Ferro Corporation
Q1 2019 Earnings Call Transcript

Published: 1 May 2019

[Operator:]

Good morning. Thank you for joining the Ferro Corporation 2019 First Quarter Earnings Conference Call. An archived replay of this teleconference will be available through the Investor Information Section at ferro.com later today and will be available for approximately seven days. I would now like to turn the call over to Mr. Kevin Cornelius Grant, Director Investor Relations and Corporate Communications.

[Kevin Cornelius Grant:]

Thank you and good morning everyone. Welcome to Ferro's first quarter 2019 earnings conference call. This morning we'll be reviewing Ferro's financial results for the first quarter ended March 31st, 2019. I am pleased today to be joined by Peter Thomas, our Chairman President, and CEO; and Ben Schlater, Group Vice President and Chief Financial Officer. The earnings release and conference call presentation deck are available in the Investors section of our website. I'd like to remind everyone that some of the comments we are making today are forward-looking statements and are based on our view of conditions and circumstances as we see them today. However, those views may change as conditions and circumstances change. Please refer to the forward-looking statement disclosure in the earnings release and the earnings presentation. Also today's call will contain various operating results on both a reported and adjusted basis. Descriptions of these non-GAAP financial measures and reconciliations are included in the earnings release and presentation deck. We encourage you to review that information in conjunction with today's discussion. It is now my pleasure to pass the call over to Peter.

[Peter Thomas:]

Good morning everyone. Thank you for joining us today. The first quarter proved to be challenging and tested our business as demand softened. Fortunately, we have a level of resiliency relative to any one market because of our diversified customer base. And an orientation to nimbleness that enables us to adapt quickly to market conditions. That's not to say that we are satisfied with the quarter's results we are not. But we are focused on a longer view in making the right decisions to achieve sustainable growth. Like many of the companies in our space, we experience softer demand during the first quarter in some of the markets in which we participate. In certain of the higher end and niche markets that we moved into in recent years, the order patterns and inventory destocking are different from what we see at the mid-level of the markets particularly in tile. This contributed to weaker demand in both the fourth quarter of 2018 and first quarter of 2019 impacting margins as well as sales. Customers at the high end of the tile market that were stocking about six months of inventory, shifted several months ago to maintaining three to four months of inventory. We anticipated that these customers would build back to a six month inventory level in the first quarter. But they have not yet done so and it seems that some are still ordering just-in-time levels. Absorption also played a role in the first quarter decline in earnings. The destocking we've discussed contributed to lower volumes at some of our larger facilities eroding profitability. We expect to offset these absorption headwinds in the second half of 2019 with increased volume throughput and benefits from our optimization initiatives. I'll comment further on the remainder of the year later in my prepared remarks. We learned from this experience and we will use the knowledge we gained about this market dynamic as we go forward. From challenging circumstances, we intend to make ourselves better. Economic conditions, especially in Europe and China, also affected our business in the first quarter. Because a significant portion of Ferro's revenue comes from Europe, we felt the negative impact. Much less of our revenue comes from China, but we still felt the effects of relative weaker demand there. I don't know that we have a clear line of sight to recovery from the slowdown in Europe, but it's worth noting that government stimulus in China may improve conditions there and this may in turn positively affect Europe. Closer to home, weather was a factor in the United States construction markets which impacted building projects and reduced demand from customers served by our Color Solutions pigments business. In addition, headwinds from foreign exchange rates negatively impacted sales by about $21 million. So, all-in-all, not a good quarter after strong performances in 2017 and 2018. But there were positives that demonstrate the flexibility of our business model and reinforce what we said about outperforming the markets where we participate. We believe we can outperform the markets because of the value we bring to our customers and our ability to increase productivity through optimization initiatives. Examples of outperformance include automotive, industrial, and surface technology sub-segments all of which we expect will outperform their markets for the year. We remain enthusiastic about Ferro's position in relation to certain mega trends within society that should continue to create opportunities for growth in these businesses. For example, we see exciting opportunities for our surface technologies business in connection with the move to 5G technology. And we see opportunities for our electronics business in North America as more and more smart technology is added to automobiles. We will continue to manage through this time of global macro-economic uncertainty with judicious investment, managing leverage, and continuing to execute innovation and optimization initiatives. Regarding optimization, we review optimization as a means to increase productivity and efficiency and become a better more profitable company. We've built a culture committed to improvement involving and getting better all the time by innovating, growing, updating, and optimizing the business; never being complacent. Optimization becomes even more crucial when managing through macroeconomic weaknesses. As previously discussed, we have implemented a number of optimization initiatives including consolidating manufacturing sites, logistical facilities, and R&D labs. The largest of these, the Americas Manufacturing Optimization Initiative, which we have discussed previously, will begin contributing to adjusted EBITDA this year. We have a number of other optimization initiatives underway or planned as well with opportunities throughout the company. Our optimization efforts include optimizing our portfolio to continue to position Ferro as an advanced technology partner enhance our market position. After 20 acquisitions, we are taking a good look at how best to optimize our portfolio going forward. As appropriate, we'll provide more details on this and other optimization efforts currently under way or completed in the future. Now, let's turn to the performance of our three business segments in the first quarter. In the presentation deck, you can see summaries on slide 5. Let's begin with our Performance Coatings segment. Performance Coatings' volumes were up 2.8% while net sales on a constant currency basis were down 2.1% to $170.3 million. Adjusted gross profit decreased to $33.9 million from $41.1 million. Gross profit margin declined to 19.9% from 23.6%, reflecting the shift in mix and volume due to the destocking and inventory re-positioning I described earlier. The dynamic that we experienced with the high end of the tile market has given us a greater appreciation for the destocking process in the high-end segment of the market. We have now gone through a cycle of strong growth as well as a period of weaker demand and a reset by our customers of inventory levels. With the transition of our portfolio in recent years to sell more into the higher space, we now better understand this dynamic and our customers' purchasing habits. Now let's look at our Performance Colors & Glass segment. In the first quarter Performance Colors & Glass volumes improved 9.4%, with net sales on a constant currency basis up, 5.3%. Organic sales improved 3%. Adjusted gross profit declined to $39.5 million from $41.2 million. Gross profit margin declined to 32.7% from 35.9%. Sales increased by approximately 10% in our industrial business. Much of this increase was attributable to increased sales of our digital printing technology. We believe we have a great opportunity with this technology to transition to flat glass market to digital printing. Our electronic materials business grew approximately 13% in the quarter. This was driven by sales of multi-layered film paste and tapes for sensors, dielectrics and capacitors, which are used in heavy duty applications such as automotive, airspace and military applications. After a strong year of market growth in cherry-gated [ph] 2018 sales in our automotive business were down low mid single digits. We continue to see pressure in North America, which accounted for the majority of the decline in our automotives sales. Europe was up low single digits but offset by decline in Asia Pacific. This performance was not a surprise as we expected 2019 to be weaker and we expect continued weakness in our automotive business throughout the course of the year. Decoration was down low single digits in the quarter compared to the prior year primarily due to strong demand for off cycle container glass in the prior year. Now turning to the Color Solutions segment, in the first quarter Color Solutions' net sales on a constant currency basis were flat, while volumes were down 4.2%. Adjusted gross profit came in at $29.3 million as compared to $31.6 million in the prior year. Gross profit margin declined to 30.5% from 32.8%. First quarter sales of our pigments were affected by softer demand in the construction and building market due to weather in the United States as well as a shift in the automotive market away from ultramarine blues. The slower start to the year in our pigments business was offset by a stronger demand for our surface technology products. Now let's talk a little bit about what lies ahead. Many companies in our space expect the second quarter to be similar to the first, relatively weak. Ferro's second quarters typically are strongest, so we are optimistic about the second quarter ramping up from the first. We perceive there to be a general expectation in the markets we serve that the second half of 2019 will be better than the first half. We generally share those sentiments based on indicators that we see in our business, although I will not say that we have clear visibility into remainder of the year. Uncertainly around trade talks, Brexit and the auto markets in Asia, cloud the horizon. Looking still further ahead to 2020, although market conditions have softened since 2017 when we introduced our 2020 goals, we still have a pathway and we are focusing our teams on achieving those goals. I'll now turn the call over to Ben for his comments.

[Ben Schlater:]

Thank you, Peter, and good morning, everyone. I'd like to start out this morning discussing our consolidated finance results for the first quarter 2019. Please note that the non-GAAP numbers I refer to are on an adjusted basis and growth rates mentioned are on a constant currency basis compared to the first quarter of 2018. The financial highlights and results can be reviewed on slide 3 and 4 in the presentation accompanying today's call, which you can find on ferro.com in the Investor section. Turing to slide 4, in the first quarter, we grew net sales 0.7% to $387.5 million. While adjusted gross profit declined 9.6% to $102.9 million. Adjusted SG&A expense was $69.3 million or 17.9% of net sales and adjusted EBITDA declined to $47.9 million or 12.4% of net sales and adjusted EPS declined to $0.22. For the first quarter, there were a few non-GAAP adjustments, primarily related to our corporate development, acquisition and optimization activities. First, in cost of sales, we have adjustments of approximately $1 million, primarily due to costs related to optimization initiatives. In SG&A, we have one time adjustments of $2.8 million in the quarter consisting of legal, professional and other expenses, related to certain corporate development activities and certain optimization initiatives, including the manufacturing optimization we announced earlier this year. Turning to restructuring and impairment, there was an adjustment of approximately $2.1 million in the first quarter related to actions to achieve our ongoing optimization initiatives and acquisition synergies. Finally, in the quarter, under other income and expense, we had an adjustment of about $100,000 related primarily to optimization costs. Now moving to SG&A, in the first quarter, adjusted SG&A expense was $69.3 million or 17.9% of net sales, compared with $66.1 million or 17.2% of net sales in the prior year quarter as stated on a constant currency basis. Newly acquired businesses accounted for the majority of the increase, while base company SG&A was nearly flat year-over-year. This brings me to adjusted free cash flow. Adjusted free cash flow was in line with our expectations with the use of $45.3 million in the first quarter compared to $42.4 million use in the prior year. We have reconfirmed our prior full year free cash flow conversion guidance of 45% to 50%. We defined adjusted free cash flow from continuing operations as GAAP net cash provided by operating activity less CapEx. Then we add back cash used for our most recently announced manufacturing optimization, acquisition-related items and restructuring activity. The most meaningful components for the quarter are as follows

[Kevin Cornelius Grant:]

Thanks, Ben. With that operator, let's open up the call for our first question.

[Operator:]

Thank you [Operator Instructions] And we will proceed with our first question on the line from Rosemarie Morbelli with G Research. Please go ahead.

[Rosemarie Morbelli:]

Thank you and good morning everyone.

[Peter Thomas:]

Good morning, Rosemarie.

[Ben Schlater:]

Good morning, Rosemarie.

[Rosemarie Morbelli:]

So looking at the results Peter, it seems as though Performance Coatings is obviously where you are having the most issues. It is also your lowest margin business. Is there any consideration of selling it and immediately upgrading your portfolio and lowering your debt and potentially buying back stock? Is that something that management and the Board are considering?

[Peter Thomas:]

As you know we pride ourselves in having a whole range of opportunities with this portfolio, whether it's inorganic, organic and the optimization initiatives that we're going to further define here. We are always in the interests of creating a better version of ourselves and we look at every opportunity to exercise that activity.

[Rosemarie Morbelli:]

Okay. I guess the answer is maybe, yes. So now looking at your optimization program I understand that it has been focused on North America and mostly the U.S. have you expanded those activities into Europe?

[Peter Thomas:]

Let me mention something to you, because I like to always refer back to prior calls. A year ago, when we were further defining the optimization activity that we have announced, which represented $30 million plus. And we've mentioned, we would see around $8 million this year we would have the balance next year. I also mentioned that during the exercise that we were building an optimization pipeline that probably would add another $12 million to $15 million of profitability. So what I will share with you today is that in this environment which is very challenging certainly we work by the rule you really can't worry about what you can't control because certainly you don't have control of how you manage through it. And what I can tell you is that our organization as a whole has been phenomenal in embracing our strategy and the framework of the strategy and the fact that optimization is very important. And that's why it's Phase 4. The idea is 2020 targets we get there with a combination of organic, inorganic and innovation as well as optimization activities. We have a lot of levers to pull. And I will tell you now that our expectation going into next year is that by the end of year, we will have a run rate of about $15 million of new opportunities and profitability on top of what we've already mentioned. I will -- you are going to ask the question about where are we? The answer is we did pull many of those levers, some are staggering in, some we're including in this guidance. Some of them we're not because we will not do it until we have the right visibility, because of the sensitivity of some of the projects. And each quarter we will orderly methodically like we always do we'll share those details. But rest assured, we are not sitting back, we are not sitting here saying we just uncovered something. We've been planning this for a very, very long time. So it was easy for us to embrace pull the trigger and start executing. Some of those projects are already done. And we have seen the value. And we are very good as you know around managing the optimization side of this business. So the news today is we are looking at a run rate of another $15 million next year.

[Rosemarie Morbelli:]

So that is in addition to the $30 million just clarifying here?

[Peter Thomas:]

Yes. And it's -- if you go back a year ago, I did kind of mention that we had another $12 million to $15 million hiding in there. That when the time was right that we would pull the trigger and we're doing that.

[Rosemarie Morbelli:]

Okay. And then if I may. I am sorry.

[Peter Thomas:]

Or we have done it already.

[Rosemarie Morbelli:]

Okay. So if I translate what Ben talked about regarding the second quarter. Then your second quarter is going to be still substantially lower than last year second quarter at about $0.34 versus $0.44. Are you expecting the second half while improving, are you expecting it to be above 2018?

[Ben Schlater:]

Yes, I think that that's implied in the guidance is that if you do the math on the second quarter, we will see in the second half of the year a recovery from a year-over-year perspective.

[Rosemarie Morbelli:]

Okay. And then..¦

[Peter Thomas:]

Rosemarie what's really important to note is that through all this we are really back to what one would find -- define as being a normal order pattern for our business. Here in the second quarter I think we've been pretty clear. We feel really good about the sequencing of the second quarter being better than the first, the third quarter being better than the second. And I think there's a bit of an interesting dynamic that could be surfacing in the fourth quarter depending on -- we certainly know we're going against an ugly period last year. And we know that the level of destocking where we sit today doesn't appear that's going to be as dramatic certainly, because no one's really building their inventory levels up in an explosive way. And so I think the fourth quarter could be a very interesting fourth. But remember and I think it was in maybe it was in 2017 we had a 9% year-over-year improvement in the fourth quarter from the prior year. So the fourth quarter could be a pleasant surprise for us. And I think if we keep doing what we are doing and I know we will we may have an interesting fourth quarter to show.

[Rosemarie Morbelli:]

Are you anticipating this pattern, the new pattern for the high-end tiles to remain more or less the way they are meaning that they are not going back to building six months inventory supply, but just sticking to the three to four months or even buying just on time, is that in your projections?

[Peter Thomas:]

That's a good point. And I am glad you brought this up. Because we didn't get it through the script and we were hoping it would come up. It's a very interesting dynamic. We have discussed in the past the high-end top producers typically would keep six months worth of inventory. It's swelled to seven to eight months during the hay-hay or the first half of last year. And then it precipitously dropped. And in the middle of that activity as we were planning for the first quarter as you all know, we did have -- we're so close to our customers and they were telling us that their objective was to build -- rebuild the inventories through the first quarter on a run rate basis that would be equivalent to what they defined was normalcy and maybe four to six months instead of something less. In the meantime what's happened, if you track the tile market, right at the time where things were coming down in destocking there has been a very, very substantial change in the demand in the type of tile that's moving forward. And a lot of it has to deal with the larger sizes. I mean I not sure if everyone knows, but part of the high-end tile means that they have tiles that are 3-by-5, 3-by-6, 5-by-6 and some that could be as large as 5-by-9 that would go into the industrial -- let's call commercial construction markets. So while all this destocking took place coming out of this the demand for the type of tile moving into the New Year has been more of the larger size which is more expensive. And there is a lot of value to Ferro in those tiles because we really are the market leaders in supplying all the things that are necessary to give the design and the scale. So rather than rebuilding their inventory with the old stuff they are orderly methodically ramping up to what one might define even a repositioning of their inventory because they believe that the demand rather than coming from residential maybe in the near-term more of construction oriented. We do see our construction by the way in Europe was up 8%, so that's between glass and this larger tile exercise that we're speaking of. So I think we had a dynamic here of the flush out, but they are being orderly methodical around just in time with the old products but they were incrementally built through the course of the year with the bigger products. And I think the bench point was very well taken more than two-thirds of our issue organically is gone. And what I can tell you, we did a lot of work roughly the destocking cost the company maybe $26 million or so and $9 million to $10 million of gross profit. So we have not built that adjustment into any of our forecasts. In fact if you separate the tile business from the rest of Ferro, what you're going to find through the course of the year where we stand today is, we'll have of course a 3% growth which is good in this environment. And we haven't made all the necessary adjustments for the time. We're kind of leaving that the way it's coming in, we're listening to the customers they are being very orderly methodical. And we don't want to make any decisions on what we think they are going to do or not do. We want to leave it at this point where it is until we get into the second quarter because we'll have a better line of visibility with it.

[Operator:]

Thank you very much and we will proceed with our next question on the line. It's from the line of Mike Sison with KeyBanc. Please go ahead with your question.

[Mike Sison:]

In terms of the $18 million to $20 million sort of current landscape of demand what needs to happen to get that back over time? And maybe walk us through the segments and what type of volume growth you need to see?

[Ben Schlater:]

Hey Mike, its Ben. Look, I think it's a lot of what Peter said, so if you think about the impact from the destocking in the first quarter I think a piece of that is sort of the rebuilding of that inventory in the Performance Coatings' piece of the business. That would be my sense is as the single largest piece. Peter just reflected that. We -- he said we have not built that into the guidance which is the case. To the extent that -- that that comes back that can come back in a quarter or two and could be a pretty significant lift to the numbers. Again we have not reflected that in 2019. So that's Performance Coatings. Performance Colors & Glass we're really not seeing anything from an overall weakness perspective. I mean there's puts and takes auto is a little slower, electronics is much, much stronger. And then with respect to Color Solutions, we have seen slowness there in pigments primarily related to construction both in the U.S. and in Europe. And it looks like the second half of the year will be better from that perspective. So I think that when you run rate the second half -- if the second half of the year comes in as expected and you run rate that and we get an annualized impact from that you will see a piece of that come back.

[Mike Sison:]

Okay. And then, I think a lot of companies are looking for a second half improvement if you will. Some have given some thoughts in the event that there is no improvement. So in the event there is no improvement in the second half, how does your outlook sort of change relative to where it is now?

[Peter Thomas:]

I think what we're showing Mike reflects what we think. A reasonable case is building in that -- if there is some softness it's there. I think what we're trying to do is be as predictable as we possibly can at this point. We're giving you our best case we see -- we don't see anything that is really chaotic or abstract to the end that you're referring to. We have a lot of sensitivities modeled, but I don't think it's really germane to even go there. Right now this is what we see. We've mentioned that the core business looks like 2% to 3% for the balance of the year. The tile business, we haven't built in that the pickup and the type of inventory level, we've discussed. I have given you the dynamic that the destocking cost us $26 million in revenue. And about $9 million of gross profit. So you can do some math around that if tile picks up how you might want to build that into your model. If people get back to a position of normalcy with that inventory that's one way of looking at it. And Ben you may want to give the other dimension.

[Ben Schlater:]

Yes. I think Mike the second half is I think there's two ways to look at it. One is what's happening relative to the broader economy. And two what happened relative to the first half. And I think that those were slightly different answers. From the first half perspective, the first quarter was down so significantly, the second half is -- it's sort of an easier comp, when compared sequentially. And that's sort of what we reflected in the forecast. I think if you look at the second half with respect to what we're expecting from an overall economic perspective, it will be sort of a lift from the first half, but that is mostly because of destocking is behind us. I would say we've been relatively conservative from an overall organic growth perspective in the second half.

[Peter Thomas:]

Yes, Mike. Let me add a couple of more things. I know we're talking about the sensitivity about what Mike argues is a down side, but I think you heard what I mentioned that complement what Ben said. Let me give you another perspective, because I think it's fair and balanced to discuss it. One thing that's very important to know the rate of absorption increased, while continuing to drive our margin of improvement particularly in the high ends. Because you could see how a damage does in the third, fourth and first quarters if you will. The second thing is the raw material tailwinds will continue regardless of what the sensitivity is about the economic environment. One thing too we know that what we're seeing with our -- in discussions with our customers around the world that positive trade agreements could spark higher auto and construction markets where we participate. We're already around the world in different areas, I mentioned, who else is telling you that construction is up 8% in Europe. If you look at automotive applications, I can share regional situations where we're growing double-digits. We know that the lower backs in China will favorably support our positions, but more importantly, it's what it does to Europe rather than what it does to China indigenously, because we know based on our contacts with the Chinese government are certainly, they're -- it's making efforts to boost sales around the automotive and coatings market. So we have -- where we participate, we're hearing that from our customers, things will happen there and we feel very comfortable. And again, although, Europe is soft, we will continue to outperform our European GDP driven by what we've already mentioned with auto and construction, because even in this environment as I mentioned, automotive in Europe is up and so was construction. And don't forget the driver around our digital printing is gaining traction in the flat glass market. So that's what helps spur in this soft environment that technology is getting traction. And again, at the end of the day, what I've just highlighted with you, we have a focus on delivering those optimization programs that are $15 million on a run rate. So I think that you've heard us -- a discussion from me on the onset around we believe we're giving you a fair represented case. Ben highlighted and I just summarized on, hey, take a look at what isn't in here, and try to use that information to decide how you want to build your own sensitivities. We've done it on the low end and the high end and we feel what we've done here is a fair representation of what we see it without any – we're not economists, we're not foreign exchange experts, we're -- I mean, we're sitting here being as accurate and predictive as we possibly can with a lot of probability at this point.

[Mike Sison:]

Okay. Thank you.

[Peter Thomas:]

Thanks Mike.

[Operator:]

Thank you very much. We'll get to our next question on the line from John McNulty with BMO Capital Markets. Please go ahead with your question.

[John McNulty:]

Yes, good morning. Thanks for taking my question. With regard to the fixed cost absorption that you had in the first quarter, I guess, one can you quantify what that was? And then also, do you feel like you are running at more normal rates at this point, so we don't see that as a drag going forward?

[Ben Schlater:]

Yes, sure. Hey John, it's Ben. If you look at the year-over-year headwind from a gross profit perspective at the base company level between lower volumes and absorption almost three quarters of the overall headwind is from lower volumes and absorption. So it's the vast, vast majority of it. We are -- and we would expect and it's included in the guidance, absorption to return to more normal levels as we get into the end of the second quarter. And so we do show that sequential improvement quarter-over-quarter between now and the end of the year.

[John McNulty:]

Got it. Okay. And then with regard to the M&A pipeline out there, I mean, you were certainly more aggressive with buying back your stock in the quarter, I guess, how do you see the pipeline? And how does that compare to your stock at these levels and the sense of urgency that to be buying back stock and taking advantage of the lower price?

[Peter Thomas:]

Yes. So John, it's Peter. First of all, our M&A pipeline is no different than what we've discussed. We continue to run parallel paths around the technology buys versus what we acquired as a real company. And also I mentioned in my prepared remarks that after 20 acquisitions, we believe we've stuffed our pipeline -- technology pipelines across all the businesses is in a way that in addition to doing what we would normally do, as we have been, we're looking at things that could be maybe a bit more impactful to the business that would complement the more of an adjacent play at a bigger scale versus what we've already created, because remember where we are is that we now have about a 15 share in a $10 billion to $12 billion market versus 12 where we -- where it's a $4 billion market and we had a 50. We've reached a point where we're managing the spread between organic growth and inorganic growth, I mean, as we were moving up in the early days, we were more inorganic than organic then the vitality index pumped in. And we're sitting at a nice balance. We needed to get the organization to this point before we move forward. Because we're using a lot of math around, how do you -- what spread between inorganic and organic do you run for a while in the way that'll let your organization adjust to it? And then now we're at a point where we want to do -- we believe we need to be a little more impactful on creating a better version of Ferro. It doesn't mean that we're going to stop it, because right now the first half of this year, we're working on and rightly so, optimization activities, making sure we feel good about what we're doing with our capital structure. And, of course, we're trying to see if we can do something more meaningful. And of course, everything, whether it's big or large takes the same amount of time. But the orientation for the first half of this year is getting the infrastructure optimized, looking at some bigger things, while we still are moving along with a couple -- with the deals. Right now, I can tell you, we continue to always look at five in that zone that I've mentioned that we could pull the trigger on. But I can also tell you, we're looking at three or four things that are more meaningful. So we've -- we're expanding more ground here in term -- our ground of looking at expanding the business. So we'll see what happens, I mean, we -- in the second half of the year. I'm sure that something will go on, whatever that is. And at that point we'll keep making the adjustments on how we want to manage the capital structure. Ben do you want to add anything to that?

[Ben Schlater:]

No. That’s right.

[John McNulty:]

Okay, great. No, that’s helpful. And then, I guess, just a last question. You had mentioned in some of the prepared remarks around the opportunities in 5G. Can you help us to think about what the scale in terms of revenues might be over the next couple of years in those opportunities for you?

[Peter Thomas:]

Yes. I will tell you as much as I can, because we're under a lot of secrecy agreements. But as it relates to 5G with us -- and I know you know the chemistry. A lot of it has to deal around, let's call them, ceramic filters for telecommunication, as well as strong vehicle to vehicle communications, as well as linking with cell phones and also what could be done from the house to the car. So there a lot of novel things that are going on. I wish I can tell you more, because it's very exciting. But if you want to quantify something like that, right now, our pipeline for those activities would be over and above our vitality index. You remember John, I think, when we were out with you, we talked about developing another layer -- an innovation vitality index, if you will. And that pipeline is growing nicely. And 5G for us in that particular pipeline could be as much as $100 million and we've only been working on it in a short period of time. And again. the margins are really rich there. But they're fast-paced and we're under secrecy agreement, but we are gaining traction with that. So were very excited. That's one of the things that I did want to mention. With all this destocking that's taking place and people are focusing on their businesses, we've had more very intriguing R&D conversations with our customers in terms of advancing their technologies. As you know, when you're in a rapid growth mode, like we've seen in 2016, 2017 and 2018, everybody is busy, just getting the job done. Well, some time has been freed up and I can tell you that our R&D teams working with all the -- our top customers. The discussions between the R&D organizations have been more robust than I have seen since 2015. So I think sometimes that's a feeder for the future. And again, we are the partner of choice with all the technology platforms we've amassed. And I did have a discussion about that in the last couple of calls. I mean, right now, Ferro is sitting on, what we call, as roughly 55 leading technology platforms that we've acquired 34 on -- over the last 20 acquisitions. So you can imagine with more free time like that's out there and all the intellectual property with all the market-leading companies, there are a lot of interesting things going on that going forward will certainly help our current vitality index as base organic growth, but then help us build the innovation vitality index. But we'll start reporting against, I think, we're going to feel comfortable. We have a couple things that could hit here. But we're under secrecy agreement, but as they commercialize, we'll start discussing that that vitality index. Does that help you?

[John McNulty:]

Yes. No, that's very helpful. Thanks very much for the color.

[Peter Thomas:]

Thanks.

[Operator:]

Thank you very much. We'll get to our next question on the line from Kevin Hocevar from Northcoast Research. Please go ahead.

[Kevin Hocevar:]

Hey, good morning, everybody. Yes. Peter, I think, you mentioned in the prepared remarks, some - a shift in auto -- in the auto market away from Ultramarine Blue. Could you elaborate on that a little bit? And how much of the weakness in Color Solutions was driven by that, versus how much - I know you quantified that the tile destocking? Do you have a sense for how much the weather impacted the Color Solutions business?

[Peter Thomas:]

Probably, slight -- I would estimate two-thirds of the Color Solutions piece was due to the slowdown with weather and maybe construction overall. But the Ultramarine Blue discussion has to deal with variations of grays and blacks. And it seemed like the last six months, there were certain ultramarine, gray kind of automotive colors that weren't being produced as much. However, it's starting to come back. So, basically, anything that was negative with Color Solutions, from where we sit today, are turning positive. And that's why I mentioned, if you take all of our businesses, including Color Solutions here, blow them up for the last three quarters from an organic perspective, other than tile, we're looking at 2% to 3% organic growth, where we sit right now. So it's coming back, I mean, I think the -- that was a short term. Okay? We wanted to mention too, because it's funny that in times like these we -- the type of color of an automobile that a consumer wants could vary depending on moods. We've learned a lot around the high end of the markets with the colors and the other things we do, depending on economic situations will dictate the type of color orientation. So I think that the mood is getting better, when the mood is better the Ultramarine blue grays and violets will come back and we're starting to see that. Does that help?

[Kevin Hocevar:]

Yes, very helpful. And on the price and raw material front, look like - looking at the Q raws, they are a little bit of a headwind here in the first quarter and pricing pretty much a little bit more than offset that. How do you see that dynamic going forward? Do you expect raws to maybe flatten out in the second quarter and then maybe turn into a tailwind in the back half or -- and similarly on pricing, pricing seemed to hold up well given the -- relatively weak demand environment. Do you expect that to continue to offset and hopefully more than offset the raw materials as you try to get back margin that was lost over the last couple of years on that price raw dynamic?

[Ben Schlater:]

Hey, Kevin. Yeah. I think it will happen -- we feel it'll happen just as you described. It will flatten out in the second quarter. We'll start to see some benefits there. And then we expect to get sequentially better in the third and fourth quarter.

[Kevin Hocevar:]

Okay. Perfect. Thank you very much.

[Operator:]

Thank you. We'll get our next question on the line from Mike Harrison with Seaport Global Securities. Please go ahead.

[Mike Harrison:]

Hi, good morning.

[Peter Thomas:]

Hey, Mike.

[Mike Harrison:]

Just continuing on the questions related to ultramarine. I seem to recall that you were adding some additional ultramarine and micronized iron oxide capacity in Columbia that was supposed to be coming on stream early in 2019. Did that come on stream as expected? And kind of how does that impact the -- I guess supply and demand dynamics around ultramarine?

[Peter Thomas:]

The answer is yes. And quite candidly, it's good that we've added that capacity and we're planning additional capacity expansions as we speak.

[Mike Harrison:]

All right. And then also maybe to just continue on some of the pricing discussion. You've been pretty aggressive and gotten some of the best pricing you've gotten ever in my history with the company, as I look over the past several quarters. Do you have any sense that in pigments or in tile or maybe in any of your other businesses you've reached a point where you've pushed maybe a little bit too hard on pricing and maybe you're in situations where you're starting to see customers walk away or look for alternatives? Or you've pushed them intentionally too hard and lost some volume that way? Just maybe comment on that kind of pushing on pricing versus maintaining or losing volume dynamic?

[Peter Thomas:]

Well, now, you just hit one of the reasons why we wanted to reposition the portfolio into the high end market. The higher up we are in the markets, the more our ability to raise prices and keep it. Because people realize they are paying for our technology. And at the end of the day, we always have competitors' intensity like I have always joked with you in the past, Mike, I have fight with -- we have a nice fight in the telephone booth anymore that doesn't exist. We pick and choose where we want to play and then the high end of our position in every market segment we serve, we can maintain a nice level pricing and we're being orderly methodical about it. If we choose for whatever reason, the answer the second part of your question, do we look at every pound that goes out the door to every customer? The answer is yes. Do we know that for every manufacturing location? The answer is yes. Do we know what the gross margin is for every pound that goes out our plant? The answer is yes. And we use that in our marketing and sales activities to determine what our pricing policy would be in order to lift the margins to a point where they are acceptable. And if that's successful, it's great. If it's not, that would be a leading indicator of the type of volume we would want to extract from the portfolio. But in this optimized environment, we will also remove the fixed cost. This will constantly enhance the portfolio of the company.

[Kevin Cornelius Grant:]

Operator, we have time for one last question.

[Operator:]

Certainly. We'll get our next question on the line from David Begleiter from Deutsche Bank. Please go ahead.

[David Begleiter:]

Thank you. Peter, just back on the high end tile coatings destocking. To be clear, did it continue into April?

[Peter Thomas:]

Yeah. There were a couple of companies, but not for the reason of just destocking. It's because some of the very high end customers that are moving faster with the leadership positions in the larger tiles for construction and home use, like for countertops or tabletops, they were a little more weaning out their old capacity so they can reposition with the new stuff. It was more of a repositioning rather than a destocking, if you will. That's how I would look at it.

[David Begleiter:]

And how would you …

[Peter Thomas:]

Because those are the same customers, David, that as they're coming out of it, because of the gross margin of those products that's helping the absorption as we discussed.

[David Begleiter:]

And how would you quantify the impact in Q2 in Performance Coatings from either absorption issues or destocking issues, or some combination of the both versus the $26 million and $9 million you had in Q1?

[Ben Schlater:]

Hey, David. It's Ben. So, we should see that come back and improve in Q2 from a destocking perspective. As Peter said, most of that was out of the way in April and we should see sequential benefit in Performance Coatings in the second quarter, both from volume absorption as well as raw materials.

[David Begleiter:]

Thank you.

[Peter Thomas:]

We would like to thank everyone for joining us on the call today. We appreciate your interest in Ferro. And we look forward discussing results with you again next quarter. Enjoy the rest of your day.

[Operator:]

Thank you very much. And that does conclude the conference call for today. We thank you for participation as we disconnect your lines. Have a good day everyone.