Ferro Corporation
Q2 2015 Earnings Call Transcript

Published: 30 Jul 2015

[Operator:]

Ladies and gentlemen, thank you for standing by. Welcome to the Ferro Corporation 2015 Second 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, July 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 second 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 and 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. Our quarterly earnings press release was issued last night. You can find the 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 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 seven 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 expressed written consent of Ferro is prohibited. I would now like to turn the call over to Peter.

[Peter Thomas:]

Thanks, John, and good morning to everyone. Thank you for joining us today. As most of you have seen from our news release, we remain on our earnings growth track despite continued weakness in the Euro and challenging market conditions in several of the emerging economies that we serve. For the quarter, adjusted EPS increased by 5% as we continued to execute on our strategy of organic growth and acquisitions. This is our tenth consecutive quarter of year-over-year adjusted EPS growth since we announced our value creation strategy in early 2013. Despite significant headwinds during the quarter, we continued to improve profitability as indicated by increased gross profit and EBITDA margins and increased return on invested capital. Our adjusted gross profit margin increased by 250 basis points to 30.3%. The adjusted EBITDA margin improved to 14.5% from 13.8%, and return on invested capital improved to 11.4% from 11.1% excluding the Vetriceramici acquisition. Having said that, our adjusted EPS growth rate has slowed compared to prior quarters primarily due to foreign currency translation and weak demand in certain emerging markets including Asia and MENA. So today, I would like to provide some clarity on what’s driving our results. First, foreign currency translation continues to have a significant adverse impact on reported results. FX translation adversely impacted sales by approximately $36 million in the quarter or 13% resulting in a reduction in value added sales driven primarily by an approximate 20% decline in the Euro over last year. Adjusting for FX, value added sales increased by nearly 5% with Vetriceramici accounting for the entire gain. Excluding Vetri and adjusting for foreign currency, value added sales for the legacy businesses declined by 2%. In addition, we estimate that foreign currency translation trends our reported EPS by approximately $0.05 per share in the quarter. The decline in organic value added sales was solely attributable to lower sales in the Performance Coatings segment due mostly to a reduction in demand for Tile Coatings. This decline was partially offset by increased sales in the Performance Colors and Glass and Pigments, Powders, and Oxide segments. So we have two businesses that are performing essentially in line with expectations, a new acquisition that is performing well and one business tile that is off primarily because of significant deterioration in economic conditions mainly in Asia. Let me elaborate and please note the following segment discussions will be on a constant currency basis. In Pigments, Powders, and Oxides, value added sales increased by $2 million or 9% for the quarter. Excluding sales of product lines previously divested, value added sales increased by 11%. Sales for surface polishing materials increased by over 20%, while pigment sales increased by 8%. The majority of the sales improvement for this segment was volume related. On a regional basis, our U.S. base business was up 15%, while the European business was down 7%. Segment gross profit increased by 36% to $9 million with segment gross profit margins improving to 31% from 24.8% last year. The margin improvement is indicative of improved product mix and better manufacturing efficiencies given by higher sales volumes, particularly for surface polishing materials. As it pertains to our outlook for the second half, on a constant currency basis and excluding the addition of Nubiola, we anticipate the business will continue to experience mid-to-high single-digit sales growth. As it pertains to Nubiola, we are excited to add this complementary business to our portfolio and expect this business to help drive future sales growth. Nubiola is a global leader in its product category and is a technology leader as well. The acquisition adds a new set of pigments to our product line, expands our geographic footprint, and expands our addressable market. The addition of Nubiola will allow us to better serve the market by enhancing our capabilities to provide color solutions to our customers. In the Performance Colors and Glass segment, we continue to experience growth in sales and profitability though at a slightly slower rate than in prior quarters. Value added sales increased by $2 million or 3% to $87 million. Vetri accounted for approximately $600,000 of the value added sales growth. Value added sales increased in the electronics and industrial product lines but declined in decoration and automotive. The decline in decoration was expected due to the loss of business at a key Latin American bottling account which we have previously discussed. The reduction in the automotive segment is the new trend, primarily reflecting lower auto demand. Adjusting for FX, gross profit improved by $2 million to $33 million with the gross profit margin improving to 38.2% from 37.2%. Gross profit increased primarily due to the increase in sales, a favorable mix, and lower raw material pricing. For the second half, on a constant currency basis, we anticipate modest sales growth in the low-single-digit range. We expect to continue to experience the impact of lower automotive sales in Asia, reduced demand in Latin America, and weaker growth than previously expected in Europe. On the positive front, we anticipate continued robust demand for our products used in electronics and industrial glass applications. In Performance Coatings, sales increased by 5% with Vetriceramici accounting for the gain. Vetriceramici’s tile coating sales in the quarter were approximately $16 million. Excluding Vetri, the base business declined by 7% or $9 million. Porcelain enamel sales remained relatively flat with growth of 1% while the legacy tile coatings business declined by 10%. The decline in the legacy tile business was principally due to deterioration in certain developing economies principally in Asia and the MENA region. On a ship to basis, sales into Asia slipped by 30% with the most significant reductions in Indonesia, China, and Thailand. In Indonesia, tile manufacturers have taken extended shut downs [indiscernible] capacity. The expectation is that they will restart manufacturing in the third quarter but at reduced rates. Sales in MENA declined by 8% with Egypt and Libya driving the change. Sales in MENA have improved sequentially but not at the rate that was expected coming into the second quarter. Similar to MENA, sales into Europe increased sequentially but were down approximately 10% on a year-over-year basis with declines in Ukraine, Turkey, and the UK among others. Lower sales in the base tile business was primarily related to reduced sales volumes for frits and glazes, as well as reduced sales for digital inks, primarily driven by the loss of business to a distributor that exited this market and by weakness in China. On a constant currency basis, segment gross property increased by $3 million to the addition of Vetriceramici. For the legacy business, gross profit declined by due to lower sales. In the second half, we expect a modest pickup in Asia as tile manufacturing in this region is brought back on line. We anticipate that this growth will be driven more by inventory restocking than by significant improvement in fundamental demand. We also expect sales to improve both in Europe and in MENA. Growth for the total Performance Coatings segment in the second half should be in the range of 5% to 6%, including Vetriceramici. The base business is expected to increase by 1% to 2%. Let me add a few additional comments about our Performance Coatings business. We believe, this is a good solid and strong business. We do not believe we have lost market share, but are being challenged by weakness in certain developing markets as is our competition. We are not taking actions to drive volume growth at the expense of price or profitability, but are instead fully committed to servicing our customers with the best coatings solutions in the highest quality products. The immediate expectation is that we will continue to face challenges for this business and the second half and we are taking mitigation actions to address this. However, we firmly believe the challenges we currently face are temporary in nature and that the market will rebound in 2016. Performance Coatings is a platform for growth and we are executing a growth strategy to drive value, including introducing new products, expanding geographically, and acquiring assets as they become available. We are currently adding capacity in Indonesia and expanding our operations in Turkey and we're working to add additional capacity in MENA. We are also integrating Vetriceramici and working to drive additional revenue growth through cross selling opportunities. In conclusion, while the quarter was not as strong as we would have liked, we continue to increase profitability and strengthen our market positions. We continue to pursue cost optimization opportunities, and we are creating substantial operating leverage for when fundamental demand returns. We remain focused on executing on our value creation strategy and on driving organic and inorganic growth. We are actively working on a number of small to medium size acquisitions or joint venture opportunities and we have the financial capacity to execute on them. We also have a healthy pipeline of new products coming to market and under development. The opportunities are before us and we intend to execute on them. And with that I will turn the call over to Jeff.

[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 continuous performance materials businesses as adjusted for restructuring and other onetime items to provide comparability of information from period to period. I will cover two primary topics and then we will get to your questions. First, I will provide a quick recap of the quarter and will then provide a discussion of our outlook for the second half of 2015. As you are aware, we have divested the majority of our performance chemicals business units. 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 a discontinued operation and generated a loss of $6 million in the second quarter or a loss of approximately $0.06 per diluted share. As of the end of the second quarter, our investment in Antwerp is approximately $40 million and we have less than $5 million of remaining capital to invest through project completion. Including expected changes in working capital, the steady state investment in this asset will be below $40 million. The facility is nearing completion and we are now running chemicals through the two manufacturing processes, production of benzoic acid and production of dibenzoates. Our customers continue to express interest in our product offerings and we expect commercial sales by the end of third quarter. Now, I will turn to our results for the quarter on a continuing operations basis. On an on adjusted basis continued operations generate $0.14 per diluted share in the second quarter, compared with $0.15 last year. On an adjusted basis, we reported income of $0.20 per diluted share, compared with $0.19 per diluted share for the same period last year. As Peter mentioned, we estimate that foreign currency translation reduced our reported EPS by approximately $0.05 per diluted share. The major adjustments, which were reported as onetime items in the current quarter, included the following items. First, we incurred $2.7 million of foreign currency losses recorded in other income and expense associated with hedging activity for the 149 million Euro purchase of Nubiola. During the quarter, we also recorded $1 million of additional restructuring charges, mainly related to headcount reductions. And finally in SG&A, we had approximately $4 million of nonrecurring expenses, primarily related to M&A activities in our reorganization projects, including among other projects, our tax restructuring process projects. As we have previously discussed, we have moved away from using a pro forma effective tax rate of 36% in calculating adjusted any earnings as was applied for all of 2013 and 2014, instead we will use our actual rate that is reflective of the progress we are making on our strategic tax restructuring projects and one that is more in line with the statutory rates in each of the legal entities where we do business. In addition, pro forma adjustments that are made for special 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 second quarter of 2015 was approximately 33% versus 36% in the second quarter of 2014. As we noted in the first quarter, we anticipate a full year effective tax rate of approximately 25%. This rate will be achieved through the realization of certain discrete tax benefits that were recognized in the first quarter of 2015. As such, third and fourth quarters will have higher effective tax rate rates forecasted to average approximately 26%. During the remainder of my remarks, I will refer to adjusted numbers that exclude the adjustments I just noted. In addition, discussions about sales and sales -related profitability measures such as gross profit margins were referenced value-added sales. As a reminder of value-added sales, exclude precious metal sales, as precious metal sales in general are pass-through sales to our customer. Excluding precious metal sales removes the volatility in our results associated with the movements in precious metal pricing. Precious metal sales were $11 million and $13 million in the second quarters of 2015 and 2014. Value-added sales were $257 million in the second quarter of 2015 versus $282 million in the prior year. On a constant currency basis and including Vetriceramici, value-added sales increased by approximately 5%. Excluding Vetriceramici and on a constant currency basis, value-added sales declined 2%. Adjusted gross profit was $78 million in the second quarter 2015, equivalent to the amount recorded in 2014. Results in 2014 however were achieved on higher reported sales. From a gross margin perspective, profitability improved by 250 basis points to 30.3% from 27.8%. On a constant currency basis, adjusted gross profit increased by $9 million or 13%. Excluding special charges in both periods adjusted SG&A was $49 million, compared with $47 million in the prior year period. On a constant currency basis, adjusted SG&A was $49 million in the second quarter of 2015 versus $44 million in the prior year. Vetriceramici accounted for approximately $3 million of the increase with incentive compensation accounting for the majority of the difference. Expenses associated with executive long-term incentive compensation increased in the quarter compared with last year, while expenses related to annual bonuses declined. The increase in executive long-term incentive compensation expense relates to the Executive Team’s Performance Share Awards granted in 2013. The cost for this program have increased to account for achieving a higher performance entailment level and an increase in the company’s stock price. For the quarter, we achieved $37 million of adjusted EBITDA, resulting in an EBITDA margin of 14.5%. This compares to second quarter 2014 adjusted EBITDA of $39 million or a 13.8% EBITDA margin. On June 30, 2015, net debt was $202 million, an increase of approximately $31 million since year end 2014 and approximately unchanged from the first quarter. Prior to quarter end however, we made provisions to close on the Nubiola transaction, including borrowing against the revolver. Consequently, cash held and debt drawn at quarter end increased from the first quarter level. Our cash and debt positions at June 30 were $211 million and $414 million, respectively. Our liquidity position remains strong. We currently have approximately 90 million of availability under the revolver and cash balances of approximately $60 million. The following significant cash flows occurred during the first half as part of the change in net debt. For continuing operations, we generated $72 million of EBITDA with the following items impacting cash and net debt. Restructuring payments of $2 million, interest of $7 million, cash taxes of $9 million, pension and other postretirement contributions of $4 million, capital expenditures of $8 million, working capital of $27 million as a use, including the following components, receivables $17 million, inventory $5 million and accounts payable $4 million, 2014 bonus payments made in 2015 of $11 million and other net items of $12 million, including $9 million of cash costs associated with one-time items, not accounted for as restructuring, $4 million associated with the FX impact on cash balances, partially offset by other items, including changes in accruals of $1 million. Acquisition activity also used approximately $5 million of cash, primarily associated with our purchase of TherMark. Our discontinued operations used approximately $18 million in cash composite of the following items

[John Bingle:]

Thank you, Jeff. Operator, we are now ready to being the Q&A session. Please repeat the instructions to assist our guest and then we will take the first question.

[Operator:]

Thank you so very much. [Operator Instructions] Our first question comes from the line of John McNulty. Please go ahead with your question.

[John McNulty:]

Yeah, good morning. Thanks for taking my question. So it looks like Performance Coatings obviously is seeing some real tough times, and I think you’d commented that you are working on ways to kind of reduce the impact, it looks like through cost cutting. Can you walk us through what some of those cost cutting initiatives might be and how to think about quantifying that in terms of a potential tailwind to offset some of these headwinds?

[Peter Thomas:]

Yeah, John, it’s Peter. Yes, what we’ve mentioned is, we have developed and are taking action on tying to recoup the shortfall that we’ve just shared with you, and the actions are as follows. Most of them of course are at the cost of goods level, most of them are driven at the direct spend level with core raw materials, in fact I will use this time to mention that we have hired a new Chief Procurement Officer that’s very talented and has many years of experience in this space in implementing the type of program that was put in with our new purchasing initiative programs that we’ve been talking about, and we are highly confident and her ability to execute against some of these mitigation plans. The second piece is that we were looking on a manufacturing basis to make sure that we are judiciously spending our money, not on just things that are nice to have or good to have, but absolute necessary things at this point in a way that will still address our concern for our employees around EH&S. We have initiatives around reformulation activities across all businesses, not only in the Performance Coatings business, but looking at the other business to help offset the shortfall that we are experiencing in the coating space. We are also looking at launching a few new product lines in the Asian region to be more competitive against other competitors that produce maybe not quite the quality that a European production quality would resemble, and we also have selective price increases that we are targeting and the last thing would be we are pushing harder for more cross-selling activities and initiatives both at the Nubiola basis and Vetriceramici basis.

[John Bingle:]

And then, Peter, I would add on the expense side, right, we do have a – and I think John we have talked about this, we do have a new tool relative to indirect spend where we have full visibility into indirect spending on a monthly basis, and we are currently approaching everyone to completely understand where indirect spend are and have a high expectation relative to cleaning up some of the historical spending we have. It’s very easy to have indirect spend not being scrutinized on an interim basis, but now we don’t have an excuse for that. We have clear visibility in indirect spend around the world on a monthly basis. And then we still have opportunities relative to some BPO activities, including our acquisitions, Vetriceramici and in Nubiola. In those – and I know we have teams travelling this week executing on capturing those synergies, so So there are continued activities. And the fact that our sales are down isn’t a reason for doing the right thing relative to cost but certainly if there is a higher level of attention to expenses at this point on.

[John McNulty:]

Okay. Fair enough. And then actually on the Vetri acquisition, I mean you’ve owned it now for a bit of time, any surprises either the positive or the negative that you can kind of walk through in terms of getting us comfortable with that business?

[Peter Thomas:]

There are more opportunities than we originally understood, and it’s doing better than we originally modelled.

[John McNulty:]

Okay, fair enough. And then just the last question, with regard to the M&A pipeline, it sounds like it’s relatively full, at the same time, you have launched a big or a reasonably sized share repurchase program. So, I guess, what’s the rationale for the repurchase program, and is that any indication that the assets in the pipeline may not be coming as quickly as you had hoped?

[Peter Thomas:]

It’s certainly not that we don’t have M&A activities. I think the answer to that is the $25 million that we put in place is the first start relative to where we think the capital structure should be, but the $25 million is not going to affect at all anything we want to do relative to M&A. It’s a add-on to value creation, it will lower our working capital or our cost of capital a little bit, and we’d been in discussions as we’ve discussed many times that we’ve been in discussions for a long time relative to should we have something in place. In all likelihood John, we’ll put this into a 10b5 relative to applicable metrics, and so that can be executed even in black-out periods and it’s just something else we want to provide to the shareholders.

[John McNulty:]

Great, thanks very much for the color.

[Peter Thomas:]

Sure.

[Operator:]

Thank you. Our next question comes from the line of Mike Sison. Please proceed with your question.

[Mike Sison:]

Hey guys, Jeff, can you maybe walk us through sort of the variables in the guidance now meaning you know what are the positives, the EPS positives on the acquisitions, how much cost savings we have, what type of growth is coming from organic initiatives which is still you know positive here and maybe just summarize that the FX headwind, and I recall that was supposed to be like $0.15 or so, is it bigger now and just sort of walk us through from, you know the $0.62 [ph] in 2014 to the range you have now.

[Jeff Rutherford:]

Yeah, let’s do it in a couple of stages. Let’s do it based on what just happened.

[Mike Sison:]

Yeah.

[Jeff Rutherford:]

So, let’s walk, let’s talk about the first half, and in the first half of the year, the FX effect John is –

[John Bingle:]

In the range of $0.08 to $0.09.

[Jeff Rutherford:]

Tax effected.

[John Bingle:]

Yeah.

[Jeff Rutherford:]

Tax effected $0.08 to $0.09 all right, and then Vetri on our operating profit level is going to be in the $6.5 million range for the first half on just under $32 million of sales, just verify my numbers, go through this John here, and then on the commercial end, was negative on a constant currency basis of $4 million.

[Mike Sison:]

Okay.

[Jeff Rutherford:]

Operating profit wise it was approximately $1 million of negative operating profit of the decline in commercial status. Then all other benefits, all other cost reductions Peter mentioned raw material improvement, direct spend, indirect spend and then what happened with incentive comp and I myself touched on this, what happened in incentive comp and in the second quarter is related to the 2013 Executive Performance share units and it’s a combination of achievement of the goals within that program, another quarter of vesting and the share price resulted in a fairly material change on a quarterly basis of that expense where it increased just under $4 million between $3.5 million and $4 million. Conversely, the annual bonus plan adjusted based upon where we are predicting 2015 to be and we got a credit against that of about $3 million. So that’s the net effect of incentive comp, but all in, to answer your question is for the first half all other contributors on a operating perspective contributed about $6 million of increased operating profit. Interest expense was down due to the refinancing and the [indiscernible] that we’re capitalizing some interest in the Antwerp’s though and then tax rate is down and will be down for the year, obviously was up a little bit in the second quarter, but for the year we are still forecasting at 25% with the discrete items that were recognized in the first quarter. So, when we move to the second half is basically what we were talking about, what John was talking about earlier of the guidance we gave Vetri is expected on a sales line to be just under $30 million.

[Mike Sison:]

Okay.

[Jeff Rutherford:]

For the second half. Nubiola, it will be just under $60 million for the second half. Those two in total will contribute on an EPS basis, somewhere around $0.08 to $0.09. Okay. The base business, the base business, the non-Vetri the non-Nubiola business, our expectation for the back half of the year is going to be somewhere between 1% and 2% rough. Right, where we’re effectively flat at first half. Our expectations for the second half are 1% to 2% growth. And then when you factor in all the other things you gave relative to guidance gross profit percentage operating profit percentage and we’re going to - we don't expect any surprises in SG&A in the back half, interest will be up a little bit because we borrowed by Nubiola and our expectation is that on and Antwerp it’s completed, our expectation is solved, but no longer capitalizing interest and on a 25% tax rate for the year.

[Mike Sison:]

And FX is about the same impact?

[Jeff Rutherford:]

FX in the back half on sales is just about $60 million off of 14 sales. So, I think I think we went through that, the back half of the year is, last year was about $517 million and our expectation as you take off 60 million after that about $547 million, $546 million, $547 million. Yes.

[Mike Sison:]

Okay.

[Jeff Rutherford:]

And [indiscernible].

[Mike Sison:]

Great and then if you look forward to 2016 and I know you are not ready to give full guidance, but I guess the positive levers will be continued may be growth organically, will you have some more cost savings or productivity that kicks in and then acquisitions right, and if you have any thoughts on kind of the potential benefits that could help?

[Jeff Rutherford:]

Yes, let's talk about, we haven't given guidance for 2016 and John is in a little panic right here as I’m talking, because I have the model in front, right.

[John Bingle:]

And so when we look at 2016 nothing has changed and let's talk through that, I know we've talked previously about EBITDA in the range of $200 million to $225 million and we could be on the high end of that range. We are not saying, we're not going to achieve that, we may have to get there a little different than we originally thought and we could talk about, but looking into 2016 and assuming that the Euro is at about 110, right, that's where we built this model off of. And we would have another, we would have a full year of Nubiola. And you would double that Nubiola contribution and it is in the low 60 million of sales, right. So, it is going to be a good contributor and there is probably some upside to that I would hope. As our guys get in and it is a very good business. We are very fortunate we bought two very, very good businesses. And the expectation for Vetri is that Verti is going to grow faster than our other businesses, right. And it has a lot of opportunities and peter can tell you all the opportunities relative to cross selling and so forth. So, we have additional benefits coming in 2016. Peter touched on it that relative to direct spend built into our model and some additional SG&A reductions built into our model that is net of net of wage inflation and so forth could contribute between $8 million and $10 million to operating profit. You factor all that in and you go back to our original model of 4% organic sales growth, you’re going to build a model that’s going to be in that range of EBITDA that we talked about probably right in the middle of that range, before any acquisitions. So our expectation is that, we’re not going to be sitting still for the next year, looking our wounds, this is a trip not a fall and so we will have transactions occurring. And as Peter said, we can’t guarantee anything but there is certainly opportunities that will add today to EBITDA and the timing of the acquisitions would add to that EBITDA. The key in there though is a 4% organic sales growth. So even if the risk in there if we have risk and we are more willing to talk about what the opportunities are in our chemical [ph] business because it’s better than what we are performing right now. We will be very – that model, we can build that model very easily to be at the top end of that range. And so we are coming off of our value strategy here. We are still right on that. We missed in the sales number in a specific segment and we’re going to give you all – we are not excuse makers, so we can give you all the reasons if you want them, but we are looking forward at what we can trade and we are still very confident in this model.

[Mike Sison:]

And just a real quick follow-up so everybody can sort of just at least visualize the growth. The range for EBITDA in 2015 underpinning the EPS is what?

[Jeff Rutherford:]

That’s mainly going to be driven by expectations for sales and gross profit in the market.

[Mike Sison:]

No, I understand. You just have EBITDA.

[Jeff Rutherford:]

[indiscernible]

[Mike Sison:]

For 2015.

[Jeff Rutherford:]

Just under 15%.

[Mike Sison:]

Is it like 170, 160?

[Jeff Rutherford:]

It’s just – EBITDA is just around 160.

[Mike Sison:]

160 going into 2015. Great. Thank you.

[Operator:]

Thank you. Our next question comes from the line of Rosemarie Morbelli. Please proceed with your question.

[Rosemarie Morbelli:]

Good morning, everyone. I was wondering Peter, if that share repurchase is based on the fact that since this is the first time in many quarters that you did not outperform expectations. You anticipate that the staff decline and you wanted to benefit from it.

[Peter Thomas:]

No, Rosemarie. As Jeff mentioned earlier, here is how we are looking at this. There are many levers for us to create shareholder value. We have a wonderful strategy that’s based on clean up of the past, expanding margins and now we’re implementing in organic growth models that we are highly confident that we’re going to execute on. This is another shareholder value creating opportunity for us. We’ve been talking about this at the Board level for the past two years and we thought that this would be a good indication to share with everyone how successful that we feel we are in executing our strategy, to put this in place and also how confident we are moving forward that we’re going to deliver. So this is nothing more than just another creation of value for our shareholders and we felt it is prudent to put it in.

[Jeff Rutherford:]

But I will add that if we can make some money of it, we are not of course doing that. So...

[Rosemarie Morbelli:]

That’s what I thought.

[Jeff Rutherford:]

Yeah. If the market overreacts to this, we know the value that company has and we’re going to put it in place and if we can buy our own shares cheap for the benefit of our continuing shareholders, we are more than willing to do that.

[Rosemarie Morbelli:]

That sounds good. So now moving on to performance coatings, Peter, did I understand correctly are you adding capacity or did I miss that particular comment and the capacity addition is in another segment?

[Peter Thomas:]

No, what we mentioned is that we are adding as we talked about I guess the last three calls, we are expanding our capacity in Indonesia and that capacity should be on stream at the beginning of 2016. That’s what Jeff mentioned, this whole thing in Indonesia, remember that we participate in as we would call maybe some rough neighborhoods that also have the best growth potential. And this thing in Indonesia that’s taking place which has caused the contraction of 40% in the construction market. To think about that as we mentioned in the past of our sales in Indonesia are running at $40 million to $50 million a year, 40% hit is about 2% of our sales. So it’s small, but it’s impactful but at the end of the day Indonesia will rebound, we are looking at it moving into next year. We are out of capacity before this downturn took place which really started at the end of the fourth quarter and really became a true signal of an issue here in the second quarter. We rate capacity and we needed to expand to take advantage of the 8% growth in the tile market that existed in that area prior to what you’ve seen. So this is a typical emerging market play. We’ve been through this before in the past, it will turn around and we’re going to be in a better state of position to take advantage of the growth without running that capacity and not giving new business. So we are very confident and that addition of capacity and we look forward to the second half of 2016 when things start to pick up.

[Rosemarie Morbelli:]

So when the demand picks up, construction picks up, do you anticipate that the [indiscernible] will continue to grow at an 8% or is it more reasonable to think of it more as a 4%, China is slowing and I am assuming that we are the countries doing the same thing long term type of growth.

[Peter Thomas:]

Yeah. We will be regardless of how robust that may, the Europe people might think. We are targeting 4% growth in that business in that area on a go forward basis.

[Rosemarie Morbelli:]

Okay. And as you are adding capacity in that particular area, are you eliminating some in Western Europe and can you give us an update on Egypt and the Middle East.

[Peter Thomas:]

Sure. The first answer is, we will not remove capacity elsewhere in the world. Our strategy is to now do as a true market leader of being worked hard within the areas where growth in the next three to five years than we are positioning moving forward our asset to be at the right place at the right time, so we could be the first mover into position. So that strategy continues with a couple of things that we are working on that we can’t be more granular on. That’s number one. Number two, even though things are tight in Europe and the Middle East and slowing down, we are still running because we have taken out these markets back in 2008, 2009 and 2010. We are still running at strong capacity levels in Spain and of course our final plant is running at capacity. So one of the challenges we have is we need more capacity and we mentioned here in our script that we are looking for opportunities in the Middle East and probably more in North Africa where we are currently positioned. The reason why that is, we expected – what we said in the first quarter was that, we knew and we signal that Asia was softening but we believe that the time based in our visibility that the uptick in Europe that we were experiencing was automotive applications and auto remodeling activities in France and also the demand pickup in Egypt and Middle East would offset what we were seeing in the second quarter, I mean the first quarter. But obviously that didn’t occur. What occurred was Asia got worse and we have a little bit of a downdraft that we are seeing throughout the world in the automotive application and of course Europe and MENA did not grow as quickly as we thought, and that’s where we were caught. Now that we spent over the past four weeks really digging into every aspect of the business with a lot of detail, we feel very comfortable that the guidance that we are putting out, we will be able to deliver that. And what we want to do is we know and we are starting to see it now, we projected that growth would improve in MENA. It improved sequentially but now we are seeing a little bit more of an uptick here in the third quarter and the fourth quarter that we thought we would have seen in the second quarter. So we still feel very good about what’s happening in the Middle East relative to what’s going on there and some of the dynamics in the second quarter and why it didn’t grow as fast as we thought. Customers in Saudi in the Emirates were still destocking more than we thought. In Egypt, the demand is good, but a couple of our customers decided they wanted to try to forward integrate and make some of the glazes that we supply and fortunately for us in the second quarter it hit us, but it may be didn’t work the way they thought, so we may be seeing some of that business going forward and of course we have areas like Morocco that were finally picking up and as well as Algeria. But in that region because of what it is, you still have troubled areas like Libya and or Tunisia where we supply there but you still have some challenges. But overall we still feel good about the Middle East.

[Rosemarie Morbelli:]

All right and if I may ask one last question regarding the savings which were, have grown every year and were going to reach more than $100 million by the end of this year, are we thinking about of $105 million $110 million for this year and then based on the new steps you are taking how much more do you think you can take out?

[Peter Thomas:]

Yeah, you know, we don’t, because of the transactions, because of the sale of paint and plastic, we don’t talk about that anymore, but what we can talk about is margin expansion and you can get to the same numbers. If you take our business back in 2012 for the continuing operations we were basically break-even on similar sales, slightly lower sales from an operating profit perspective. We are now projecting forward in the mid-11s right? So, we have improved operating profits over a three-year period of time a $110 million to $120 million and it’s a combination of a lot of things. It’s margin expansion, it’s - there’s some sales mix margin improvement in there, but there’s a lot of cost reductions and that 11% to 12% operating profit splits almost in half between gross profit and SG&A. SG&A is reductions, gross profit is expansion. Yeah, John’s just showing me SG&A, excluding incentive comp in Vetriceramici is $38 million in the quarter, so we’ve taken a lot out and we now measure at an operating profit. We want to see it in the results and so we’ve improved operating profit a $110 million to $120 million in the last three years.

[Rosemarie Morbelli:]

Thank you very much and good luck.

[Peter Thomas:]

Rosemarie?

[Rosemarie Morbelli:]

Yes.

[Jeff Rutherford:]

Rosemarie, I just want to highlight based on your questioning, I just want a bundle of some of the tailwinds that we’ve discussed here for the second half of the year, so we can put it in perspective so you don’t all of you don’t have to run in and try to piece it together, but here’s what we’re feeling good about for the second half. The auto market is still blooming in places like North America in Mexico and registrations are up in Germany. So that part of the world is still very positive for us. The second part, when you look at our colors and glass business the climate in Europe in the second half is actually better than it was in the first half. In particular, the sales of our industrial glasses mostly flat glass applications on commercial buildings throughout parts of the world that are growing in addition to oven doors in our appliance market are really, really picking up here coming out of the second quarter. We also see continued growth in our structural roof glaze business in France as part of our remodeling activities and that is also a very positive sign where we continue to see domestic demand growing. The next piece would be the synergies of the two acquisitions as Jeff mentioned as we dig more into those acquisitions we’re finding more opportunities for value; and it’s beyond just straight synergies, but the cross-selling activities that have taken place at the Vetriceramici level we’ve taken them to Europe, I mean Asia where they weren’t strong and to Latin America where they were just starting in emerging position and those two activities are already starting to provide a benefit and we feel the same way here with Nubiola just by only owning them for a couple of months we’re that much ahead two of those cross-selling activities. So those are very positive tailwinds moving through the course of the year for us.

[John Bingle:]

And operator we have…

[Rosemarie Morbelli:]

Thank you that was very helpful.

[John Bingle:]

Operator we have time for one more question.

[Operator:]

Thank you. Our last question comes from the line of Dmitry Silversteyn please proceed with your question.

[Dmitry Silversteyn:]

Good morning. All of my questions have been answered, but I just like to revisit a couple of points perhaps, you talked about in your powders and oxides business are seeing strong growth, I think yourself in like 20% in the polishing electronic market, given that the semiconductor industry is supposedly is going from inventory correction and we've seen pretty steep decline in June sales for GSMC [ph] and there was a company that reported today that could be actually a customer of yours that preannounced a couple of weeks ago on very poor sales, how do you reconcile your ability to grow in that market with what looks like a destocking phase, are you just lacking that and we should see that more in the third quarter, or did you gain some customers that allows you to offset what’s going on in the broader market or are you just too small a player and to really be bothered by external or is it all about internal execution?

[Peter Thomas:]

Yes it is Peter. I think it depends on, that's a good point and thank you for bringing that up because it gives us chance to do another commercial here. In our specific applications right, are removed from some of the things you mentioned a lot of ours are tied with automotive applications, the new business and the pickup in that business; and the second piece which we cannot discuss in a lot of detail is that we have some military applications with our electronic products that are picking up and ramping up and providing a nice benefits for us.

[Dmitry Silversteyn:]

Okay, so these are polishing applications, but not the traditional…

[Peter Thomas:]

Now these are not, I am talking the electronics, there are two things, polishing at the deal with auto finishes ophthalmic lenses and glass and gorilla glass activities or LCDs, but the electronic pieces, multi layer materials, electronic packaging materials that are specific to things like for us like automotive sensors and some other proprietary applications plus military applications.

[Dmitry Silversteyn:]

Got you.

[Peter Thomas:]

So, we’re very selective on what we are doing there.

[Dmitry Silversteyn:]

I understand that Peter thank you; and then a couple of follow-up questions on the performance coatings business. First of all with your sales being down and your gross margin being up, sort of how do we reconcile that is it mix, is it cost removal, I’m just surprised that [indiscernible] just came in significantly later than you expected by you had gross margin did a lot better?

[Peter Thomas:]

Yes, you know you know what, it is real simple, it is mix in Vetri.

[Jeff Rutherford:]

And it's an improvement in direct spend and indirect spend, procurement people, I've done a real good job there and operations people are managing the plants based upon the forecasted sales and doing a nice job operationally. There is positive mix in there to relative to the, if you're going to have a sales mess it’s fortunate that it was in our lowest margin business.

[Dmitry Silversteyn:]

Got you. Okay, it makes sense. And then finally on your comment of getting into Asia Pacific region with more, how could I put this, lower or non-European quality products to allow you to go out and compete in that faster growing market, and besides sort of volume growth that you're going to get off of that how should we think about the mix impact of those lower price products both on top line and does it necessarily mean that they are a lower margin or is this often the case some of these lower price for older products actually carry a higher margin so we will be positive for mix on the operating profit line?

[Peter Thomas:]

Yes it is too early to give you a total value, but your concept is right, what it is, is a lower price point product with higher gross margins. And it will be very selective on where we go with that because a lot of how we compete is a bundling Dmitry, it is a bundling approach, it isn't a one off let sell our frit, lets sell our glaze, lets sell our ink. We bring a whole bundle to the customer and we do have customers that also buy low end type of formulations that we haven't participated in their book of business, but because they buy other things we've been asked to do that. And that is why we are doing it. So we're going to be very selective with that.

[Dmitry Silversteyn:]

Got you. Okay thanks for that clarity.

[John Bingle:]

Alright, well that concludes our call this morning. For copies of our press release replays of this call or to access our SEC filings, please visit our website at ferro.com and click on investor information. Thank you for your time this morning and have a good day.

[Operator:]

Thank you. 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.