Ferro Corporation
Q3 2018 Earnings Call Transcript

Published: 9 Nov 2018

[Operator:]

Good morning. Thank you for joining the Ferro Corporation 2018 Third 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 this conference over to Mr. Kevin Cornelius Grant, Head of Investor Relations for Ferro Corporation. Please go ahead, sir.

[Kevin Grant:]

Thank you and good morning everyone. Welcome to Ferro's third quarter 2018 earnings conference call. This morning, we'll be reviewing Ferro's financial results for the third quarter ended September 30, 2018. I'm pleased today to be joined by Peter Thomas, our Chairman, President and CEO; and Ben Schlater, Vice President and Chief Financial Officer. The earnings release and the conference call presentation deck are available in the Investor 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 our earnings release and the earnings presentation. Also, today's call will contain various operating results on both, a reported and adjusted basis. Description 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's now my pleasure to pass the call over to Peter.

[Peter Thomas:]

Thank you, Kevin, and good morning everyone. Ferro's is on course to deliver it's 2018s [ph] best performance in many years, and third quarter was another step in that direction adding to strong performance in the first and second quarters. We're accomplishing what we set out to do at the beginning of the year; even with the challenges with higher raw material cost is relative to the prior year, and the occasional cause of macroeconomic uncertainty. In 2018 we continue to outpace our peer group and revenue growth, and we are well on our way to deliver a 20% growth in EPS, and greater than 15% growth in EBITDA. As these numbers suggest, we are successfully executing the dynamic innovation and optimization phase of our value creation strategy and delivering another excellent year-over-year improvement in performance. Revenue growth was strong in the third quarter company-wide, net sales increased 12.9%, and on a constant currency basis organic sales increased 7.3% compared with the same period last year. We hold healthy positions in the markets we serve, and we have a strong customer value proposition based on innovation, quality and technical expertise. Organic growth was again a major contributor to our increased revenues. For more than two years we have delivered quarter-after-quarter of organic growth due to our value proposition, our strengthened portfolio businesses, and our strategy to target the higher end of the markets we serve. Our vitality index which measures revenue from new product sales reflects the strength of our product innovation pipeline. We previously said that we intended to drive our vitality index in excess of 20% by 2020. I am pleased to report that our vitality index now stands at approximately 21%. I'm also very pleased with the cash generation capacity of our businesses. Ferro drove cash flow in the third quarter by tightening alignment between sales and plant utilization, and satisfying a portion of customer demand with existing inventory which contributed to the reduction in working capital. These actions also drove net cash provided by operating activities of $73.4 million and adjusted pre-cash flow conversion of 124% which is propelling the company towards it's full year cash generation targets. We anticipated the customer destocking that typically occurs in the fourth quarter, and we are now in a better position to deploy cash as we do most appropriate, including through stock buybacks. We see the same macroeconomic uncertainty that our peer company see weather related to foreign exchange rates, trade tariffs, rising interest rates, the late stage of the economic cycle, geopolitical tensions or equity market volatility. Although we are not currently experiencing the reduction in demand for our products, and we believe in our position serving the higher end of our markets insulates us to some degree from market softness. We do recognize that circumstances can change; having improved our cash position we are better positioned for market weakness if it develops. As noted in their earnings release, Ferro experienced the dip in gross margin in the third quarter due largely to a combination of our cash conversion initiatives and higher raw material prices relative to the prior year quarter, which as we discussed previously were anticipated. We expect gross margins to bounce back in the fourth quarter. Our raw material prices are decreasing, and we believe that Ferro pricing in the fourth quarter will more than offset the higher raw material prices relative to the prior year for the first time since early 2017. Based on these factors we are affirming our 2018 guidance at the lower range for adjusted EPS and adjusted EBITDA, and at the upper end of the range for free cash flow conversion. Now, I'll say a few words about each of our three business segments. Turning to Slide 7 in the presentation, you can see the third quarter 2018 summary of our business segments. So let's begin with Performance Coatings. Performance Coatings churned another quarter of strong sales and profit growth. Net sales on a constant currency basis were up 26.2%, and volumes are up 12.7%, organic sales growth was 7%, adjusted gross profit was $36.3 million, gross profit margin declined to 20.6% reflecting margin compression from raw materials that we pre-bought at the beginning of the year and continued to work through [ph]. As previously said, the Performance Coating segment has been the most significantly impacted by the elevated raw material prices over the past year but the Performance Coatings team has done a great job of increasing prices, reformulating products and optimizing plain spend in response. In Italy and Spain, Performance Coatings continued to see solid stable growth as demand remained strong for our high value materials. In Indonesia, we continue to capture market share in part because of anti-dumping tariffs imposed on Chinese manufacturers. And in China, we keep continue to see increased demand as other manufacturers closed due to environmental health and safety concerns at their facilities. Performance Coatings also generated improved volume in sales during the quarter with some of our most important accounts; that is our larger appliance customers. Now let's look at our Performance Colors and Glass segment. Performance Colors and Glass produced another quarter of solid sales growth, well ahead of the market rate. Net sales reported on a constant currency basis grew 13.5%, with volumes up 20.9%. Organic sales increased 11%, adjusted gross profit was $40.1 million and gross margin was 32.5%. We continue to see solid growth in the automotive part of the PCG business. We produce mid-teen sales growth in Asia Pacific, and we produced mid-single digit growth in Europe even as the automotive market as a whole in Europe grew less than 2%. In contrast, demand from our automotive customers in North America and Latin America was flat. Demand also continues to remain strong for Ferro's electronic packaging materials with sales up 24% over the last year. The number of sensors per product and industrial applications continues to increase which has been a key driver of growth for the high performance materials we sell that are used in sensors. Demand for our glass decoration products grew nicely as well in the mid-single digits as we saw off-cycle sales during the quarter from a major beverage bottling company that uses our products to decorate glass bottles. Now looking more broadly to the future; Ferro is a technology leader in Glass Coatings which positions us well to acquire expertise to the emerging mega trend that we have talked about including LED, 5G smartcards, 3D printing and more. We are at the forefront of innovative functional class coatings and our position in multiple markets to take advantage of the opportunities created by these mega trends. Now, turning to the Color Solutions segment summary. Net sales growth in the third quarter was all organic. Reported on a constant currency basis, net sales increased 4.6%. Adjusted gross profit was $31 million. Gross margin was 32.3%. Sales for our Color Solutions business advanced due to large parts of continued strong growth in our surface technology business. We are seeing strong demand in this business from memory chip makers who use our products for polishing. Demand also was strong for ultramarine blue pigments. We are expanding our manufacturing facility in Columbia as we announced last quarter to satisfy continued demand for ultramarine blue pigments. Color Solutions also benefited from increased demand for our transparent iron-oxide reds. As in our other businesses, Color Solutions is concentrating on serving higher end markets, improving mix and pricing our products according to the value proposition reflected in our high quality products in technical support. On Slide 8, you will see year-to-date performance metrics for our three reporting segments. So to sum up, Ferro had a very productive quarter with all three business segments contributing and the company making excellent progress in executing our strategy of dynamic innovation and optimization. I'm now going to turn the call over to Ben for his comments on the quarter and Ferro's financial position.

[Ben Schlater:]

Thank you, Peter, and good morning everyone. I'd like to spend a few minutes to review the consolidated financial results from the third quarter of 2018. Please note that the non-GAAP numbers I refer to are on an adjusted basis using constant currency. All third quarter comparisons are versus the third quarter of 2017. The financial highlights and results can be reviewed on Slide 3, 4, 5 and 6 in the presentation accompanying today's press release, which you can find on ferro.com in the Investors section. Starting with the third quarter performance on Slide 4; we grew net sales 16.3% to $395.2 million with organic sales growth of 7.3%. Adjusted gross profit increased 3.5% to $106.6 million. Adjusted SG&A expense was 56.2 million or 14.2% of net sales. We grew adjusted EBITDA by 8.4% to $63.7 million or 16.1% of net sales. And adjusted EPS increased 12.1% to $0.37. Now turning to Slide 5, I'll quickly go through our year-to-date performance. We grew net sales 16.9% or $1.2 billion. Adjusted gross profit increased 8.7% to $353.5 million. Adjusted gross profit margin was 29%. We grew adjusted EBITDA by 13.7% to $202.9 million or 16.7% of net sales. Adjusted EPS increased 15.8% to $1.17. With that, I'll review one-time adjustments for the third quarter and provide an overview of SG&A expenses and other income and expense lines. For the third quarter of 2018, there were a few non-GAAP adjustments, primarily related to our corporate development, acquisition activity and optimization initiatives. First, in cost of sales, we had adjustments of approximately $1.1 million due primarily to acquisitions costs related to optimization activities. In SG&A, we had one-time adjustments of $8.2 million consisting of legal, professional and other expenses related to certain corporate development activities, as well as fees associated with certain optimization initiatives. Under restructuring and impairment, there was an adjustment of approximately $2.6 million in the third quarter related to actions to advance our optimization initiatives and acquisition synergies. In other income and expense, we had an adjustment of about $1.3 million, primarily related to impacts of currency in Argentina; and we had an adjustment of $2.4 million for special items being tax affected at the respective statutory rate where the item originated. Now turning to Slide 6, I will go through SG&A. The third quarter adjusted SG&A expense was $56.2 million or 14.2% of net sales, compared with $57.6 million or 16.9% of net sales in the prior year quarter as dated on a constant currency basis. We continue to see good operating leverage as we grow the top line while maintaining tight range on SG&A. That brings me to cash flow; as Peter mentioned earlier, we are very pleased with the efforts our team has made to improve the efficiency of the balance sheet for 2019. For the third quarter, adjusted free cash flow from continuing operations within inflow was $79.1 million which compares to an inflow of $20.8 million for the prior year quarter. We defined adjusted free cash flow from continuing operations as GAAP operating cash flow less CapEx, then we add back cash used for our most significant optimization projects, acquisition-related items and restructuring. Beginning with operating cash flow, the most meaningful components are as follows

[Peter Thomas:]

Thank you, Ben. Now at our Investor Day, almost exactly one year ago, we explained the dynamic innovation and optimization phase of our value creation strategy. Over the past year we've shared a great deal with you about innovation initiatives and how they have contributed to an energized company culture where new products, new formulations, new technologies and new applications are constantly used in our work. We haven't taught this much specifically about optimization but I can assure you that our teams are deeply engaged in optimization initiatives as well. We have a broad range of global optimization initiatives underway, some of which we have completed. For example, over the last few years we have closed six manufacturing facilities and six sales offices, and we are in the process of closing another six production facilities by the end of 2019. We continually assess our facilities and capabilities to increase productivity and efficiency, and we will continue to seek out additional opportunities for optimization whether involving site consolidation or other actions to drive value. This morning I want to share more about actions we are taking to optimize manufacturing, our balance sheet and functional SG&A. Let's begin with manufacturing; our focus is to ensure we have global manufacturing capabilities that allow us to be highly efficient in delivering products to our customers, and that positioned us well to serve our evolving markets. And very importantly, we also want to be close to our customers that we can provide the technical support they rely on for their success. They use our key things for us. Our manufacturing optimization initiatives improved developing technical and manufacturing centers of excellence with new equipment, state-of-the-art production processes, and new technologies. Depending on the size and scope of the manufacturing center of excellence we may make changes to R&D, supply chain logistics and customer service to support the facility. In the past you have heard us discuss a major project in our optimization efforts; to remind you, this is the project we expect to deliver approximately $30 million of incremental EBITDA by 2020. I want to share with you today more about that project as it is nearing completion. We expect to complete the program to begin contributing to our financial performance in 2019, and as reported in the new release to contribute approximately $8 million to $10 million in adjusted EBITDA in 2019. We anticipate the adjusted EBITDA run rate benefit by the end of 2020 to be $30million. The second area of optimization that I want to address today relates to the balance sheet. As you know, we have transformed our business to target the higher end of the tile market which has increased growth and lifted the margins in our Performance Coatings business. However, the high-end tile market generally buys longer accounts receivables terms. To address this we are evaluating an accounts receivable facilities specifically for our tile business through which we could solve the receivables and thereby accelerate our receipt of payment. We would expect this facility to be accretive to our cash position and EPS, and to improve our economic return. We plan to use any funds received from their facility to pay down debt. We are working on this facility and expected to be in place in the fourth quarter of 2018. And finally, let's talk about functional optimization. Our value creation strategy has been transformative in many ways, we have taken cost out of the business by focusing all our efforts on becoming a leading technology driven functional coatings and color solutions business. We continue to encourage a culture of efficiency and productivity throughout our organization. We have been able to capture synergies from acquisitions made in recent years in both, back office and other functions. We have optimized our account in connection with these acquisitions, elevating the best people from our base business and the acquired businesses to drive the company forward. In addition, every department in the business is focused on driving 2% more efficiency. We are pleased with the contribution these optimization initiatives have made to Ferro's performance and our teams have embraced the importance of continuously driving efficiency. We see more optimization opportunities ahead. Now I want to comment once again on the Vision 2020 goals that we laid out at the Investor Day last year. As a reminder, those goals include $1.7 in annual revenue, organic growth of at least 3% to 4%, and 2% annual optimization efficiency within business. We also expect our optimization efforts to produce gross margins of 33% to 34%, EBITDA at 20% plus, and free cash flow conversion of 50% to 60%. We are well on our way to achieving these outcomes. For example; we expect that stabilization of raw materials pricing to contribute 100 basis points to 150 basis points to gross margins. We expect that optimization efforts will improve those margin by another 150 basis points or so. And we expect that organic growth initiatives will contribute another 50 basis points or so. So let's bridge from where we are today to 2020 by looking at 2019. In 2019, we expect to see top line growth of the least 3% to 4%. We expect much of that growth this fall through to gross profit with gross profit margins improving 45 basis points to 50 basis points. We also expect to see a benefit from raw material prices in 2019 adding about 70 basis points to 80 basis points to gross profit margin. Then finally, we would expect to see about 50 basis points to 60 basis points improvement from the optimization program we have described. This translates roughly to a 31% gross profit margin in 2019. We intend to deploy cash in a prudent way that drives shareholder value. We would expect to continue to repurchase shares in 2019 on an opportunistic basis and within our leverage targets. With this preliminary look at 2019, perhaps you can see why we are so confident that we are on-track to achieve or exceed our 2020 goals. Thank you. And I'll -- let's return the call to Kevin for the Q&A.

[Kevin Grant:]

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

[Operator:]

[Operator Instructions] We have a question from the line of Rosemarie Morbelli with Gabelli & Company.

[Rosemarie Morbelli:]

Peter, you announced recently the acquisition of some technologies and you exercised technologies more than operations. I was wondering where we stand -- what they are going to bring in? And if you could give us a little more details on what is happening there?

[Peter Thomas:]

Sure, we would love to do that. We thank you for your compliment, we feel the same as you related what's going on here. But during the last call, we mentioned that we had a range of -- let's call them technology acquisitions to fill the gaps in our portfolio. So here is where we stand today because we were able to add another one since the last call, but in total, we have acquired seven types of technology platforms if you were companies. And let me give you an example of what the revenue and EBITDA and synergy -- adjusted EBITDA might be from that handful or seven types of deals. We're looking at revenues somewhere between -- let's call it $70 million and $80 million; we're looking at EBITDA anywhere between $10 million and $13 million, and synergy adjusted EBITDA anywhere between $20 million and $25 million; that would put us at an acquisition multiple of about 8 and synergy adjusted at 4.1. So again, within the framework -- well, here is what's important. When you look at that collection, let's share with you as much as I can with a lot of [indiscernible] detail but let me give you a high level. What we've acquired are advanced water-based glass coatings, probably three or four technology platforms that we did not have, and are new in the industry. We also complemented our high-end tile business with adjacent higher end tile additives that enhance the performance of our current high value product offerings. We also acquired a high-end dielectrics business that complements our key customer's requirement for the way we service the customer; actually, that particular deal was driven by our customers asking us to do that. We also bought some very interesting automotive types of coatings, I won't be more specific around the substrate; but again, it's just another type of technology platform that we've added that will continue to differentiate us. We also bought a complimentary range of colonial [ph] silica chemistry around CMP slurries, again, complementing our product offering to our key customers who wanted us to do and add that type of technology. And we also added the last high-end tile glaze producer in a way that we now have over 30% of the high-end market for title coating solutions, and our relative market share has now upto almost three. So we've pretty much filled in this year most of the technology gaps that we felt we had so that we can really leverage all those synergies in 2019 and 2020. So there is just the brief summary. Let me add another piece of information because I think that it's important you always hear us talk about adding technology, and that's why we're delivering the type of vitality index and that's why we continue to jump to [indiscernible] twice versus our competition in many of the markets we serve. In 2012, Ferro actually possessed 21 market-leading technology platforms and about 60% of our revenue in 2012 was from leadership positions. Where we stand now through the balance of this year, Ferro now has 51 market-leading technology platforms, and over 92% of our revenue is coming from market leadership positions. So that's a reason why we spend a lot of time around organic activities, the pipeline, the vitality index and why we speak so often around filling those technology platforms because our breath and depth of technology offerings is really, really desired by our high-end customer base. So that's where we are for the deal so far this year, and by the way I will add we're at the table with a couple of more, we hope to maybe get one more deal done, we have letters of intent in place and we'd love to close one more deal with a very interesting complimentary technology platform.

[Rosemarie Morbelli:]

So does that mean that by the end of this year you will have spent somewhere between $100 million and $150 million in M&A in line with what you are projecting?

[Peter Thomas:]

The answer is yes, but I also want to add a couple of other things, it's very important -- we always talk about invested capital around deals. And remember, we would view like that major capital for that cost if you will of that major program, and even our stock buyback was strategic investment. So if you add all those together, we're approaching about $200 million of invested capital and what we would define as strategic investments including investing in ourselves which as you know, we believe is very strategic because intrinsically our stock is really undervalued.

[Rosemarie Morbelli:]

The SG&A ratio is at it's lowest at 14.2% of sales; is that sustainable or were there some kind of temporary steps taken during the third quarter?

[Peter Thomas:]

Thank you for bringing that up. What you see there Rosemarie, part of that reduction had to deal with incentive comp reductions, basically that's what that is.

[Ben Schlater:]

I would just add to that. In addition to that we are seeing base company SG&A, the leverage there improved, particularly, as we've added the deal. So effectively what's happening is, you're seeing base company SG&A stays flat as the top line grows, and that's adding a fair amount of leverage as well.

[Rosemarie Morbelli:]

Could you talk about the environment in China; you touched on it but could you give us a little more details vis-à-vis of the competitive environment as well as the tariffs and trades?

[Peter Thomas:]

Yes. Actually I will tell you; China for us, regardless of what we're -- it's kind of what we said what I mentioned in the prepared remarks; we do see what everyone else is seeing but we've repositioned ourselves in higher end markets where we're buffering ourselves better, we have some coverage of protection if you will. But also we positioned as you know over the past 18 months, our technology in certain markets where we were starting with very little; so the law of small numbers is actually helping us but one thing you should be aware of; as it relates to what we're dealing with in China and Asia, in general, basically for the third quarter year-over-year, if we look at automotive, for example; our automotive business is up over 11% in China. Our industrial applications with center activity and they are like -- we're up over 30%. When we look at other types of electronic applications that I mentioned in my prepared remarks were up over 30% in that area as well. When you look at our Color Solutions business, service tax is up, well into the double digits. Our pigments business is up mid-double digits in the teens. Even with our tile business, because of the environmental impact where a lot of companies are being shutdown to the credit of the government, even our tile business is up over 20%, and that would be in all product lines like fritz [ph], colors, our FAS product line, and porcelain enamel [ph] is up in high single digit. So the environment there for us whether it's because of the environmental shutdown or the tariffs are not hurting us because we produce locally. And again, the demand for our higher end products is really significant. So we're actually enjoying one of our better years in China and Asia this year.

[Operator:]

And we have a question from the line of Mike Sison with KeyBanc.

[Mike Sison:]

I wanted to make sure I understood the walk for '19; I think you said $8 million in cost savings, was it $20 million in acquisitions? And then raw materials would be a benefit? And then I guess finally would be the organic sales growth, right. Is that how -- we should look at it.

[Ben Schlater:]

Mike, it's Ben. I think so -- I mean if we jump off our guidance for 2018 and we add to that sort of 3.5% growth, we think that that will turn into EBITDA, Mike somewhere in the range of $16 million. And then you take the optimization savings and 8 and it add it to that. And then you've got deals of about another 8; and then finally we think that -- Peter referenced 70 to 80 basis points of margin enhancement because of rows [ph] flipping around. That's about another $120 million. So when you rack all that up, again 12 from Ross, 16 from growth, 8 from optimization and from 8 deals you get to about $315 for next year or so. And so as we sit here today, I mean -- we look at business, we look at the business demand is strong, raw materials as we sit there we going down so of as we see we feel pretty good sort of average for next year from an EBITDA perspective..

[Mike Sison:]

And then in terms of 2020 talked about being able to get there with -- just as is without more acquisitions, and I guess if you think about getting to 1.7 or so in sales, it's kind of the walk that I'm seeing plus 20% margins. The growth from '19 to '20 is even stronger; is that the way to think about that maybe?

[Ben Schlater:]

Yes, you're right. I mean if you look at this year where we expect the end might which I think is $1.632 billion in revenue; and with the type of growth you're seeing, there is a good possibility that we could hit that $1.7 billion next year.

[Operator:]

[Operator Instructions] We have a question from David [ph] with Deutsche Bank, please go ahead.

[Unidentified Analyst:]

I guess in terms of the four acquisitions you did in the quarter, how do we expect them to contribute to your growth? And can you also discuss the synergies and margin profiles of décor business?

[Ben Schlater:]

I think we just talk for next year in '19, we expect those deals at the EBITDA line to contribute about $8 million. And those deals when taken collectively next year, we also expect to be margin accretive from a gross margin perspective.

[Peter Thomas:]

Relative to the specific gross margins, rather than discuss the specifics; let me give you a different way of looking at it because I don't want to provide a lot of detail. But if you're looking at the water-based coatings which would be positioned in our performance colors of glass business, let's say that the profile of those new product lines will have anywhere between 800 and 1000 basis points higher than current portfolio of that business. With the high-end dielectrics and the other slurry business, that would be probably in line with our other electronics type of applications which would be anywhere between 55% and 80%, depending on what the mix is.

[Ben Schlater:]

And as it relates to the high-end, remaining high-end tile contribution with additives, as well as the high-end glazes in the like, they would have gross margins that are probably 1500 to 2000 basis points higher than current aggregate from [indiscernible]. Does that help you?

[Unidentified Analyst:]

Yes. And secondly, I guess under $30 million, optimization savings; can you roughly break that down by segments?

[Peter Thomas:]

No, we're not in a position to do that at this point but early January we'll tell you everything in detail, right now that project is nearing completion, things are moving, things are starting up, things are being, made new systems and processes are being vetted, everything is a go, we're just to push the button. But we'll be very specific here very shortly, and hopefully, when you hear what we have to say although we've been talking about it for two years, and I think we made some reference on the last call that we thought that maybe they were even more exciting opportunities and variants to that that you'll be as excited as we are, it will address your comfort level as to why we feel so confident about that project and what it means to us next year.

[Operator:]

Our next question is from John McNulty with BMO Capital Markets. Please go ahead.

[John McNulty:]

So, I guess a question on the fixed cost absorption and the dialing down of production to kind of push out inventories; I guess when you think about what the actual impact was on the margin -- what was that? And in fact something that we should be thinking about kind of going forward as to how you kind of manage your second half numbers or is that kind of more just a onetime -- look this is what we need to do this quarter to kind of get ready for the optimization plan?

[Peter Thomas:]

Well, there you said something very important, to get ready for the optimization plan; so let's go through that. And John, I think you know us pretty well and you have an idea of how you link that. Let's make sure we're clear about something, one of the most important things that we're establishing here is, we really want to be responsible for the actions that we take, and we're taking prudent actions. We've all been around long enough to know there is so much noise in the marketplace, John, whether it's real, whether it's contrived, whether it's self-fulfilling, it doesn't matter -- the bottom-line is sometimes where there is smoke there is fire. And the last thing that we want to do is play catch-up with something that could be more significant going forward. So we took the third quarter as an opportunity to advance maybe some of the things that we would typically do in the fourth quarter, we thought that was a responsible thing to do and that it was prudent because there were some things that we were hearing, from the macro perspective you know how we feel that we believe we're sheltered so much but it doesn't mean we're new to it. And if in fact things occur like some people think, the last thing we want to do is Ferro is running on in the fourth quarter and first quarter and telling you in the call that we're doing mitigation plans and we're doing this, that isn't the case; we're catching this potential knife by a handle. So we took the actions to address and align and right-size our inventory mix for our customers that we've selected to grow with. And if you remember, the first two quarters you heard me talk about extracting value for the value proposition, and part of that value proposition was six months of studying what is the right mix that we feel we should have that would reward us for the value we bring to the customers; so we took six months of data, we process that information and we came up with a mix that we felt was absolutely essential for us to move in the third, fourth and first quarters so that we can flush the system with materials that we might not have an interest in. So the combination of being in the state of preparedness for any potential downturn, alignment of the right mix for customers that we might have done in the fourth quarter where we took an earlier action. If you put all those together, it was the absolute right thing to do. And that really meant about $0.03 to us, John, to be very candid with you. But that was our decision, there is nothing fundamentally wrong with the business; we have significant demand, we have great organic growth, we're going to experience more organic growth in the fourth quarter, we don't want to be reactive at the last minute, we want to jump that curve and get ahead of it because at the end of the day if you're swimming in a stream with a bunch of animals, you sure want to be upfront and upstream instead of downstream. So that's the deal, we want to get this thing straight going into the year, we've done the right thing. And the second thing is, raw materials were $0.02, one of that we were aware off, we've made it clear. So I've already identified $0.04 that either we were aware of and/or we did it was self-inflicted. The other thing that there was a precipitous drop of Cobalt where it dropped like 20% and 30%, and everything based on LME; so we've got caught in a little bit of a jam that are going to cost of $0.01 but this $0.03 and the Cobalt, and the materials in invested transitory; I mean you heard us talk about the come back into the fourth quarter and the first quarter. So when you look at your math and we see the headlines that we missed and we missed that; look, we're guiding for the year, we're very nimble, and we're going to do the right things for the business because we have a clear line of vision to what this is going to be next year, we essentially gave you a very good look if you're doing the math and I'm not sure how many people are doing that but I think it looks like 2019 is shaping up to be a very, very respectable year for us. Again, which would be seven in a row. So I'm not sure if that answers your question but on, you can see we're passionate about -- we are doing things that we feel are prudent and right for the business, and we want to stay ahead of the curve.

[John McNulty:]

One last question; Ben, I think you would mention earlier is that the optimization program -- in addition to the $30 million of cost saves there might be some working capital and cash flow benefits as well. Are you at a point where you can give us some clarity on that or it's a little bit earlier on it?

[Ben Schlater:]

It's a little early John but here is where I think we can help. This is something that will really help get you our adjusted free cash flow conversion target; so as we sit here today in that 45% range, as we bridge to 2020 and somewhere between 50% and 60%, this is going to have a significant impact of getting us here -- from here to there. I think what you'll find is that in 2019 you will find our free cash flow accretive to where we end you '18 because of it.

[Operator:]

We have a question from Kevin Hocevar with Northcoast Research.

[Kevin Hocevar:]

You've gone on a nice spree here in terms of acquisitions; so wondering if you could just kind of touch on the pipeline. I know you typically have a pretty full pipeline of acquisitions in various degrees of exploration but -- so wondering, if you can kind of comment on how that pipeline looks? And how we can expect -- obviously, you've done a lot lately but what can we expect over the next couple of months or so?

[Peter Thomas:]

As I mentioned earlier, we do have LOIs with two, we're hoping to close one, another one by the end of the year which would give us another -- actually both these builds have a very intriguing market leading technology profiles. So we feel there is a possibility we can at least get one of them done. Our pipeline over and above that as we still maintain that we're in heavy conversations again with another five, we still maintain our $100 million to $150 million invested capital but remember what I just mentioned, that would also include our own stock buybacks. On an opportunistic way, we view that as a deal, and think about that, there is no integration either way but -- again, intrinsically, we believe we're undervalued so we're being very opportunistic. And again, part of the reason why we wanted this now, we're going to share something else with you. If in fact what some people believe is going to be a little bit of a head storm in the first and second quarters of next year, we wanted to really tighten our cash position up in a way that maybe some of the things we're looking at to be had at a more preferred value or there could be other things out there if the market does take a turn that we would be in a very nice position to capture something at a more reasonable price. And that's another reason why we took the actions in the third quarter just to make sure that we're cash ready with some of the types of investments we're thinking.

[Kevin Hocevar:]

On the raw material side, just another quick one there -- expecting that to be a $12 million flip in EBITDA next year and a nice little bump to gross margins. Can you give just a little color there; is that a net gross versus pricing number or is that simply gross and is that an assumption that gross kind of stay where they're at today? And which are the ones -- I know you mentioned Cobalt come down -- I think as we've talked -- wondering if you could just give us some color on -- just a little more color around that raw material piece.

[Ben Schlater:]

The $12 million is a net number, right, so that would we that would be the benefit we see come back through at the gross margin line, it does assume that raw materials stay were where they are today. With respect to your question on Cobalt, we are aware of -- sort of -- there is a view in the market that Cobalt may go back up. We are not seeing that -- the areas where that's been identified in the market is sort of outside of our supply chain and a different grade of Cobalt. And the other thing I would mention is, we have largely reformulated a pretty significant amount of Cobalt out of the supply chain. So the Performance Coatings team has done a very, very good job of that in 2018. So from a gross perspective, we feel pretty good about going into the fourth quarter and into 2019.

[Peter Thomas:]

Kevin, just as add something real-time; our Chief Procurement Officer is in China at a Cobalt conference and she has been keeping us pretty much up-to-date here and basically, just to summarize, this is something that she does said; there is not much of a concern here at the Cobalt conference. So it seems like whatever is out there, it doesn't seem like it's -- maybe it's hyped up a little bit but it doesn't seem to be too much of an issue coming out of that conference.

[Kevin Hocevar:]

Thank you very much.

[Peter Thomas:]

Operator, we have time for one more question.

[Operator:]

And we a question from Mike Harrison with Seaport Global Securities.

[Mike Harrison:]

Wondering if you can talk a little bit about your business in Turkey, just wondering if you're seeing any impacts from some of the political and economic situation on your production that's based there? And maybe on the markets that you served in and around that country?

[Peter Thomas:]

Just like the second quarter when we discussed this, our Turkish business is up double digits, and we're just not -- we're positioned in things that are more high-end and lower volume, and good margins, and we're very pleased with our beach front that we built in Turkey, and we have an expectation with all this going on there we're going to do more.

[Mike Harrison:]

And then also wondering about the kind of the pricing and mixed front, the efforts that you've been making in response to raw material inflation that we've been seeing over the past several quarters; it seems like you guys have made some changes in your approach and been pretty successful, particularly in Performance Coatings. Just wondering kind of how sustainable or sticky you think that some of these pricing and mix improvements could be such that as you start to see gross maybe moving in the other direction? How confident you can be that you hang on to this pricing rather than give it back to the customer?

[Peter Thomas:]

I'm glad you brought that up and thanks for recognizing that. Ben, not that I'm asking the question for him; but why don't you share the magnitude of the price increases that we've accomplished because I think that's an important point and then we can answer those.

[Ben Schlater:]

So year-to-date, the business across all segments has as pulled $33 million of price year-over-year, and of that $33 million, two-thirds are about $21 million, shift in performance coding. So I can tell you that's something that's not been done before in Performance Coatings, in that amount of time; so that's very, very significant and I think sort of a testament to Garcia [ph] and his team and what they've been able to do from a price perspective.

[Peter Thomas:]

And here is kind of what the strategy would suggest; the reason why that is because of the repositioning of that business in the higher end, number one, and the fact that they were able to get the magnitude of that $21 million also would suggest how sticky it might be if that helps you.

[Mike Harrison:]

And then the last question I had is just on the -- in your 10-Q, the Color Solutions business, it references $3.8 million in the higher manufacturing costs; I just wanted to understand is that related to some of the fixed cost absorption and some of the self-inflicted things you did this quarter or is something else going on there? Thanks.

[Ben Schlater:]

No, that's it Mike. It was largely in Color Solutions, that's one of our highest margin businesses and the absorption impact would be felt more there. So the planned actions that we took there set largely in Color Solutions.

[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 to discussing our results with you again next quarter. Have a good day.

[Operator:]

This concludes the call for today. We thank you for your participation. I say, please disconnect your lines.