Ferro Corporation
Q1 2015 Earnings Call Transcript

Published: 3 May 2015

[Operator:]

Thank you for standing by. Welcome to the Ferro Corporation 2015 First Quarter Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded, Thursday, April 30, 2015. I would now like to turn the conference over to John Bingle, Treasurer and Director of Investor Relations. Please go ahead, sir.

[John Bingle:]

Thank you. Good morning and welcome to the Ferro Corporation 2015 first quarter earnings conference call. Joining me on today’s call are Peter Thomas, Chairman, President and Chief Executive Officer and Jeff Rutherford, Vice President and Chief Financial Officer. Peter will open with a few brief comments. Jeff will provide financial details for the quarter and will discuss our guidance. And we will address your questions at the end of the call. Yesterday, we issued two press releases, one, covering our first quarter earnings and the other announcing that we have signed a definitive agreement to buy Nubiola. You can find the two releases as well as the reconciliation of reported results to non-GAAP data that we will discuss this morning in the Investor Information portion of Ferro’s website at www.ferro.com. Please note that statements made on this conference call about the future performance of the company may constitute forward-looking statements within the meaning of federal securities laws. These statements are subject to a variety of uncertainties, risks and other factors related to the company’s operations and business environment, including those listed in our earnings press release and more fully described in the company’s Annual Report on Form 10-K for December 31, 2014. Forward-looking statements reflect management’s expectations as of today. The company undertakes no duty to update them to reflect future events, information or circumstances that arise after the date of this conference call, except as required by law. A dial-in replay of today’s call will be available for 7 days. In addition, you may listen to or download a replay of the call through the Investor Information section at ferro.com. Any redistribution, retransmission or rebroadcast of this call in any form without the written consent of Ferro was prohibited. I would now like to turn the call over to Peter.

[Peter Thomas:]

Thank you for joining us today. As most of you have seen from our news releases, we are off to a good start in 2015 with solid earnings for the first quarter and continued progress on our inorganic growth strategy with the pending acquisition of Nubiola. The majority of my comments this morning will be focused on our latest acquisition. We are excited about the Nubiola transaction and the opportunities that will provide to drive shareholder value, enhance our current position in inorganic pigments, and accelerate our vision to become a global leading color solutions company. Let me start by describing Nubiola. Like Vetri, it epitomizes the type of acquisition candidate we are pursuing. Nubiola is a 101-year-old business owned by the Nubiola family of Barcelona, Spain. The company is a worldwide producer of specialty inorganic pigments with 2014 annual sales of $119 million and EBITDA of $23 million at the current euro exchange rate. It achieved compound annual growth of 4.1% over the last three years. Nubiola is the world’s largest producer of Ultramarine blue, along with a range of other high-value pigment and corrosion inhibitor product lines. Ultramarine blue was prized in the plastics and coatings industries for its durability, unique color attributes and its whitening capability. It is the most consumed color pigment in the plastics industry. Think of all the blue tilted plastic water bottles. That is Ultramarine blue. Nubiola’s Ultramarine product line has only a handful of global competitors and there are significant barriers to entry. Ferro has signed an agreement with the shareholders of Nubiola to acquire 100% of the equity on a cash-free and debt-free basis for €146 million or approximately $160 million. The transaction will be funded with excess cash and a draw on Ferro’s existing revolving credit facility. The deal is expected to close within the next 60 days subject to customary closing conditions. We expect the transaction to be accretive to Ferro’s adjusted diluted earnings per share by $0.04 to $0.06 in 2015 and by more than $0.15 in 2016. Based on expected synergies exceeding $8 million, the acquisition purchase price represents a transaction multiple of approximately 5 times. We expect the investment will achieve a return on invested capital of greater than 12% in the first full year of operations with synergies improving ROIC to 15% within an acceptable timeframe. Nubiola employs approximately 750 people, including temporary employees. It has production facilities in Spain, Colombia, Romania and India, a technical applications lab in the United States and a joint venture in China. Nubiola sells in more than 85 countries. The majority of its customers serve the plastics and construction industries. Nubiola’s current strength in the plastics end market nicely complements Ferro’s strength in the coatings market. The two businesses share distribution channels, but there is minimal overlap between the product lines. Nubiola’s business model of regional production in high-touch, local technical service is consistent with Ferro’s go-to-market strategy. Strategically, the acquisition will significantly strengthen our position as a global color solutions provider and creates a true market leader in inorganic specialties. It will expand our product portfolio and geographic footprint and more than triple the size of our addressable market in inorganic pigments to greater than $1 billion. Now, stepping back to look at the big picture over the last 24 months, we have significantly transformed Ferro. We have harvested substantially all of the assets in our Specialty Plastics and Polymer Additives businesses for approximately $238 million in cash and have reinvested those proceeds and opportunities with higher margins, stronger positions in their respective markets and more synergies with our core Performance Materials businesses. These investments will enhance our position as a global leader in glass-based coatings and color solutions and generate higher returns. The EBITDA associated with the divested businesses was approximately $40 million. Over the last nine months, we have invested approximately $280 million to acquire three businesses

[Jeff Rutherford:]

Thank you, Peter and good morning everyone. As John mentioned at the start of the call, you will find reconciliations of non-GAAP results discussed during this conference call in our press release and also in the supplemental financial data that is posted in the Investor Information portion of Ferro’s website. My comments, in general will focus on our continuing performance materials businesses as adjusted for restructuring and other one-time items to provide comparability of information from period to period. I will cover three primary topics and then we will get to your questions. First, I will provide a quick recap of the quarter, I will then give a quick overview of the performance of the each of our reportable segments and finally I will conclude with a discussion of our outlook for the remainder of 2015. As you are aware, we have divested the majority of our performance chemicals business unit. We are currently in an active process to sell the remaining polymer additives assets, our dibenzoates manufacturing plant in Antwerp, Belgium. Because we are actively marketing this property, we will not discuss the specifics of a potential transaction or speculate on potential proceedings or timing. The Antwerp facility is reported as the discontinued operations and generated a loss of $4 million in the first quarter or a loss of $0.04 per diluted share. As of the end of the first quarter, our investment in Antwerp is approximately $35 million and we have approximately $5 million of remaining capital to invest in the second quarter. Including some expected changes in working capital, the steady state investment in this asset will be below $40 million. Now, I will turn to our results for the quarter on the continuing operation basis. On an unadjusted basis, continuing operations generated $0.17 per diluted share in the first quarter compared with $0.12 last year. On an adjusted basis, we reported income of $0.23 per diluted share compared with $0.14 per diluted share for the same period last year. The major adjustments, which were reported as one-time items in the current quarter included the following. First, we incurred a $4.5 million non-cash charge related to the devaluation of the Venezuelan bolivar. $1.9 million of the loss was recorded in other income and expense as foreign currency loss and the remaining $2.6 million was recorded in costs of goods sold as a lower of cost or market charge against our inventory. During the quarter, we also recorded $500,000 of additional restructuring charges mainly related to headcount reductions. And finally, in SG&A, we had approximately $2.4 million of non-recurring expenses, primarily related to our reorganization projects including amongst others our tax restructuring project and expenses associated with M&A activities. As we discussed on the fourth quarter call, we have decided to move away from using a fixed pro forma tax rate of 36% as was applied for all of last year, to a rate that is reflective of the progress we are making in our strategic tax restructuring projects and one that is more in line with statutory tax rates in each of the legal entities where we do business and more importantly where we earn income. In addition, adjustments that are made for non-recurring items during 2015 will be tax affected using the statutory tax rate in the jurisdiction where the adjustments are recorded. Accordingly, the effective tax rate used in calculating adjusted EPS for the first quarter of 2015 was approximately $0.15 – 15% versus 36% in the first quarter of 2014. For the full year, we anticipate that the effective tax rate will be in a range of 24% to 25%. The first quarter tax rate of approximately 15% was due to our ability to recognize certain tax assets that were previously fully reserved. During the remainder of my remarks, I will refer to adjusted numbers, which will exclude the adjustments I just noted. In addition, discussions about sales and sales-related profitability measures, such as gross profit margin will reference value-added sales. As a reminder, value-added sales exclude precious metal sales, as precious metal sales, in general are pass-through sales to our customers. Excluding precious metal sales, removes the volatility in our results associated with movements in precious metal pricing. Precious metal sales were $10 million and $13 million in the first quarters of 2015 and 2014. Value-added sales were $253 million in the first quarter 2015 versus $267 million the prior year. We estimate that changes in foreign currency adversely impacted sales growth by $31 million in the quarter. On a constant currency basis, value-added sales increased by approximately 7%, adjusted for the negative impact of foreign currency changes, sales increased by 9% in Performance Coatings and by 7% in colors and glass. On an adjusted basis, Pigments, Powders and Oxides declined slightly due to the expiration of a toll manufacturing contract associated with the exited metal powders business. Adjusted gross profit was $73 million in the first quarter of 2015 or 28.9% of value-added sales. This compares with $75 million in the first quarter last year and a gross profit margin of 28%. Changes in foreign currency rates accounted for the full decline in gross profit year-over-year. On a constant currency basis, adjusted gross profit increased by $7 million or 10%. Excluding charge – special charges in both periods, adjusted SG&A was $47 million compared with $51 million in the prior year period. The reduction was primarily due to lower personnel cost, reduced bad debt expense and lower cash and equity incentive compensation cost partially offset by higher professional services fees. Cash and equity-based incentive compensation was $3.8 million in the first quarter of 2015 compared with $6 million in the same period last year. Excluding the incentive compensation expenses and adjusted for Vetriceramici, first quarter SG&A was approximately $40 million. On a constant currency basis and adjusted for Vetriceramici, adjusted SG&A for the base business declined by 7% to $43.6 million. For the quarter, we achieved $35 million of adjusted EBITDA, resulting in an EBITDA margin of 13.6%. This compares to first quarter 2014 adjusted EBITDA of $32 million or an 11.9% EBITDA margin. At March 31, 2015, net debt was $203 million, an increase of approximately $32 million since year end. Our liquidity position is strong. At quarter end, we held $105 million of cash and had revolver availability of $195 million. The following significant cash flows occurred during the quarter as part of the change in net debt. For continuing operations, we generated $35 million of EBITDA with the following items impacting cash and net debt. Restructuring payments of $1 million, interest of $3 million, cash taxes of $6 million, pension and other postretirement contributions of $5 million, capital expenditures of $5 million, a use from working capital of $8 million, 2015 AIP cash payments of $11 million, and other net items of $14 million, including $3 million of cash costs associated with one-time items not accounting for as restructuring, $2 million associated with the FX impact on cash balances and other items, including changes in accruals of $9 million. Acquisition activity also used approximately $5 million of cash, primarily associated with our purchase of TherMark. Our discontinued operations used approximately $8 million in cash composed of the following items, $4 million of losses, capital expenditures of $10 million, offset by a working capital reduction of $6 million. Our precious metal consignment obligation was $3 million at quarter end and we currently have no demands for cash collateral related to precious metal consignment program. I will now provide a brief overview of our year-over-year first quarter results for our reporting segments. The analysis covers only continued operations and is based on value-added sales. In Performance Coatings, sales declined by 6%. However, adjusted for the impact of foreign currencies, segment sales increased by 9%. Tile sales, excluding the effect of FX, increased by approximately 14%, while porcelain enamel sales remained relatively flat. Vetriceramici sales in the quarter were $14.4 million, accounting for the reported sales to gain in tile partially offset by a reduction in sales for the base business. Lower sales in the base tile business was primarily related to reduction in sales for digital inks, partially driven by the loss of business to a distributor that exited this market as well as lower average selling prices. In addition, demand for our base frits and glazes and colors was lower in the regions, where economic growth has been challenging, including Indonesia, China, Russia and the Ukraine. We expect improving economic condition in Europe and the Middle East to drive base tile sales demand over the course of 2015. On a constant currency basis, segment gross profit was flat year-over-year due to the lower sales in the base business partially offset by the new Vetriceramici business. In the Performance Colors and Glass segment, we continue to experience strong growth in sales and profitability. On a constant currency basis, value-added sales increased by $6 million, or 7% to $90 million. Vetriceramici accounted for approximately $500,000 of the value-added sales growth. Value-added sales, on a constant currency basis, increased in all major product lines and across nearly all geographic regions. The largest sales gains were in electronics and automotive. As expected, sales in Latin America declined for container glass coatings due to loss of business at a key bottling account, which we previously discussed during our fourth quarter results call. Adjusted for FX, gross profit improved by $3 million to $34 million with the gross profit margin improving to 38.3% from 37.1%. Gross profit increased primarily due to the increase in sales of favorable mix and modestly higher pricing. In Pigments, Powders and Oxides constant currency value-added sales declined by $1 million or 4% for the quarter. Included in the reduction, however, is the impact of the expiration of toluene arrangements associated with the sale of our metal powders and solar paste businesses? Excluding the impact of this change, sales increased approximately 1%. Sales for surface polishing materials increased by approximately 13%, while demand for pigments declined by 4%. Segment gross profit, on a constant currency basis, improved by 9%, with segment gross profit margins improving to 29.7% from 26.2% last year. Finally, I would like to provide some color on our outlook for 2015. While EPS growth was strong in the first quarter, we continue to be pressured by weaknesses in certain emerging markets and the unfavorable translation impact of weakening global currencies against the U.S. dollar. Despite these challenges, we expect the underlying businesses will perform in line with our prior guidance. We continue to expect each of the segments will enjoy a constant currency sales growth for the remainder of the year. Colors and Glass continues to demonstrate strong growth and our expectation is that a rebound in European demand and strengthening construction markets will provide a catalyst for higher sales growth in our Performance Coatings and PPO segments. Our orders through April support this outlook. Consequently, we continue to expect double-digit constant currency sales growth for the consolidated business, excluding the impact of Nubiola and continue to believe profitability will be in line with our prior guidance with gross profit margins of 29% to 29.5% and operating income margins in the range of 11.5% to 12%. Based on our current outlook for FX rates, we anticipate currency translation will reduce projected constant currency sales growth by 13%. Though a strengthening dollar will partially reduce EPS growth due to translation, our lower average tax rate for the full year in the range of 24% to 25% will offset this impact. Further, we expect we will close on the Nubiola transaction within the next 60 days. We anticipate this transaction will add greater than $0.15 to adjusted EPS annually and believe it will be accretive to 2015 adjusted EPS in the range of $0.04 to $0.06, including the impact of purchase accounting. Assuming successful conclusion of the Nubiola transaction, we are raising our adjusted EPS guidance for 2015 to $0.89 to $0.96 per diluted share. For cash flow, we expect continuing operations to generate approximately $50 million of cash flow during the full year, excluding the requirements for M&A activity. That concludes our prepared remarks. I will now turn the call back over to John for Q&A session.

[Operator:]

Thank you. [Operator Instructions] The first question comes from the line of John McNulty with Credit Suisse. Please go ahead.

[John McNulty:]

Yes, good morning. Thanks for taking my questions. I guess the first question is with regard to the – I am going to screw up the way you say it, the Vetriceramici acquisition, can you walk us through kind of – it’s your first acquisition that you have really done of any size and I know it’s a little bit early, but can you walk us through kind of what you are seeing in terms of any surprises there, the ease of integration? And then I guess linked to that how – whether that gives you comfort around the new acquisition as well?

[Peter Thomas:]

Yes. As it relates to the Vetri acquisition, we are very pleased. Everything we had laid out in terms of our plan for 2015 in terms of the synergies in the back office, the R&D pipeline assessment, them hitting their budget, them developing a new pipeline, integrating very nicely with our existing team and we couldn’t be more pleased at this point.

[John McNulty:]

Okay. And then with regard to now you will be integrating two assets at the same time. I guess, if you can speak to your comfort with regard to the bandwidth that you have as an organization to do that? And then also maybe the financial flexibility if you feel you have – if you still got bandwidth to actually do further acquisitions this year or should we expect to kind of cooling off period until these two have been integrated in?

[Peter Thomas:]

Okay, good. We will answer it in two pieces. First, as you know, we do have a pretty nice specialty pigments business with our complex inorganic pigments. And the nice thing about the Nubiola acquisition is that we share the same distribution channels and for the most part, we have a lot – some key global account overlays that are equal. So from a commercial perspective and a manufacturing perspective, it’s more of the same of what we do in the same spaces. So we are very pleased with unlike a Vetri where it had its own brand recognition around specialty parts of market. Nubiola business is very complementary. What we are doing in this case is bringing a broader basket of high end and higher margin pigments to a similar customer base. So in terms of the integration from a commercial side, R&D and manufacturing, it’s pretty much very similar to what we are already doing for the most part.

[Jeff Rutherford:]

And then John, this is Jeff. On the infrastructure side, obviously we can flex up and flex down with our relationship with Capgemini whenever we need to. So when we integrate in, we can lean on them relative to resources and then flex back down. So we see no problem at all on the infrastructure side of integrating both those companies into the Ferro infrastructure.

[John McNulty:]

Okay, great. And then just a question on the core businesses, I know there had been some pricing pressure, I guess in the ink side of the business, can you give us an update there, it sounds like it maybe wasn’t as big of a headwind this quarter as it’s been in the past couple of quarters, so maybe some comments on that would be helpful?

[Peter Thomas:]

Yes. In fact, we will – let me stretch your question to be more aligned with what our comments were around. The economic situation was a little softer than we expected and there are really three pieces to that including the ink. The first piece is, in Indonesia I guess if you are following that market, that particular market is replete with export positions in natural materials and oil and gas and the price depression there is really negatively impacted that economy over the last three months or four months, where we have a very strong position with. Our tile products in the construction industry, was down by about 25% for the first quarter. So we felt a bit of an impact there. The second piece is for the first time since we have been involved with questions around the Ukraine and Russia, this is the first quarter that we have seen more softness than we actually had expected. And also with the inks business, as Jeff mentioned we had our major distributor in China decided to exit the market because of low margins and there has been a some continued price pressure, but not to the magnitude of where it was last year because we are reaching points and price points at the fully diluted cost basis where lowering that price doesn’t make much sense. It’s all about the economy getting better and the competitors feeling better about not cutting price and starting to take advantage of the markets growing. And that’s why we specifically mentioned, we do see some green shoots in Germany and we see them [Technical Difficulty].

[Operator:]

Ladies and gentlemen, please standby the conference will resume momentarily.

[Peter Thomas:]

Are we back on?

[John Bingle:]

Operator, we are back on?

[Operator:]

You are live in the conference.

[Peter Thomas:]

Good. So anyway, John to wrap up a long story that someone decided to cut us off on, we are starting to see that the price erosion is starting to slow up. And we hope that with new product introductions and some of the green sprouts, we are going to see a bit of a change in that moving forward.

[John McNulty:]

Great, thanks. Thanks for the color. And actually just may be one thing, because you did cut off during the comments, I think you said you were just starting to see green shoots and you mentioned Germany and then that’s where you cut off, so if there was anything else to fill in there that would be helpful?

[Peter Thomas:]

Yes. Let’s briefly underscore a couple of points because I think you have heard us for a long time suggesting even though back in February of last year how we felt about Europe and what was happening. And we always commented that until we saw some domestic demand in Europe, particularly in Germany or France, we were going to be pretty – less bullish on Europe. But the first indications are in Germany, we see domestic auto demand pick up. In France, we see some moderate remodeling activity with some of our product lines that usually signal that there is some potential traction that could take place. We are starting to see a pickup in Spain. And so when you look at Europe from that perspective and then we ask ourselves the question, do we see something similar and new in the Middle East, and the answer is yes. So when you put that altogether, we see some brighter spots looking ahead.

[John McNulty:]

Great, thanks very much for the color.

[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 there. In terms of your outlook for ‘15, you are able to maintain your gross margin, operating margin outlook despite as you know it’s a little bit more negative FX, what was the operational offset there potentially, can you just kind of outline that, was that more cost savings, better performance here in different segments offsetting the FX?

[Jeff Rutherford:]

Yes. It’s – Mike, it’s Jeff, it’s a couple of things, right. It’s – we are getting favorable mix in sales and so the margin is going to be maintained. And we continue to have favorable experience in SG&A. So it’s a continuation of what we have been working on for the last 3 years, right. We continued to expand margin. We still – we continue to look for the ability to further leverage SG&A and we hit one of our – we didn’t make a big deal out of on it on the call, but we hit one of our goals and that’s the base business SG&A without bonus and stock comp at $40 million, we hit that. We did get – obviously, we got a little bit of favorability from FX, but we are right on that number. And then, we are seeing favorable tax rate. So all the things we are working on are coming – are being realized, and so we are able to maintain our earnings expectations.

[Mike Sison:]

Great. And then the tax rate going forward, if I look into ‘16 and beyond, any help there, is this level that you can keep longer term?

[Peter Thomas:]

We are still looking at – beyond this year at 27% was what we model at. And obviously, it’s going to matter relative to transactions going forward. In the Nubiola transaction, we are modeling at – in the 22% to 23% rate based on our strategies relative to the acquisition and where it’s bought through our Irish holding corp or FinCo. And so going forward, it’s going to depend on the next set of assets that we purchase where they are at and what tax plan we can affect into those acquisitions. But right now, on the business with Nubiola when we model we are modeling at 27%.

[Mike Sison:]

Okay. And then a question on Nubiola, if you think about the accretion numbers you gave us, what type of growth in the business do you expect to see longer term, does this grow above GDP and in addition combining with your current businesses, are there any sales synergies that sort of come through?

[Jeff Rutherford:]

We haven’t modeled those in, but we are modeling based upon the growth of that business at 4% to 5%. We have ideas for greater growth in that, but we are modeling at 4% to 5% in how we are valuing the acquisition.

[Mike Sison:]

Okay, great. And then one quick question on Pigments, Powders and Oxides that had a stronger quarter than I thought in the first. Do you think that business has turned the quarter? Gross margins have really improved in that business this quarter versus the prior, is that sustainable at those levels close to 30% now?

[Peter Thomas:]

Yes. Mike, I think what you are seeing now is a PPO business that’s more representative of what it should be versus what happened last year with that large customer who had a major de-stocking challenge. And don’t forget what’s happened here. The Nubiola business, as we have mentioned a long time ago, we are building a color solutions platform. So, essentially the PPO business, which is about 60% pigments to start with, will become the color solutions platform as we start to build that out and Nubiola will fall under the PPO platform. And so right now, what’s nice about it is if you take the $120 million plus the $110 million of last year, you are now starting to see a more developed and more of a representative business unit that is more aligned now in terms of its revenue with Performance Colors and Glass. And hopefully, as we move forward, we can start to level load of three of those businesses, but I think with the Nubiola business and PPO and the margins that are in the business, right, we think that with the PPO business moving forward it’s going to be equally exciting as the other two, and that’s been our strategy all along.

[Mike Sison:]

Great, thank you.

[Operator:]

Our next question comes from the line of Jermaine Brown with Deutsche Bank. Please go ahead.

[Jermaine Brown:]

Hi, good morning gentlemen. Regarding Nubiola, the $8 million in synergies, over how long do you expect to realize this?

[Jeff Rutherford:]

Well, it will be – obviously, when we close the deal, it will be mid ‘15, so it would be 18 to 24 months.

[Jermaine Brown:]

18 to 24, understood. And last quarter, you were guiding to an FX impact of about $0.12 to $0.14, can you quantify what it is going forward for ‘15?

[John Bingle:]

Yes, we are looking at an FX impact of – on just the base business of about $0.15 and then we have rolled in another $0.02 to $0.03 within the operations associated with what we talked about last quarter, reductions on cross-currency impacts as well as the impact on, for example, Vetriceramici.

[Jeff Rutherford:]

So, that $0.15 – let’s make sure we understand what we are saying. So, if you take what we reported in ‘14 and adjusted to the – our expected ‘15 rate – of course as soon as we went to $1.05, the euro went to $1.11, but – so we are at $1.05. So, the adjustment of ‘14 for our expected expectations for ‘15 is $0.15, right? So, it doesn’t measure what would have been pro forma on Vetriceramici of those rates, it’s just our base business. And then we do have some cross-currency sales and that’s embedded in the operations and that’s another $0.03. So, we are absorbing $0.18 to $0.20 of share because of FX.

[Jermaine Brown:]

Understood. And in terms of your growth expectations going forward, can you provide a little bit more color on a segment by segment basis on a constant currency basis, should we assume similar to [indiscernible] segment?

[Jeff Rutherford:]

Well, let’s just say this, on a constant currency basis, what we model at is GDP plus 1% on the base business and that’s what we generally do. Well, we don’t provide guidance by segment, right? We talk about results by segment, but when we model, we model at GDP plus 1%. Now, we have one business that we just talked about in Colors and Glass that exceeds that number, right? And it has for some time. So, Colors and Glass is expected to exceed GDP plus 1%. We expect tile to get back to that. Now, that’s the base business. That’s excluding Vetriceramici, which is not comp, but it is all sales growth. And the other two businesses, our expectation is they get back to GDP plus 1%. We feel good about PPO in the rest of the year and we are looking for tile to get back to that. So, we are looking for overall our benchmark for sales for all of our segments is 4%. And – but we know that Colors and Glass will exceed that. PPO is expected to get to that for the rest of the year. And our challenge is not with Vetriceramici, but with the base legacy tile business and porcelain enamel businesses and they have plans to get back to that 4% growth.

[Jermaine Brown:]

Understood. Thank you very much.

[Jeff Rutherford:]

Sure.

[Operator:]

Next is Rosemarie Morbelli with Gabelli & Company. Please go ahead.

[Rosemarie Morbelli:]

Thank you. Good morning, everyone and congratulations.

[Jeff Rutherford:]

Thank you.

[Rosemarie Morbelli:]

I was wondering how much on an EPS basis your results were helped by the tax benefit in the first quarter?

[Jeff Rutherford:]

Well, it would be this – we know – on a – from a timing perspective?

[Rosemarie Morbelli:]

No. It looks as though your $0.23 includes some benefit in the first quarter from the tax adjustments that you made. How much did that contribute on an EPS basis trying to figure out of the $0.23 what it really was?

[Jeff Rutherford:]

Yes, it’s somewhere between $0.03 and $0.04.

[Rosemarie Morbelli:]

Okay. So, we are looking at the base business in line with previous expectations, a bigger hit from FX, but all of that being a fit by that little chunk of tax benefit plus the improvements you are making in the quarter. Am I looking at this the right way?

[Jeff Rutherford:]

Yes, you are. That’s correct.

[Rosemarie Morbelli:]

Okay. So, now when you look at that $0.18 to $0.20 hit from FX, I presume you will have the impact on core, you will have the impact on Vetri. Do you have something that you have estimated on the Nubiola?

[Jeff Rutherford:]

No, that 18% to 20% is only on the core, right? We did not include it. That’s just our base legacy business effect. If we put Vetriceramici and we put Nubiola, it would be greater than $0.20.

[Rosemarie Morbelli:]

Okay. So, you are actually doing quite well if you keep your numbers at the same level and you exclude from that the negative impact of FX from Vetri and then from Nubiola?

[Jeff Rutherford:]

It would be greater.

[John Bingle:]

If you are asking, Rosemarie, if we ended up at rates that were more similar to last year, it would be greater than just $0.18 to $0.20. That’s correct.

[Rosemarie Morbelli:]

Okay. So, now you have added Vetriceramici in Italy. You are adding Nubiola in Spain. How much of bigger FX impact are you adding to your entire portfolio? Are all of the sales coming out of Nubiola in – denominated in euros even if they are selling into all of those other countries?

[Jeff Rutherford:]

Well, their dispersion of sales is in South America, Europe and United States. So, U.S. is 40%. So, their impact isn’t going to be as great as the consolidated. It’s not representative of the consolidated business. We are going to have to work on that, John, and get that – of what that effect would be.

[Rosemarie Morbelli:]

Okay, that will be helpful. And then so you have made now, let’s assume Nubiola is done, you have made two acquisitions in Europe mostly. Have you looked or is it too early to look at manufacturing facilities whether you need all of them and whether that $8 million of synergies is exclusive of whatever additional work you can do?

[Jeff Rutherford:]

Yes, the $8 million does not include anything related to facilities at this point.

[Peter Thomas:]

Yes, remember what we mentioned each call, Rosemarie is that while we are in this aggressive acquisition mode, until we have a common point, we are going to be – we are not going to be in a position to think about rationalizing European manufacturing assets until we fully understand what the new Ferro looks like there. And as we keep adding things on, we don’t want to make a mistake here too early. And so we are going to let some time go by and let some more things take place here before we look at sooner or later it will be done. But while we are in this rapid growth mode, we are – we want to make sure the right thing. But we will get to it as you know we get to everything sooner or later.

[Rosemarie Morbelli:]

Okay. And this – if I may ask one last question, this is the last probably, acquisition that you can make without adding debt given your cash flow situation and then adding from the – from your credit line is really at a very low level interest rates. So you seem to be on a roll in terms of acquisitions. We – should we expect something else to come up between now and the end of the year and at that point, you will have to use some debt for it, I am guessing and how much leverage are you considering to be appropriate, so I know it has been – yes I know?

[Jeff Rutherford:]

So, let’s work backwards. So you can do a calculation on EBITDA, pro forma EBITDA on the two acquisitions, the Vetriceramici and Nubiola and get to a steady-state EBITDA. And you are going to be – we haven’t given guidance, but you can do the math. You are going to be into the 2.25 – $225 million of EBITDA. When we – when you get there, which is going to be in ‘16, if we don’t do anything else between now and the end of the year or into ‘16, which is unlikely, but let’s just look at that from a new base model perspective. We would have somewhere in the $200 million to $225 million of EBITDA and we have $300 million of debt. So our phones are going to ring off the hook, saying we are underleveraged at that point, right. So the model, the base business, what we just announced from an acquisition perspective, we will have plenty of liquidity, we will have plenty of opportunity for other acquisitions. So that’s what we are looking at, that with where we are going to be in pro forma EBITDA, what we are looking at as far as other opportunities. We can do the other opportunities without over leveraging the balance sheet. We have got – and we have got some money when we sell Antwerp coming back, right, that we are going to have – by far have the ability for this type of transaction or larger. And those are in the pipeline, it’s just again, a matter of getting to the right place with the seller and transacting. We will have the liquidity to do whatever we want.

[Rosemarie Morbelli:]

And the next one if I may, are we looking at more European type of acquisitions or are you moving back into the U.S.?

[Jeff Rutherford:]

Well, when we – in our pipeline, they are all over. I mean that’s again, what we have said previously is the deals are coming to us now, right that we are seeing things and we see things that don’t make any sense, but we see things that makes sense. Obviously, we are not going to talk about them because for multiple reasons, but people are coming to us and private companies are coming to us, that’s how Nubiola.

[Rosemarie Morbelli:]

Okay, that’s…

[Peter Thomas:]

Remember one thing – one thing that’s important, Rosemarie, is if you look at Vetri, between North America and South America, there is about 20% to 25% of their revenue and – away from Europe, if you will. And same thing with Nubiola, we are talking about 40-plus percent that’s the shipped to away from Europe. So even though they are European based, we are building our Americas presence, which – on a ship to basis, which is also part of our strategy to try and become more level loaded around the world.

[Rosemarie Morbelli:]

Okay, thank you very much.

[John Bingle:]

Operator, we have time for one more question.

[Operator:]

Alright. Thank you. The last question comes from Dmitry Silversteyn with Longbow Research. Please go ahead.

[Unidentified Analyst:]

Good morning. This is [indiscernible]. I am filling in for Dmitry. Thank you for taking the call. So, you mentioned you had a cost of goods sold impact of the Venezuelan bolivar. Was there anything else that you saw besides FX impacting cost of goods sold and what do you foresee having an impact for the rest of the year?

[Jeff Rutherford:]

Just for clarification, are you talking about Venezuela impact on gross profit?

[Unidentified Analyst:]

The actual just gross profit in general besides FX.

[Jeff Rutherford:]

Well, we continue to see favorable mix in gross profit. We continue to see favorable experience from our global direct sourcing initiative. And that’s how we are going to get to the expanded gross profit percentage that we guided to of 29% to 29.5%. So, we see growth, then that all excludes the impact of the devaluation in Venezuela and we don’t expect anything additional. We have pretty much written our investment in Venezuela down to zero.

[Unidentified Analyst:]

Okay. Well, thank you very much.

[Jeff Rutherford:]

Sure.

[John Bingle:]

Alright, well, thank you everyone. This concludes our call for this morning. For copies of our press release, replays of this call, please access our website at www.ferro.com and click on the Investor Information. Thank you for your time. Have a great day. Bye-bye.

[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.