closing remarks.

Benjamin Gliklich -- Chief Executive Officer

Thanks, Aaron, and thanks to all for participating. We look forward to seeing many of you at the Investor Day on May 20th and continuing to tell the Element Solutions story broadly in the quarters to come. Thanks very much.

Operator

Thank you for your participation. This does conclude today's program. You may disconnect at any time.

Duration: 44 minutes

Call participants:

Yash Nehete -- Senior Associate, Corporate Development & Investor Relations

Martin E. Franklin -- Executive Chairman

Benjamin Gliklich -- Chief Executive Officer

Scot R. Benson -- President & Chief Operating Officer

Carey Dorman -- Chief Financial Officer

Daniel Jester -- Citi -- Analyst

Michael Leithead -- Barclays Capital -- Analyst

Josh Spector -- UBS -- Analyst

Steve Byrne -- Bank of America -- Analyst

Goldman Sachs -- -- Analyst

Yefremov Aleksey -- Nomura Instinet -- Analyst

Jon Tanwanteng -- CJS Securities -- Analyst

Pete Osterland -- SunTrust Robinson Humphrey -- Analyst

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