Ferro Corporation
Q4 2018 Earnings Call Transcript

Published: 28 Feb 2019

[Operator:]

Good morning. Thank you for joining the Ferro Corporation 2018 Fourth 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, Head of Investor Relations and Corporate Communications.

[Kevin Grant:]

Thank you and good morning everyone. Welcome to Ferro's fourth quarter 2018 earnings conference call. This morning, we'll be reviewing Ferro's financial results for the fourth quarter ended December 31, 2018. I'm pleased today to be joined today by Peter Thomas, our Chairman, President, and CEO; and Ben Schlater, Group's Vice President and Chief Financial Officer. The earnings release and 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 the presentation deck. We encourage you to view that information in conjunction with today's discussion. It's now my pleasure to pass the call over to Peter.

[Peter Thomas:]

Thanks, Kevin, and good morning everyone. Ferro reported another strong year of growth in 2018. Revenue increased 15%, adjusted EPS increased 16%, and adjusted EBITDA increased 12%. Ferro generated strong cash flow with free cash flow conversion of more than 51%. In addition, as of the end of 2018, we delivered our 10th consecutive quarter of organic growth. To the Ferro team around the world, I extend my congratulations on these excellent results. Ferro's year-over-year improvement in financial performance demonstrates that we now have a portfolio of businesses substantially stronger than we had several years ago when we implemented our value creation strategy. We have elevated the quality of our portfolio by divesting non-core assets and making acquisitions that expand our leadership in higher growth, higher margin niche markets. Now in the dynamic innovation optimization phase of our strategy, we are investing in these enhanced technology platforms within our portfolio to drive new product development and fuel organic growth. At the same time, we're advancing optimization initiatives to improve productivity efficiency such as The Americas Manufacturing Consolidation Project we announced in January. We are pleased with the innovation and optimization objectives achieved to-date and excited about the opportunities ahead. You can see the positive results produced so far and the favorable trajectory that has developed in the charts including the first page of our earnings release. We believe Ferro is positioned for long-term sustainable value creation. For 2019, we expect to continue to generate growth in revenue and profitability that compares favorably with our industry. Our peers are reporting softening in some markets and we will not be immune to such conditions. However, Ferro will continue to bring new products to market and to expand into new markets and we will continue to optimize our operations. We remain confident that Ferro continue to grow revenue and profitability in 2019 even if at a somewhat slower pace than in 2018. With all the talk about uncertainty in macroeconomic conditions, let's focus mainly on the optimization side of our strategy. Optimization initiatives are designed to enable Ferro to look profitability even when we encounter softness same market conditions. We see significant optimization opportunities within our business today and we are moving forward with initiatives so that we can drive profitability even if broader market conditions soften. The Americas Manufacturing Optimization Initiative that we announced last month is one such opportunity. This initiative is expected to contribute $8 million to adjusted EBITDA in 2019 and approximately $30 million by the end of 2020. Now, taking a global perspective on our optimization initiatives, over the past two years we have consolidated six manufacturing sites in our facility, and by early 2020, we expect to consolidate an additional seven manufacturing sites, including those affected by the Americas Manufacturing Optimization initiative. In other words, we are working hard on optimization now so that even if market conditions weaken in the future, we can still deliver market leading improvements and profitability. Now let me say a word about the fourth quarter of 2018. In the fourth quarter, along with the raw material cost headwinds that we encountered during much of the year, we also experienced mix in customer order patterns that negatively impacted margins as we previously reported. Seasonal destocking and inventory repositioning were higher than usual, particularly by customers of our higher-end tile products. Previously these customers were carrying approximately six to eight months of finished goods, but with the destocking in the fourth quarter, this was reduced to about two to four months. As a result, we experienced a negative impact to margins due to decline in high-end volume and a relative increase to middle market volume. And as we previously reported, Ferro's Performance Colors & Glass products were pushed into 2019 due to capacity utilization footprint optimization initiative. While we were disappointed with these circumstances at the end of 2018, we're pleased at the way our business model delivering strong year-over-year growth in revenue and profitability. We also were pleased with the cash flow generated by the business in 2018 which gives us flexibility to invest in acquisitions, buyback shares, and pay down debt as appropriate. Now I'll turn to the performance of our three business segments for the fourth quarter and full-year. In the presentation deck, you can see summaries on Slide 6 and 7, our fourth quarter and full-year performance for our three major segments. Let's begin with Performance Coatings. In the fourth quarter, Performance Coatings volumes increased 7.7%, while net sales on a constant currency basis increased 12.8%. Organic sales increased 3.8%. Adjusted gross profit declined slightly to $36.5 million. Gross profit margin declined to 20.3% from 23.1% reflecting the shift in mix and volume resulting from the destocking and inventory repositioning that I mentioned earlier. For the full-year 2018, Performance Coatings volumes increased 11.9%, while net sales increased 24.5% to $733.9 million. Organic sales grew 3.7%. Adjusted gross profit increased year-over-year to $166.7 million. Gross profit margin for the year was 22.7% compared with 25.5% in the prior year. During 2018 the Performance Coatings segment was affected by significantly elevated raw material price. Now we expect the destocking that we experienced in the fourth quarter to carry into the first quarter of 2019. While we anticipate improvement for the remainder of 2019, as high-end market inventories return to their usual size. Before moving to our next business segment, I should point out that to counter the industry challenges we encountered during 2018, the Performance Coatings team did a great job implementing price increases, reformulating products, and optimizing plan spend. Now let's look at our Performance Colors & Glass segment. In the fourth quarter Performance Colors & Glass volumes declined 2.1% with net sales on a constant currency basis down 2.7%. Organic sales declined 4.1%. Adjusted gross profit increased to $38.7 million. Gross profit margin declined to 32.9% from 34.5%. For the full-year, Performance Colors & Glass volumes increased 12.7% with net sales on a constant currency basis up 8.1% to $487.5 million. Organic sales grew 6.4%. Adjusted gross profit increased year-over-year to $167.5 million. Gross profit margin for the year was 34.4%, down from 35.9% in the prior year. For over a year, PCG's growth in the auto market has been strong, as demand for our product applications increased in the total market share. In the fourth quarter of 2018, our PCG auto sales were down 2.7% as global auto sales declined approximately 6% mainly as a result of a slowdown in Asia and Europe. For the full-year 2018, our PCG auto business grew 7.4% continuing the long track record of market outperformance driven by Asia which was up 14%, and Europe which was up 8%, then offset by a decline in U.S. of about 7%. Demand was muted in the quarter with Ferro's Electronic Materials with sales down 3% year-over-year. For 2018 sales increased 10.4%. Looking ahead, we were excited about the growth potential for this business. Our Electronics Materials go into sensors, dielectrics, and capacitors, which are used in fast growing areas by Intelligent Automation. The number of sensors per product in the variety of markets for example has been rising as products are made intelligent and this in turn drives demand for our high performance materials and sensors. Fourth quarter sales for our industrial product line declined by 10.3% mainly as a result of customer delaying orders for our desktop printers as they anticipated new printer technology that we unveiled late last year. For the year industrial sales increased 11.2%. Ferro is a technology leader in functional Glass Coatings. We are leveraging our technical knowledge and innovation capabilities to fuel future growth in most of the markets that are in this megatrend including Intelligent Automation, 5G, smart cars, and LED. Now turning to the Color Solutions segment summary. In the fourth quarter, Color Solutions delivered strong sales and profit growth. Net sales on a constant currency basis increased 19.4%, while volumes were down 1.2%. Organic sales increased 14.7%. Adjusted gross profit increased to $33.4 million. Gross profit margin expanded to 34.1% from 31.1%. For the full-year of 2018, Color Solutions net sales increased 7.8% to $391 million, while volume was down 5%. Organic sales grew 5.6%. Adjusted gross profit increased to $129 million. Gross profit margin full-year increased to 33% up from 32.5% in the prior year. Fourth quarter sales growth for the Color Solutions business was due in large part to the continued strong demand for our surface technology products. We are seeing robust demand in this business from memory chip makers who use our highly engineered policies in their products. We experienced a softening in the market for Colors which are usually have been granular as customers worked on inventories due to slower housing construction. Demand for CIC PPs and automotive applications also declined from it. However demand for our specialty pigments in military applications was strong. Now a brief comment on our balance sheet. We are taking a prudent orientation to our balance sheet maintaining the leverage posture. We intend to deploy capital as we do most appropriate for acquisitions, share repurchases, and debt repayment. So to sum it all up, Ferro delivered another very good year in 2018. We showed strong growth in revenue and profitability and we generated significant cash flow. And again, I extend my thanks and congratulations to our associates around the world for another strong year. With that, I'll 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 more consolidated financial results for the fourth quarter and full-year 2018. 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. All comparisons are versus the fourth quarter and full-year of 2017. The financial highlights and results can be reviewed on Slide 3, 4, and 5 in the presentation accompanying today's call which you can find on ferro.com in the Investor section. Starting with the fourth quarter, we grew net sales 9.1% to $395.5 million with organic sales growth of 3.6%. Adjusted gross profit increased 3.5% to $108.8 million. Adjusted SG&A expense was $66.4 million or 16.8% of net sales. We grew adjusted EBITDA by 6.4% to $56.1 million or 14.2% of net sales and adjusted EPS increased 13.8% to $0.33. Now turning to Slide 5, I'll go through our full-year 2018 performance. We grew net sales 14.9% to $1.6 billion. Adjusted gross profit increased 7.4% to $462.3 million. Adjusted gross profit margin was 28.7%. Adjusted SG&A expense was $257.2 million or 16% of net sales. We grew adjusted EBITDA by 12% to $259.1 million or 16.1% of net sales. And adjusted EPS increased 16.3% to $1.50. With that, I'll review one-time adjustments for the fourth quarter; we provide an overview of certain items within our financial statements. For the fourth quarter, there were a few non-cash adjustments primarily related to our corporate development, acquisition, and optimization activities as well as our annual mark-to-market adjustment for our pension and other postretirement benefit liabilities. First in cost of sales, we have adjustments of approximately $3.7 million for the fourth quarter primarily due to acquisitions and cost related to optimization initiatives. In SG&A, we have one-time adjustments of $4.6 million in the quarter consisting of legal, professional and other expenses related to certain corporate development activities, certain optimization initiatives including the manufacturing optimization we announced in January of this year. Turning to restructuring and impairment, there was an adjustment of approximately $2.9 million in the fourth quarter related to actions to achieve our ongoing optimization initiative and acquisition synergies. In the quarter, under other income and expense, we have an adjustment of about $17.6 million. This was primarily related to pension and other postretirement mark-to-market adjustments of $18.3 million with an offset in earn-out adjustments related to acquisitions that are beyond the measurement period. Finally, we have adjusted out or removed a benefit in the fourth quarter of approximately $4.5 million as a result of clarification to the Tax Cut and Jobs Act and the reevaluation of certain tax assets in our Americas region. The fourth quarter adjusted SG&A expense was $66.4 million or 16.8% of net sales compared with $67.8 million or 18.7% of net sales in the prior year quarter as stated on a constant currency basis. Newly acquired businesses accounted for the increase. We continue to see good operating leverage as we grow the top-line while maintaining relatively flat SG&A at the base company level. Interest expense for the quarter was $8.7 million compared to $7.8 million in the prior year quarter. And for the year, interest expense was $33 million compared to $27.8 million in the prior year. We ended the year with an adjusted tax rate of 22.7% compared to a 27% tax rate in 2017. The decline in the rate year-over-year was primarily driven by the utilization of fully valued tax credits and the release of certain valuation allowances. We do not currently expect these impacts to repeat in 2019. This brings me to cash flow. We were very pleased with the efforts our team has made to improve the efficiency of the balance sheet in 2019. For the fourth quarter, adjusted free cash flow from continuing operations was an inflow of $146.1 million which compares to an inflow of $55.5 million for the prior year quarter. For the year, we improved our adjusted free cash flow by 105.5% to $189.1 million compared to $86.4 million in the prior year. We define adjusted free cash flow from continuing operations as GAAP net cash provided by operating activities less CapEx. Then we add back cash used for our most significant optimization projects, acquisition-related items, and restructuring activities. The most meaningful components for the full-year 2018 are as follows

[Kevin Grant:]

Operator, please open up the call for first question.

[Operator:]

Thank you. [Operator Instructions]. Thank you. Our first question comes from Rosemarie Morbelli of G. Research. Please go ahead.

[Rosemarie Morbelli:]

So just starting with something Ben just said, it looks as though if my math is correct that the first quarter EPS is going to be around $0.28 which compares with $0.36 last year. So what makes you comfortable looking at the full-year what are the improvements you're looking at in the next three quarters because you have to generate quite a lot of growth in those last three quarters? And I know Ben gives us the details of the pluses and minuses but a little more of the underlying operations with the end markets would be helpful.

[Peter Thomas:]

Hi Rosemary, it's Peter. It all starts with the fact that we did notice continued destocking at our higher end markets not only within tile but a couple of the other businesses, that continued through the first quarter and more importantly a lot of the tile products at the high-end continued through the month of February. And if you take a look at that destocking in total for the company in the first quarter, it really makes up the difference from last year. And you heard in my prepared remarks, the magnitude of the destocking and it's actually a good news, bad news story when you reposition yourself in the higher end markets because companies typically have more finished goods inventory because they typically carry more SKUs because of the diverse market applications. And that was the first time that we've seen something like that. In fact, you heard me mention that the high-end tile producers which by the way is as close as we get to a consumer product that has fashion, orientation to it that they typically would have six to eight months of finished goods versus the bottom cut or the mid-cut which could be two to three months. So when there's an inventory destocking that we have seen for the first time since 2016, it usually goes through the fourth quarter into the first quarter. So we feel very comfortable where we sit today that all the destocking has taken place across all of our high-end markets throughout the business and we're already starting to see a repositioning of inventory not just filling. There's also another dimension of destocking with the higher end markets that they reposition their inventory, their mix changes. And that's why it typically takes a little bit longer for those markets because they since it is product driven and it's some in the case of tile fashion statement. They have to purge out and then take a look forward through their S&OP process, what styles will be in demand over the course of the year and that repositioning had to take place. And we're already starting to see the build. So we feel comfortable that destocking is over. We do see a demand picking up. You'll see more of it moving into certainly the second quarter. And why do we feel comfortable that we'll deliver again it gets back to our model around our delivering and commitment of GDP plus 1 to 2. We will continue to drive new products which exceeded a lot of new application areas, exceeding Color Solutions where our growth rate was pretty, pretty solid in the fourth quarter and for the year. So our expectation again is that we will continue to outperform the market and again last year you saw with automotive where we were up 7% while the market was down we're going to be up again. This year in that space where most of the reports suggest there will be a contraction in automotive. So if you take a look at five or six different submarket segments, where we participate, we will continue to outperform the market. And we're launching a lot of new products this year. So we feel very good and confident that we'll deliver what we're saying.

[Ben Schlater:]

Hey Rosemary. The other thing to just add to what Peter said, in terms of, I think what Peter went through was a lot of context around the first quarter versus the other three quarters in 2019. Just a data point on the first quarter versus last year is as you recall, the Euro last year in the first quarter was much closer to a $1.21 and $1.22 versus the $1.145 or so that we have in guidance for this year. So that $0.36 from last year has got $0.04 or $0.05 of currency in it.

[Rosemarie Morbelli:]

Okay. And thanks, that is helpful. I'm assuming that you expect the impact from FX to diminish as the year unfolds maybe in the second half?

[Ben Schlater:]

Of course, yes, as those rates get tighter that will happen in the third and certainly in the fourth quarter.

[Rosemarie Morbelli:]

So Peter I apologize if you talked about it but you came out -- came through very muddled. So I couldn't get everything you said. So when you talked about the high-end tile producers usually having a six to eight months of inventories, where do they stand now and where does Ferro stands in the products that are sold into that particular market?

[Peter Thomas:]

Yes. So what we've noticed is a contraction of about 50% through the fourth quarter and through February. So they're probably standing and our average estimate is somewhere between three and four months and the expectation is through the course of the year, they'll ramp up to what would be a traditional amount and that's why we feel comfortable that the volume will be coming back.

[Rosemarie Morbelli:]

And where is your inventory level, is it about three to four months as well. Did you come down at the same rate?

[Peter Thomas:]

Yes, you mean our inventory level?

[Rosemarie Morbelli:]

Ferro's inventory?

[Peter Thomas:]

At the customer here?

[Rosemarie Morbelli:]

Both places.

[Peter Thomas:]

At the customer level, they may only take a couple of months of our inventory and they're starting to rebuild their inventory level at that point. And as it relates to our tile inventory, do we discuss that individually. No we don't go through that with each individual. Let me put it to you this way. We've done a very good job of cash conversion as you've seen, so we have ratcheted down our inventory across all the business segments.

[Rosemarie Morbelli:]

Okay. And one last question and then I'll get back in queue. Could you talk about the countries where you see the most issues in 2019? We know Europe is slowing. We know Asia-Pacific is slowing or China is. So if you could give us a little more, that would be helpful.

[Peter Thomas:]

Yes. So we see everything that all of our peer group sees and everything you've mentioned. However what I will say again because of our business model, we will continue to outperform the markets where we participate. So in China, most of what we see is a slowdown of automotive and which was very important for us last year at about 14% growth. And this year we do expect growth in that area not at the 14% level but certainly above what the pundits are suggesting a 2% to 3% growth there. So we do feel good, why do we feel good? It's for two major reasons. One, what you have to think about with Ferro is the content. Forget about, I think we need to make sure everyone understands. Don't focus on inventory, don't focus on builds. You need to focus on content. The more glass that the car has, the more demand for Ferro box. And I'll give you an example. If you look over the past five years, Ferro's content has increased by 30% because of more glass in a lot of the higher end cars in particular. I mean you see a lot of the cars have more glass roofs, panoramic views, and that's good for us. So focus on the fact that Ferro, one, has developed new products that outperform the competition, and number two, the demand for our content is very significant. And so we feel really good about that both in Asia and also Europe were the two areas where people believe that automotive is slowing, we will not slow down as much. The third piece is to give you an example again in Mexico, which is pretty much truck oriented. Ferro is the leader in that area for our type of products for truck production that's indigenous to Mexico and also export to the U.S. So we feel really good about that particular model. And again every one of the businesses I do want to mention is we increased our market share across every business last year and we did it through new product introduction aligned with the market leaders in the spaces where we participate. It wasn't done on price and again don't forget that's the backbone of our GDP plus model because we're doing it now with the fifth year of a very strong vitality index which means that we have all the technology with the market leaders and they typically launch this portion amount of new products of course that carries us with it. So that gives the map is on our side and it will be again this year as you can see by the growth that we showed between 5.5 to 6.5 and Ferro's proxy by the way based on the data, the data that we use is about 2.6%, 2.5%. So everybody should feel good about our ability to continue with another four quarters of organic growth.

[Operator:]

Thank you. Our next question comes from Mike Sison of KeyBanc. Please go ahead.

[Mike Sison:]

Hey guys. Price mix is going to be a big -- a bigger plus this year. Can you maybe walk through which raw materials and maybe which segments will capture that positive price mix?

[Ben Schlater:]

Sure Mike. Hey, good morning. For the most part, Mike, we're going to see the benefit in Performance Coatings that's what we saw most of the headwinds last year. So if you think about last year, we saw a net headwind of about $9 million. Most, the vast majority of that was in -- was in Performance Coatings in fact the other two businesses were about a push. And the tailwind that we'll see this year also we'll see a lot of that reverse around, a lot of that we'll see in cobalt that we've seen a significant movement in cobalt from the first two quarters of last year and so that the biggest piece of the benefit that we'll see this year will be in cobalt. But we're seeing it across a number of raw materials but that's the biggest one.

[Mike Sison:]

Okay, great. And then Peter, can you maybe talk about the acquisition environment and I think your annual goal is to pick up $100 million in sales per year. How does that look and any particular areas you're focusing on to add to your portfolio this year?

[Peter Thomas:]

Yes. So I'm glad you brought that up this early. We want to make sure and I think you caught it in Ben's prepared remarks where we would talk about always our framework would be $100 million to $150 million of invested capital for our deals. And if you notice last year, we introduced the concept of $100 million to $150 million of invested capital into strategic investments. And the reason why we did that is because we knew we were spending more money on our optimization program and also we were buying back stock and because of the sensitivity about the optimization project, we didn't really want to bring that up earlier and since we just started to buyback the stock, we want to make sure that everyone understands we're being very judicious and prudent about how much money we spend. So right now we would look at optimization projects, additional optimization projects, more stock buybacks here in the near-term as well as our acquisitions to account for that $100 million to $150 million of invested capital for, let's call it strategic investment. However that doesn't say last year we spent $75 million in deals. That doesn't mean that we didn't have up to $150 million to $200 million because at any point in time we do and we continue to work on a whole range of deals. And our pipeline has increased once again. And what you'll hear us talk about aside from the 50s, we always talk about five that we're always in discussion with which we are, we can sit here and honestly tell you that we're engaged with five different activities with discussions. But as it relates to the magnitude of the dialogue, what we've also decided is that because we've beefed up our M&A department and more people are engaged, we can probably take on a little more activity around having discussions, so that we can increase that by a little bit, with the idea that we may spend a little more time on looking at things that are not so much to add technology platforms like we've the 20 that we've acquired but something now that's more meaningful around extending the three businesses. Okay. What we mentioned and this is a very important point that those 20 acquisitions that we did over the past four years, if you really dissect them, you'll find that as we stated that we were acquiring leadership technology positions that we felt we needed to win moving forward. So when we started this journey, Ferro had a market leadership in about 17 different technology platforms and with the 20 acquisitions, we now have 51 and our technology portfolio is very, very sound and we believe we've covered all the gaps that we would feel existed in our leadership positions in a way that for the next three to five to seven years, we're going to be in pretty good shape. So it's probably time for us to look out at things that might be a little bit bigger not gigantic. I'm not talking about really hundreds of millions of dollars of things but maybe something that's a little bit bigger than some of the deals we've done to put equal time in those as well as the smaller deals just to keep the momentum going. So we have about 13 of those right now that we're having conversations internally and externally with. So we feel pretty good about the pipeline, it still remains rich and we feel very good about that.

[Operator:]

Thank you. Our next question comes from Mike Harrison, Seaport Global Securities. Please go ahead.

[Jacob Schowalter:]

Good morning. This is Jacob on for Mike.

[Peter Thomas:]

Hi, Jacob.

[Jacob Schowalter:]

With M&A, just wanted to get an update how the integration is progressing on the acquisitions you've completed over in the second half of 2018? Any notable success stories you want to point out?

[Peter Thomas:]

The acquisitions are running fine. The integrations are fine. If you look at we’ll be running a make good for our board coming up in April and we were just reviewing that yesterday as a matter of fact and we feel very, very good on our presentation to the board on what we've been able to accomplish in terms of delivering against our synergy commitment. And remember those 20 deals represented by $150 million of synergies which would be over a five-year period at the onset when we acquired them. And what I can't tell you without being specific is that we're ahead of schedule with delivering against those synergies and we're not finding anything that's abstract or anything that concerns us. And so we feel pretty good on our integration model and our ability to absorb those entities in a very efficient and orderly methodical way.

[Jacob Schowalter:]

All right. And then we've touched on the destocking in high-end tile coatings. I was curious the underlying demand trends that you guys are seeing as we move through this destocking period. Has that sort of stayed stable or has it improved in January and February maybe some comments on the underlying demand?

[Peter Thomas:]

Yes. So what's really interesting and this is a good point. Thanks for asking it. If you look at our tile business for the year, all-in on constant currency on a revenue basis it was up 31.8% including the acquisitions but it was up close to double-digits regardless even in the fourth quarter so the demand is still there. But remember we have a bifurcated kind of a business model with tile where you have high-end and we also have the mid-cut and there still remains some straggling of lower end. And the demand at the lower end and the mid-cut continue to be okay through the fourth quarter as you noticed because I mentioned that our revenue and volume was up in the fourth quarter for that business but it was at the high-end. So the good news is we expect very, very good growth for the tile business again this year all-in with all the businesses. And as I mentioned to Rosemary we can see that the higher end is starting to pick up and always remember that when things go bad, the high-end will still be in demand because of the nature of the technology, I mean you're talking about a differential of high-end tiles can range on a square meter price basis anywhere between $25 and $35 a square, you have the mid-cut that could be eight to nine, the low-cut to be three to five. And even when times are tough, people will spend those who have the wherewithal, will continue to buy the high-end tile. We see no change in that dynamic other than the destocking that took place mostly because demand did slowdown overall in the second half of the year and those inventory levels were built because demand in 2016, 2017 and the first half of 2018 were pretty strong. And there are a bunch, there was a new -- recently there was a Tiles show and that's typically where all the new designs take place and that's one of the reasons why things are started up so late where all the new fashion was highlighted and put on display. And so all those customers are now ramping up with their new product lines. So we feel really good about the continued growth in that business because of our leadership position number one, we have a low cost position, and number three, we do have the market leadership position in the high-end though.

[Operator:]

Thank you. Our next question comes from David Begleiter, Deutsche Bank. Please go ahead.

[Unidentified Analyst:]

Hi is David Huang [ph] here for David. I guess specifically on Europe, how is the underlying demand by end-market and country?

[Peter Thomas:]

Yes. So as everyone has noticed, Europe we see a general slowdown in Europe. You can clearly see it particularly with us; we would notice it more than anything in the Pigment side of the business. But relative to what's coming out in terms of GDP growth for Europe or by Automotive or Construction, what we can tell you, we do see a softness but again compared to with the data coming out in every sub-segment whether it's auto, whether it's construction, whether it's pigments, whether it's deco, whether it's sensors, or whatever we are outperforming the market as it's been presented by the trade documents. So we see it but again our model is when things are really good, we'll do better, when things are soft, we won't be as soft. And we're clearly seeing that now. And I think that's one of the really good things about what we've created here over the past six years is that an environment which when things are great, we would do better, if things are soft, we won't go down as much and that's exactly what you're seeing in 2019. Exactly the case that really underscores the value that we've created in this model to withstand headwinds like this. And the fact that we have a robust pipeline and optimization activities whether we get it from revenue, we certainly have a combined activity around cost management and optimization and greater efficiency and that's what you're seeing in 2019. You're seeing the benefit of that major optimization program in addition to continued vitality index of about that 20% that's producing what we believe is a very strong guidance relative to the space.

[Unidentified Analyst:]

Thanks. And just on Q4 Color Solutions, I guess you guys have good positive volume mix number in Q4 and you talked about volume down slightly. Does that mean due to the big mix contribution in Q4 for Color Solutions and if so where does that come from?

[Peter Thomas:]

Yes. So I think I mentioned in my prepared remarks, well let me underscore it. With our vitality index in all of our R&D programs, we introduced a topic well maybe about a year ago, a little bit more ago that we might have some what we define as being off cycle activities which means that if we have a new product introduction particularly in the high-end spaces, it takes time for gestation to take place in those spaces because of the higher nature. And we introduced some new products in the beginning of the year that are finally starting to gain some traction in the second half of last year particularly in the fourth quarter now moving into this year that we have a hit on. And in this case, in that business it has to deal with Surface Technologies and our position with proprietary and very interesting and technologically Advanced Polishing activities that we can't talk too much about. But certainly that that has helped us in the second half of last year mostly in the fourth quarter because it's starting to ramp-up.

[Operator:]

Thank you. Our next question comes from John McNulty, BMO Capital Markets. Please go ahead.

[Unidentified Analyst:]

Hi, good morning. This is Avish Bhatia [ph] for John. So the first one --

[Peter Thomas:]

Good morning.

[Ben Schlater:]

Good morning.

[Unidentified Analyst:]

Good morning, hi. So the first one regarding the seven planned rationalization you mentioned, what are the segments that should benefit from this the most and can you remind us how the $30 million of profit lift is spread through the divisions?

[Peter Thomas:]

Here's what we can say on this. Every business unit that we have will benefit from that optimization activity. And if you think about the remarks over the past two-and-a-half years, it was more of we are going to create a state-of-the-art kind of a manufacturing capability that stretches across one Ferro in a way that makes us the most efficient producer with each one of those market segments with the most contemporary equipment automation, or supply chain activities everything is very, very efficient and very contemporary. So each one of the businesses will benefit from that activity and that's probably something that is very important because we should do that and be the most efficient producer as a market leader around the world.

[Unidentified Analyst:]

Got it. And then can you speak to the efficiency program in a bit more detail as in like, do you have the ability to accelerate that program a bit given the slower macro backdrop right now?

[Ben Schlater:]

Yes. So the program continues to be to operate on schedule. Obviously, we're pushing that to be sort of as planned, the rollout of that new program is important from a cadence perspective. So we're actually marching pretty close to what we thought we would.

[Unidentified Analyst:]

Got it. One final question from my side, regarding some of the timing issues we saw in the Color & Glass business tied to some of the restructuring moves. How should we be thinking about that going forward? Do you foresee any other temporary blips as we progress through the year or was this kind of like a one-off?

[Peter Thomas:]

Yes. I think what's really important to note is that what you're seeing is that our new product development pipeline program is working extremely well maybe quite candidly a bit better than we might have anticipated. And we have challenged a little bit here that the demand was a little bit greater than we could fulfill in the short-term but we're adjusting to it and we'll be able to handle it going forward. And a lot of that happens a lot with a lot of the new high-end technology activities across all businesses that it's maybe let's call it new to the world type activities and not just new to Ferro or just new-new but new to the world. Sometimes you have some start-up delays then we just have to catch up to it. And we have a little bit of a blip in the fourth quarter but we feel very good here that we have that under control.

[Kevin Grant:]

Operator, we have time for one last question.

[Operator:]

Thank you. Our final question comes from Rosemarie Morbelli of G. Research. Please go ahead.

[Rosemarie Morbelli:]

Thank you. Peter, I was wondering talking about your comments regarding acquisitions. What are we thinking -- what are you thinking in terms of potential size of the three newbie [indiscernible] something bigger and how much leverage are you willing to take in this uncertain environment?

[Peter Thomas:]

Okay. So what we're thinking, Rosemarie again I think you understand the model from the very beginning because you've been with us. And as we started this process, we had a lot of discussions back in 2012 and 2013 about how we needed to build this business to be a successful model that it was going to be orderly methodical and we would define different phases. And really define a bunch of strategic priorities around those phases in a way that everyone in that company was aligned. They were incented around those phases and we would just continue to move to a point where we are today, where we completely have a different fare. You can see that particularly last year we had the best year in the history of our company particularly with most of the financial metrics as you know was double-digit and of course our stock doesn't reflect that but of course we did have double-digit growth in almost in all financial metrics. But again we're at a point now where we feel very comfortable; we plugged all the technology gaps. So now it's sort of like we need, we want to add some more smaller technologies but we'd like to do something a bit more meaningful. Again maybe I would use newbie allo [ph] as a case that it'd be good to have another newbie owner type, the financial metrics like that maybe a little bit bigger but nothing that should cause anyone a concern because at the end of the day quite candidly, Rosemarie, we worked really hard last year to prove to our shareholders that we're prudent around managing equally the balance sheet and the P&L. I mean we've been able to manage this very, very well. And at the end of the day, if you asked us what's important the P&L or the balance sheet for the last half of last year and the fourth quarter, we would tell you it's the balance sheet. We had a commitment of delivering a certain level of cash and we wanted to get our leverage down. And we did that. So our teams are very good around understanding that dynamic of hey there's a P&L time, there's a balance sheet time, but in this period we have to keep feeding ourselves every year. So even in that environment where some may think it was a little abstract for us, it shows you the strength of our business model that one we did grow double-digits in every financial metric and shame on us for coming out with a guidance last year was so far more robust than everybody else that we end up kind of getting penalized for it. But at the end of the day, we delivered a record performance and we delivered the cash we set and we still had strong P&L performance. So again right now, we're in the zone of we have to really, really in this environment watch the balance sheet and watch cash. We're not going to do anything stupid right, Ben.

[Ben Schlater:]

Yes, I mean I think I would just underscore what Peter said there. We felt good about where we ended the year last year from a leverage perspective. You heard us go through sort of our leverage targets for the end of this year. I would say that what's included in those leverage targets is obviously the cash flow guidance; we would typically also have cash charges that we would add back to that for optimization and the restructuring charges. Those charges in 2018, we would expect from, we announced this significant optimizations last month, we would expect additional CapEx related to that this year of about $20 million in addition to additional restructuring charges of about $10 million to $15 million. And then we have charges from a deals perspective to get those synergies of let's say another $10 million to $15 million. And what we've done is we've built all of that into our leverage target this year. So the leverage target that we covered on the call, we feel really good about including sort of those one-time cash charges that I just went through. The only thing that wouldn't be included in there is any deal activity. And then our share repurchases which to-date this year, we've already made $20 million worth of share repurchases. So we're very, very focused on leverage. You will see leverage spike in the first half of the year. We kick it up somewhere between let's say 3.2, 3.3 times in the first half of the year before we then burn that off back to the previously mentioned target. So that just underscores sort of what Peter was mentioning around our focus around the balance sheet and leverage in particular going forward.

[Rosemarie Morbelli:]

So that is great. Thank you, Ben. And I'm just wondering if you are still comfortable with your 2020 targets?

[Ben Schlater:]

Yes. We remain committed to those, Rosemarie, as we announced in November of 2017, our expectation was that we would continue -- the key pillars of those if you would is whatever the market does, we're going to do 1% to 2% on top of that. And then on top of that from a optimization perspective, we're going to get 2% every year. And we are -- we remain committed to those metrics through 2020.

[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 our results with you again next quarter. Thank you.

[Operator:]

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines. Thank you and have a good day.