Ferro Corporation
Q1 2017 Earnings Call Transcript

Published: 26 Apr 2017

[Operator:]

Good morning and thank you for joining the Ferro Corporation 2017 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 7 days. I would now like to turn the call over to Mr. Kevin Cornelius Grant, Manager, Investor Relations for Ferro Corporation.

[Kevin Cornelius Grant:]

Thank you, operator. Good morning to everyone participating on the call and thank you for joining us. This morning, we will be reviewing Ferro’s financial results for the first quarter ending March 31, 2017. As a reminder, the news release and conference call presentation deck are available on the Investor Relations section of our website. I am joined today by Peter Thomas, our Chairman, President and CEO and Ben Schlater, Vice President and Chief Financial Officer. After our comments this morning, we will be happy to take any of your questions. I would like to remind everyone that some of the comments we are making today are forward-looking statements and are based on our view of the world and our business as we see them today. Of course, circumstances can change. Please refer to the forward-looking statements disclosure in the earnings release and presentation. Today’s call will contain various operating results on both a reported and adjusted basis and will focus on continuing operations. Those identified as adjusted exclude certain one-time items and charges. Descriptions of these non-GAAP financial measures and reconciliations are included in the earnings release and presentation deck. It is my pleasure to turn the call over to Peter.

[Peter Thomas:]

Thank you, Kevin and good morning everyone. Our focus on repositioning the company’s portfolio, optimizing operations and transforming to a leading functional coatings and color solutions company continues to strengthen our business. We turned in a strong first quarter performance across the company, reflecting our team’s efforts to drive consistent growth. We are pleased with our performance as compared to the prior year period and with our consecutive quarter progress and we look forward the momentum to continue. In the past three quarters, we have delivered significant year-over-year organic growth, gross margin expansion and EBITDA growth driven by acquisitions, new product introductions and continued focus on operational excellence. As we have discussed, we are now in the growth phase of our value creation strategy. As part of our focus on growth, we are viewing our businesses through a lens of optimization. Optimization doesn’t just refer to cost-cutting or efficiencies, but also involves looking at how we can leverage our core competencies and extend them through new technologies, processes and products. Our optimization efforts across the organization are healthy to generate more consistent organic growth, commercial synergies and faster and more productive integrations of our acquisitions. As we become more strategic in this optimization work, we are not only improving our product portfolio and revenue base, we are also enhancing our market positions, improving margins and creating a much more valuable company. Our global team is doing an outstanding job and I am grateful for their efforts as we continue to transform the company and how we do business. Now, let’s take a look at some specifics from the quarter. Please note the non-GAAP numbers I refer to in my prepared comments are on an adjusted basis using constant currency. During the first quarter, we grew sales by 18.8% to $320.6 million, with organic sales increasing by 6.7%. We generated gross profit of $101.4 million and a gross profit margin of 31.6%, an increase of 120 basis points from 34.4% achieved in the prior year quarter. We grew adjusted EBITDA 35% to $56.4 million from $41.8 million in the prior year quarter. Our adjusted EBITDA margin expanded 210 basis points to 17.6% from 15.5% in the first quarter of 2016. And finally, we delivered $0.31 in adjusted earnings per diluted share, up 40.9% from the prior year quarter. As you can see, the Ferro team delivered another strong quarter. We executed on growth projects and effectively managed costs driving improvement in both top and bottom line performance. We generated strong volume and sales growth in the quarter as well as margin expansion. Organic volume increased as well by 11.4% compared to the prior year quarter driving our margin expansion of 140 basis points. Organic sales grew 6.7% versus the prior year quarter and grew sequentially for the third straight quarter. Now as we reported in last night’s release, we successfully completed the acquisition of SPC, a tile coatings manufacturer based in Italy that focuses on the fast growing market for high-end specialty products. The transaction purchase price was €19.8 million on a cash and debt-free basis. The transaction was funded with cash on the balance sheet. SPC’s products, strong technology and design capabilities and customer-centric business model are complementary to Ferro’s tile coatings operations and position Ferro for continued growth in the high-end tile market in the key locations of Italy and Spain as well as other countries. We are delighted to welcome SPC to Ferro. Now before we get into segment performance for the quarter, please turn to the conference call presentation deck Slide 3, where you can see that the first quarter sales increased to $320.6 million, up from $269.8 million in the first quarter of 2016 on a constant currency basis. Turning to Slide 5, this slide show that we continue to improve gross profit margin while increasing sales. Consolidated adjusted gross profit margin for the quarter grew by approximately 120 basis points to 31.6%. Contributing to the improvement in gross profit were sales volume, improved business mix, price increases, improved manufacturing efficiencies and more profitable product reformulations. Margin was also protected through our raw material mitigation plan in the fourth quarter of last year. In addition, we were more effective in the first quarter in offsetting increasing raw material cost pressures than originally anticipated. Our latest view is that year-over-year raw material inflation should peak in the second quarter. We feel that our raw material spend projections for the remainder of the year are on target. Now, if you will turn to Slide 8 in the conference call deck, you will see the results for Performance Colors and Glass or PCG. As you can see, the first quarter was very strong. Net sales increased 19.6% to $103.5 million in the first quarter, up from $86.6 million in the first quarter of 2016. From an organic perspective, sales improved 4.8%. The business delivered gross profit margin of 36.6%, an improvement of 50 basis points. Net sales were driven by higher sales from our regions on a ship-to basis. Higher volumes and favorable mix also contributed to the performance as did contributions from our recent acquisitions of ESL and Pinturas Benicarló. From a product line perspective, our sales of automotive enamels grew by mid single-digits end of quarter. Sales were higher year-over-year in Latin America and in Asia were up for the third consecutive quarter. And despite a softer European auto market, our sales were higher than the year ago quarter, driven by our well established position as a leading innovator of enamel coating solutions. We also saw a significant ramp up in our sales into the electronics market with organic sales increasing 15.9%. In addition, we saw improvement in container decoration products in North America and Europe, particularly for hot colors, which helped to offset weakness in the industrial products family. Overall, organic gross margin for this segment expanded to 37%, an increase of 90 basis points from 36.1% in the prior year period. Let me take a moment to remind you the dynamics of the business in this segment. PCG is a market leading supplier of glass based coatings for glass substrates. Our products add value in automotive, decoration, industrial and electronics applications. PCG serves technology driven markets where product campaigns have intermittent life cycles. Consequently, demand can fluctuate as product campaigns ramp up, level off, wind down to an off cycle period. Even as sales fluctuate however, we can maintain or even improve margins due to the value we bring to customer relationships through our technology driven R&D support for their product innovation efforts. We continue to see many opportunities for growth in 2017 and beyond, driven by new to Ferro and new to the world product introductions as well as acquisitions that leverage our existing platforms. Now let’s move to Color Solutions, formerly Pigments, Powders and Oxides on Slide 9 in the conference call deck. As a reminder, Color Solutions is a leader in production of high value inorganic and organic pigments and color solutions for a variety of substrates and in applications such as paints, plastics, automobiles and construction materials like concrete. This segment continues to generate strong volume growth, which contributes to the margin expansion we are experiencing. We are extremely pleased with the performance of the business and the platforms that we have acquired to make the business more successful such as Nubiola, a global manufacturer of inorganic pigments and Capello, a global manufacturer of inorganic and organic pigments. With these acquisitions, we have expanded our ability to reach into new market segments and provide customers with products that bring a broad range of functional and aesthetic attributes to their products. As I noted, Color Solutions performed very well in the first quarter, contributing $90.5 million in total net sales, up from $60.5 million in the prior year quarter. Gross margin improved 30 basis points to 33.5%. From an organic perspective, sales increased 16.6% to $70.6 million, while margins expanded 150 basis points to 34.7%. The Color Solutions business saw margin improvements in all product lines and higher sales and volumes from acquisitions, surface technology products and pigment products. Our surface technology business, which specializes in precision polishing agents for various substrates, produced strong organic sales in the quarter. Surface technology sales grew by 41.8%, with improved margin expansion driven by increased sales and volumes. Gross margins for this business continue to be at the high end of our portfolio. For the remainder of 2017, we are expecting continued growth in Color Solutions, bolstered by contributions from recent acquisitions, cross selling opportunities involving our recent acquisitions and our pigments business and new product introductions in both our pigment and surface technology product lines. Now let’s turn to our third segment, Performance Coatings. Please turn to Slide 10 in our reference call deck. Performance Coatings is a leading supplier of glass based coatings for metal substrates, which we sell through our porcelain enamel business and decorative coatings for ceramic tile, which we sell through our tile coatings business. Performance Coatings also had a nice quarter, improving sales by 3.1% to $126.6 million at a gross margin of 26.5% compared to $122.7 million in 2016 at a gross margin of 25%. We saw strong volume growth of 10.9% in the tile business driven by sales into emerging markets. Our Middle East sales continue to benefit significantly from our acquisition of Al Salomi in Egypt. We also saw higher volumes in Vietnam, Indonesia and China as our investments in infrastructure and marketing capability in the Asia-Pac region have begun to take hold. Porcelain enamel sales grew 1.5% in the first quarter, coming largely from sales into South Africa and Latin America. As we had noted in prior calls, the tile and porcelain enamel markets are competitive. However, our strategy for Performance Coatings is to drive volumes to gain market share while enhancing margins by providing higher value products at the top end of the markets. Our acquisitions of Vetriceramici and SPC are good examples of how we are advancing our strategy through acquisitions. In porcelain enamel, we are driving volume principally through organic growth by bringing new products to market and penetrating emerging markets, including the Middle East, Asia and South Africa. Demand has been good in these areas for end products using our PE coatings such as water based teeters, sanitary ware and appliances. We are in good position to continue driving growth in Performance Coatings. Product reformulations are a good example of how we can leverage our technology, know-how, market knowledge and customer relationships for competitive advantage. Our capabilities enable us to reformulate our products such that they have equal or better functional performance while reducing costs to our customers. This expands our penetration into the markets we serve as reflected in the increased volume we see. And while average selling prices may be affected, the value we are delivering to our customers and the higher volumes we are selling drive gross profit margin. We believe we can use this model to offset raw material cost increases, build loyalty with higher tier customers, gain market share and strengthen margins. As with Performance Color & Glass and Color Solutions, we are confident of the opportunities ahead to grow Performance Coatings. So the first quarter represented a strong start to the year as we continue to build on the momentum underlying our organic growth and margin expansion initiatives. As a result of the strong operating performance in the quarter, we updated our guidance for the full year while maintaining our full year [ph] guidance for the remaining three quarters of 2017. All-in-all, we are very pleased with the momentum generated and confident in our ability to execute our strategy and drive growth across the Ferro portfolio to create sustainable long-term value for our shareholders. So with that, I will now turn the call over to Ben.

[Ben Schlater:]

Thank you, Peter and good morning everyone. I wanted to take a little time to provide some further detail on the financials in the first quarter. I would like to focus on a few areas. First, an overview of one-time items that have been adjusted out of our first quarter. Second, an overview of our SG&A expenses in the quarter. Third, the components of our cash flow in the quarter. And finally, I will cover our updated guidance for the year. There were several one-time items that impacted earnings and have been adjusted out of the reported results. I will discuss each one on a pretax basis in the context of their impact in the quarter. First, in cost of goods sold, about $2.6 million related to the amortization of purchase accounting adjustments related to the acquisitions we concluded in late 2016 associated with the valuation of purchased inventories. Second, in SG&A, we had $2.6 million primarily for professional fees associated with business development activities. Third, also in SG&A, we had approximately $3 million related to restructuring costs, mostly related to planned restructuring programs in the quarter. And finally, in other income and expense, approximately $1.2 million related primarily to a charge from extinguishment of the debt costs from the old credit facilities that were refinanced in February partially offset by a gain related to certain foreign tax liabilities in Latin America. Now turning to SG&A, for the quarter, adjusted SG&A expense was $56.4 million compared with $50.2 million in the prior year quarter as stated on a constant currency basis. Of the $6.2 million increase, newly acquired businesses account for the majority of the increase, adding approximately $4.8 million. SG&A for the base business increased with the investment in strategic services of approximately $1 million. This investment was in the areas of sales, R&D and technical services. Consistent with our comments at year end, we are investing in these commercial functions to maintain a pipeline of product development opportunities to drive organic growth. The balance of the difference was associated with incentive compensation accruals and other functional expenses. Cash flow in the quarter was relatively flat compared to last year. As illustrated on Table 11 in the press release, adjusted free cash flow from continuing operations for the first quarter was a use of $2.2 million compared to a use of $2.8 million in the prior year quarter. As a reminder, adjusted free cash flow from continuing operations is defined as adjusted EBITDA from continuing operations, less cash items used to operate the business, including cash taxes and interest, investment in working capital, capital expenditures and other operating cash items. The significant cash components of the quarter’s cash use were as follows

[Kevin Cornelius Grant:]

Thanks, Ben. Operator, we will now be happy to take the first question.

[Operator:]

Thank you. [Operator Instructions] And our first question comes from the line of Rosemarie Morbelli with Gabelli & Company. Please go ahead.

[Rosemarie Morbelli:]

Thank you. Good morning, everyone and congratulations.

[Peter Thomas:]

Thanks, Rosemarie.

[Ben Schlater:]

Thank you.

[Rosemarie Morbelli:]

Peter, I was wondering given the strength of the first quarter and the fact that you haven’t changed the outlook regarding raw material costs regarding macroeconomics and so on. Could you give us a little detail as to where you were surprised in the first quarter? I am assuming that you were.

[Peter Thomas:]

Yes, thanks for the question. We thought this might come up first. So, let’s look at raw materials for a second. During the latter part of the fall as we were planning for 2017, we saw that headwinds were mounting through the course of ‘17 based on the data we were receiving. And as you know, we moved pretty quickly into mitigation mode, so that we would have a good robust program before the year started that we could execute immediately so that the impact of those raw materials would not be as significant as if you didn’t have a program to mitigate it. So, we did build a mitigation program that would include many levers, some of which would be fourth quarter pre-buys, productivity initiatives, reformulation, price increases, volume increases, manufacturing efficiencies our revitalization part of our organic pipeline to launch new products a bit faster and in anticipating of somewhat of an unknown moving into 2017 since raw materials were moving. We actually instead of staggering those levers we pulled them all down at the latter part of last year in a way that they all took hold one way or another through the first quarter in a way that actually allowed us to be more effective in terms of offsetting raw material increases than we thought in the first quarter. However, having said that, when we still look out through the balance of the year, that impact or headwinds of raw materials have not changed. And we expect that year-over-year the raw materials will peak in the second quarter and then tail off through the balance of the year. So what we have is the situation where those levers have both a short-term and a longer term impact. By pulling them all, you can see the benefit that we realized here in the first quarter and that’s why we are holding it. That’s a – that would be a step change for the business that we don’t have to give back. However, we have exhausted a lot of the short-term levers. And going forward, we are constantly looking for other mitigation plans to help through the balance of the year. But our view right now, maybe somewhat conservative is that our expectation is that, that outlook will remain the same, second quarter piece tailing off in the second half of the year.

[Rosemarie Morbelli:]

And so those – the steps you took to offset raw material costs, any surprises on the volume growth, the organic volume was rather – growth was rather strong. So any areas which did better than you expected and could you give us a feel as to – I mean, you did talk in general terms of where the volume growth was in your different segments, but I am wondering if there was specific areas where it was substantially higher, the demand substantially higher than you anticipated?

[Peter Thomas:]

Yes. So as you know, each of our businesses throughout the world did better than we anticipated, maybe not surprising relative to how we are planning, because we maybe have planned for certain volume growth through the balance of the year, maybe more of it’s been realized here in the first quarter and maybe in the first half of the year. But some important things the note is that if you look at a big surprise for us was Asia Pacific. The Asia Pacific business, from a revenue basis year-over-year with the legacy business alone, grew somewhere between 12% and 17%. Now, what we have done there is modified the business model. We – a couple of years ago, we hired a Vice President to run that region, who is very strong in marketing and has a very crisp innovation acumen. And we needed to enhance that in that region in order to optimize the value that we can receive from that space. And the way we have done that through his leadership is that we built the model where we are only focusing on the high end of each of our businesses where that customer need for applications and services or let’s call it, our heavy touch model that we would really put a strong end together in Asia which is working. Just focusing on the very high end of each of the businesses with select customers where maybe the competitive intensity isn’t as robust and they really value our value proposition and that organization knows how to extract the optimal value for that value proposition. So Asia Pacific was actually a bit better than we thought. Likewise, we have taken that same model that we believe that we have developed nicely in Asia, we brought it to Brazil. And in Brazil, our revenue numbers were up in double digits as well. And we have taken the same approach, where we have taken all the pigments business, the Vetri model. We have even moved to the higher end of the porcelain enamel product range where the competitive intensity isn’t as rich. But also when you are in environments like maybe Asia and/or Brazil, where there maybe some informality, if you will, it’s very difficult for people and to mimic what we are doing in that type of environment in a way that it would cause price erosion. So we have also embraced that model in Brazil. So Brazil, Asia Pacific has done well. And Egypt or MENA has done better. Egypt in particular, with the devaluation of their currency, makes it easier for us to export now. Not only the fact that we are the market leader in indigenous Egypt, but now we can export and gain market share with a better lower – with a lower cost position in some other areas. So I would also add that Egypt was very strong. And in terms of – that’s the regional perspective. From a product line perspective, automobile, everyone sees that maybe it’s starting to soften, but the space for us globally was actually up. We saw – Asia is very strong for us. Mexico is strong and even Brazil was a lot stronger than we thought. Automobile is good. The high end tower market was very robust in the first quarter and we feel pretty comfortable for the balance of the year in that space as well because typically, what we have done with our customer and product rationalization programs in the past 3 years, we have aligned ourselves with the market leaders at the high end in a way that we can capture the new products that are being launched in a disproportionate way versus our competition. So we can grow at a faster rate, not only taking advantage of the GDP growth, but also a disproportionate amount of new products. So I would say as a summary – that was a long answer, by region and by product line, that’s where maybe we benefited more than we thought.

[Rosemarie Morbelli:]

Thank you. I will get back in queue. I have another question.

[Operator:]

Our next question comes from the line of David Begleiter with Deutsche Bank. Please proceed with your question.

[David Begleiter:]

Peter, on your sales guidance increase, can you bridge that increase from the prior guidance, the new guidance?

[Peter Thomas:]

Sure.

[Ben Schlater:]

Hi David, it’s Ben Schlater. It’s simply we take the performance from the first quarter, we add it to the existing guidance from – for the remainder of the year and then the math pushes the overall year guidance from a sales perspective up 1.5 points. So it purely just reflects the performance in the third quarter with – or the first quarter rather, with no change for the rest of the year.

[David Begleiter:]

Got it. And Peter, I understand the need, reason for caution after one quarter, but are you any less confident in the business going forward that would hold you back from raising guidance now or is that just simply a matter of draws are higher and we are only one quarter into the year?

[Peter Thomas:]

Yes, it’s that. I will tell you David and you have been with us for a long time and I would take you back to the third quarter of 2015 Analyst Call. I think you were asking some questions about our growth rates. I think both you and Rosemarie were touching on that that what would we expect to see from the growth phase, if you remember that discussion. And what I shared with the two of you that were similar questions is that please hang in there for the gestation period of the re-energized growth phase, because by the second half of 2016, you will see the new Ferro take shape. And that’s actually what’s happened. You can see for the third straight quarter, we have organic growth in both revenue and volume that’s outperforming the proxy GDP for Ferro, both in revenue again and in volume, actually two times in the volume, which is more germane from our perspective in measuring the business. So we had made a structural change in the business. This company is different. We are purely in the growth phase and the new Ferro, which you can see if you go back to the third quarter with organic growth of about 3%, fourth quarter, 4.7%, today, we are at 6.7%. We are starting to tighten the gap between quarters on growth in a way that maybe becomes more predictable moving forward. But at the end of the day, this company is structurally changed. So we feel good about the second half of the year.

[David Begleiter:]

Thank you very much Peter. Thank you very much.

[Operator:]

Our next question comes from the line of Mike Harrison with Seaport Global Securities. Please go ahead.

[Mike Harrison:]

Hi, good morning.

[Peter Thomas:]

Good morning Mike.

[Mike Harrison:]

Peter, I was wondering if you could talk a little bit in greater detail on what’s going on in the tile coatings business, first of all, can you talk about the pricing dynamics there, understanding you are trying to migrate into the higher end to the market where there is less competition, but how much pricing pressure are you seeing in the commodity side of the market? Maybe I will stop there for now.

[Peter Thomas:]

Well, you have been following this for a long time and you know as well as I do based on the pyramid that we drew for you that we are no longer in the commodity portion of the business. So the competitive intensity around pricing is not like it used to be. We have essentially repositioned ourselves into the high end of the middle and the high end of the high end. So what that suggest to you and I used to joke with you of course, that one of the best things to do is paralyze your competition with less attractive business. So a lot of that volume on the commodity side is back in the market where others have taken it and good for them. And what we have done between Vetri and SPC now, we are clearly the market leader in that space where there is less competitive intensity. So that’s why you haven’t heard us talk too much in the last two or three quarters about pricing. I mean the days of night fight in the telephone booth are over. We don’t do that. We understand that we are dealing with a premium type of a customer base who values our value proposition. We worked very closely with those customers to understand what their product life cycle is in a way that we would automatically know when it’s time for us to make an adjustment that would preclude anybody from taking the position from us. We are actually gaining market share with the new model. So in terms of – you could see the margin increase Mike, in Performance Coatings, I mean if you study the tile market globally around the commodity side of the business, you would see that margins have probably dropped where our gross margin has lifted. So in terms of pricing, you won’t hear us talk too much about that. What we will tell you the way we address it is that we know how to reformulate those products to perform better at a lower price point, but yet allowing us to generate absolute gross profit dollars lifting the margins up as well.

[Mike Harrison:]

Okay. And as I think about the drivers within tile coatings, just in terms of overall volume growth, a lot of us used to think of that business as being really emerging market construction driven, wondering if you can comment on what is driving – what drives the higher end of that market, is it still an emerging market driven business or are there other drivers that we need to keep in mind?

[Peter Thomas:]

Yes. Here is how you should look at it. It’s a good question. The drivers haven’t changed. We are just participating at a higher level in a way that even if construction goes down, we won’t go down now as much nor will our margins. So basically, one would argue that we have just absolutely cherry picked the most favorable positions in the space. But the drivers remain the same. You have emerging market growth and you have selective customers that set the tone for the market. And what’s different is that we now are in all the high end customers that set the market, set new products and launch faster and allow for a disproportionate amount of growth for us. We are the chosen on the high end now. And SPC has amplified that and has really solidified our position there.

[Mike Harrison:]

And then in terms of the surface technologies business, that’s been strong for I think a few quarters now. I know you have a CMP business is there and it sounds like semiconductor materials are doing pretty well broadly, but can you talk in a little more detail about what markets are driving the strength in surface technologies and what changes you guys have made in order to see what I assume has to be faster than market growth?

[Peter Thomas:]

Yes. So I can’t give you a low level of detail or a higher level of detail for competitive reasons, but the drivers are still the same. It’s just the customers that we selected and who again value the mix of products that we bring to the table. So what we are finding is anybody who is a leader in any of those spaces are now using Ferro as the supplier of choice, why, because of the asset light heavy touch model. What we have done over the past 3 years is we really have shrunk our customer base down by about 30% to 35% and we are only focusing on those who are market leaders or a market leader and who would value Ferro. And we have changed our way of going to market by bringing an applications technologies and marketing dimension to that customer base in a way that we have earned our right over the past 2 years to be the leader and the incumbent. And we have the first chance to substitute ourselves out in a new generation. So by using that model, you will see that that business continued to expand.

[Mike Harrison:]

Alright. Thanks very much.

[Operator:]

Our next question comes from the line of Ian Zaffino with Oppenheimer. Please go ahead.

[Mark Zhang:]

Hi, good morning guys. This is Mark Zhang on for Ian. Thank you for taking my question.

[Peter Thomas:]

Good morning.

[Mark Zhang:]

The question was actually on M&A activity going forward, just wanted to see how you guys are thinking about the space going forward and are there any specific areas you guys are targeting or in other words, which of your segments do you guys see meaningful growth opportunities and what are your thresholds or benchmarks for future deals? Thank you.

[Peter Thomas:]

Good. And nothing has changed from the last three or four quarters. We still are maintaining a pipeline of 176 targets. As we have mentioned publicly, we are currently engaged in heavy discussions with five different targets. We have – we are in various stages of discussion with another 16, so the cascading or the waterfall of the pipeline continues as we have expected. We – in terms of targeting each of the businesses, we know where we might have gaps in each business and we continue to plug those gaps in a way to strengthen our leadership position in each of our businesses. So we will continue that process. We maintain the strategy of investing $100 million to $150 million a year in invested capital. In return, our expectation is that we would see $120 million to $150 million of revenue growth, with an EBITDA of somewhere between $25 million and $30 million. That’s our model. That’s what we target. And actually, I think we have been outperforming that a bit. And we have one down. And again, we have five other targets we believe we are a buyer of choice with all of those different targets. And most of them are very similar to what you are seeing now. However, that doesn’t mean we are not entertaining something that’s a little bit larger or something that could be pretty attractive. And we do have those on a regular basis and we continue looking at a few of those. So we feel very, very, very good about our inorganic pipeline for the balance of the year and going into the next year.

[Mark Zhang:]

Terrific, that’s very helpful. And then I guess just for a follow-up, is there any way I could actually – more [ph] on the mechanics of the SPC deal, I know you guys mentioned EPS accretion, but is there anything on EBITDA that I can think about and are there any details around, I guess synergies that you guys could help guide to? Thank you.

[Ben Schlater:]

Yes, sure. So on SPC, I think we put in the press release the purchase price was €19.8 million. We did the deal at 6x. We would expect that on a synergy adjusted basis that that multiple is going to come down probably somewhere between 3x and 4x. And so again, that would be typical for us on a tile coatings deals. That’s what we would expect with respect to that.

[Mark Zhang:]

Okay, terrific. Thank you very much.

[Operator:]

Our next question comes from the line of Mike Sison with KeyBanc. Please go ahead.

[Mike Sison:]

Hi guys, nice start to the year. In Color Solutions, when you think about the organic growth, very impressive, it’s you don’t see a lot of businesses growing mid teens, can you maybe talk about some of the new products there and maybe some of the sustainability of that and longer term is, what type of growth do you think that organically is that – should that business consistently give us?

[Peter Thomas:]

Yes. Thanks for recognizing that. I guess I should have mentioned that was one of our surprises too. The pigment business that we have created, the triad of higher end companies is far exceeding, I would say, and fair to say, right, Ben, our expectations. I mean the cross-selling activities have been phenomenal. Everywhere we go, we just continue to find that those – that all of the customer bases may have individually been sold to by each of the companies. But when you look at those customers, they buy all three. So the idea of us being able to go in there with the basket and also leveraging some of the core competences we have in terms of particle engineering where we can help our customers blending those products we can particle engineer them to have certain types of functionality. I mean the cross-selling, the breadth and depth of the product line plus our ability to work with them to modify those things with something that we underestimated. So that horizontal strategy is part of the Color Solutions business, which would be as you know Mike, rolling up all the high end pigment pieces like we have done, is a nice prelude into sustained growth because it will now feed that vertical dimension like we have done with Delta Performance Products. So Color Solutions, if you look at both horizontal and vertical pieces, we see very, very good growth there. And we are very excited. We – again, putting those three together has far exceeded maybe our expectations. But I have to say one other thing. The employees of both Nubiola and Cappelle are phenomenal. They are very entrepreneurial. They are very marketing oriented. They know how to touch the customer. And they know how to really build good relationships. So what we have always said is we are going to take the best of – this isn’t about Ferro, it’s about the emerging Ferro using acquisitions to strengthen the entrepreneurial shift of our organization. In fact, you may – I am going to lay a number out there that may surprise everybody, part of the reason why you are seeing the last three quarters as part of this strategy because 35% of our current population are coming from those acquisitions that were smaller entrepreneurial and they get how to focus on a customer. And we have not taken that away from those organizations. In fact, we encourage that expression and ask them to help the rest of Ferro behave that way. And that’s another reason why this color thing is moving the way it is, it’s phenomenal. We are very, very pleased with it.

[Mike Sison:]

Right. And then if you think about the growth that you are seeing and I think the business will end up somewhere between $300 million to $400 million, what’s the – is this kind of an area where now you really want to get bigger acquisitions? Is this an area that you could accelerate? And is the market big enough where this could be double in several years?

[Peter Thomas:]

It’s a business that could be doubled and we have aspirations to that end.

[Mike Sison:]

Okay, great. And then if you do indeed can sustain the organic growth that you did in the first quarter, I know your guidance for 3Q to 4Q is less than that, but if it does sustain at Q1 levels, would the earnings leverage be similar, less the raw material squeeze you have to makeup, but if I strip that out, the earnings leverage would be kind of in line with 1Q?

[Ben Schlater:]

Mike, I think that’s right. I mean, in terms of the sensitivity, if we saw continued growth like we saw in the first quarter, I think the fall-through would be similar.

[Mike Sison:]

Great. Thanks, guys.

[Peter Thomas:]

You’re welcome.

[Kevin Cornelius Grant:]

Operator, we have time for one last question.

[Operator:]

Thank you. And our last question is a follow-up from the line of Rosemarie Morbelli with Gabelli & Company. Please proceed.

[Rosemarie Morbelli:]

Thank you. So, going back to SPC, how much are they bringing in revenues and are they going to be integrated with Vetriceramici?

[Ben Schlater:]

Hey, Rosemarie, it’s Ben. With respect to SPC, they are going to bring somewhere between $20 million and $25 million in revenues. With respect to the integration, yes, I mean, it’s – we are obviously still working through that, but the idea there is that those products are very, very complementary to the existing portfolio lineup with Vetri and that will strengthen the overall offering there, particularly from a commercial perspective.

[Rosemarie Morbelli:]

Okay. And in terms of assets, do you need their assets or can you produce those particular, I am guessing, in Vetri’s manufacturing plant equipment?

[Ben Schlater:]

So, the processing is very similar between Vetri and SPC, but we have not been public about where the synergies will come from.

[Rosemarie Morbelli:]

Okay. And in your 6x, I think on the press release, you said that it sounded as though it includes already some synergies, not all of them. Did I read that properly?

[Ben Schlater:]

No, the 6x is gross. It doesn’t include any synergies.

[Peter Thomas:]

Okay, great. Adjusted for 3 to 4.

[Ben Schlater:]

Correct.

[Rosemarie Morbelli:]

Okay, thank you.

[Peter Thomas:]

Thanks, Rosemarie.

[Kevin Cornelius Grant:]

We would like to thank everyone for joining us on the call today. We appreciate your interest in Ferro and we look forward to discussing our results with you again next quarter. Have a great day and best regards.

[Operator:]

Ladies and gentlemen, that does conclude the conference call for today. We thank you once again for your participation and ask that you please disconnect your line.