Ferro Corporation
Q4 2015 Earnings Call Transcript

Published: 25 Feb 2016

[Operator:]

Ladies and gentlemen, thank you for standing by. Welcome to the Ferro Corporation 2015 Fourth 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, February 25, 2016. 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 fourth 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. A quick item before we begin. As stated in our prior calls, we are moving away from describing our sales, growth statistics and profitability metrics, on a value-added sales basis that is based on revenues excluding the sale of precious metals, and we will begin reporting on a net sales basis in the first quarter of 2016. We’ve incorporated this concept in our 2016 guidance. This is the last quarter that we will reference value-added sales. Accordingly, we have posted a schedule to our website that restates our profitability metrics for 2014 and 2015, based on net sales to provide you year-over-year comparisons. Our quarterly earnings press release was issued last night. You can find the release, a reconciliation of reported results to non-GAAP data that we’ll discuss this morning, and supplemental slides for the call 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, 2015. 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’d now like to turn the call over to Peter.

[Peter Thomas:]

Thanks, John, good morning everyone, and thank you for joining us today. As you saw in our earnings press release, we delivered another strong quarter to close out a very good and productive year. Despite challenging macroeconomic conditions, we have successfully advanced our value creation strategy, moving aggressively into the growth phase. We have achieved a great deal during the year and I’m proud of the efforts and accomplishments of the Ferro team. I’m particularly excited about what our efforts will mean for the future, and our ability to drive growth, profitability, and higher levels of cash flow. For the year, we increased constant currency sales by 11%. We increased our adjusted gross profit margins by 180 basis points. We increased our adjusted EPS by nearly 40%, delivering the 12th consecutive quarter of adjusted EPS growth. We generated $155 million of EBITDA, which provided $75 million of free cash flow for investments and for the repurchase of our common stock. We invested over $225 million in growth opportunities, including three acquisitions of TherMark, Nubiola and Al Salomi. And we improved our adjusted return on invested capital to 13.7%. From a financial metrics perspective, it’s been a very successful year. But I want to spend a few minutes on the actions we have taken strategically to strengthen our position and build momentum for continued and sustainable growth. As we have discussed, our actions over the last three years have repositioned Ferro to be a focused, functional coatings and color solutions business. This past year, we continue to successfully execute this strategy in all three of our business units and I want to share some highlights of that process with you today. During the year, in our Performance Coatings business, we made substantial progress integrating Vetriceramici, setting the stage for improved profitability and continued expansion of the Vetriceramici brand. In our Pigments, Powders and Oxides business, we acquired Nubiola, improving our product portfolio and setting in place another solid platform for growth in color solutions for the coatings, plastics and construction industries. Across all businesses, we enhanced our market position in Turkey and the MENA region by, first, investing in our existing operations in Turkey to improve our sales, marketing and logistics capabilities. Next, by acquiring Ferer, our distributor in Turkey for the marketing and distribution of glass coating and color products. And acquiring Al Salomi, an Egyptian-based tile coatings manufacturer, which has the capability to expand production capacity to accommodate future sales growth. These investments in Turkey and the MENA region provide the foundation for above market growth in 2016, for our Performance Coatings segment and positions us extremely well for the future in these important growth markets. We’ve also been actively working to develop and launch new products that we believe will improve our profitability, and further enhance our organic growth. Our new product pipeline is oriented toward innovative products solutions that leverage our expertise in colors, and coatings. Over the past three years, since the value creation strategy was initiated, we have brought to market new products and product reformulations that now account for nearly $200 million of our current net sales. We are focused on revitalizing our product offerings, keeping the product portfolio fresh, and enhancing our gross margins. Success in this area is one of the drivers behind our gross profit improvement since 2012. Finally, we’ve been actively engaging the process to sell our Belgium dibenzoates manufacturing assets, and we have made measurable progress. The capital spend for the project is completed, we are producing dibenzoates and the plant is now ramping up to commercial production levels. We recently made our first large scale commercial sale of dibenzoates produced at the facility, and we expect the operating cash needed to fund these operations will decline, as sales of 12 phthalates are converted to the new dibenzoates products had increased levels of profitability. There are multiple parties interested in the facility, and we are committed to finalizing a sale during 2016. We are pleased with these strategic accomplishments, and we see many more such opportunities to enhance our position, and accelerate our transformation into a leading functional coatings and color solutions company. I’m also excited and optimistic about 2016. We have a strong product portfolio with leading market positions and we are poised for organic and inorganic growth in all three of our reportable segments. For 2016, on a constant currency basis, we anticipate that the company will record 10% to 11% of net sales growth from our existing business portfolio, with approximately 85% of the growth coming from recent acquisitions. In addition, we anticipate the gross profit margin will improve by 50 to 100 basis points, based primarily on higher volumes and improved business mix. At an enterprise level, we view the core market of our business growing over the long-term at GDP with our internal organic growth activities typically adding 1% to that number. For 2016, we anticipate continued growth in the auto and construction sectors, and believe through our recent strategic actions, we can surpass our benchmark organic growth target of GDP plus 1% on a volume basis. In the Performance Colors and Glass segment, we anticipate continued solid growth through 2016. Since 2012, on a constant currency basis, we’ve enjoyed cumulative average growth of approximately 4%, which we consider above our sales weighted global GDP estimate. For 2016, we anticipate sales growth will again exceed the global GDP rate with slightly improved gross margins. As a reminder, in the Performance Colors and Glass segment, we provide our customers with glass-based coatings that are applied onto glass substrates. We categorized our business into four sub-segments

[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 this morning will be brief, I will describe a few non-standard items that occurred during the quarter. And then we will provide an overview of our 2016 guides. During the fourth quarter, we sold our interests in our Venezuelan joint venture for $500,000 recording a loss of approximately $125,000. This entity reported $8.4 million of sales and an operating loss of $1 million in 2015. As Peter mentioned earlier, we are also in an active process to sell 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 the potential proceeds or timing. The Antwerp facility is reported as a discontinued operation and generate a loss of $8 million in the fourth quarter or a loss of $0.09 per diluted share. As of the end of the year, the carrying value of assets held for sale for Antwerp was approximately $31 million. In addition, the major adjustments in the quarter, which we reported as one-time items and have been excluded from adjusted earnings, included the following. First during the fourth quarter, we released our valuation allowances on certain deferred tax assets, which were originally provided for in 2012. The release of the valuation allowance resulted in a $63 million tax benefit, positively impacting GAAP reported diluted earnings per share for the fourth quarter and full year. On an EPS perspective, the tax change added approximately $0.72 to our GAAP diluted EPS. We also recorded a mark-to-market pension adjustment in the fourth quarter, resulting in a $9 million non-cash charge, related to our pension programs with $11 million recorded in SG&A and a credit of $2 million in cost of goods sold. During the fourth quarter, we also recorded $4million of additional restructuring charges. And finally in SG&A, we had approximately $6 million of non-recurring expenses, primarily related to business development activities and our ongoing cost reduction in reorganization projects, principally associated with personnel actions. Now I will turn to 2016 guidance. For 2016, we expect net sales growth of 10% to 11% with our recent acquisitions adding approximately $90 million and a base business providing low single-digit sales growth. To provide comparability of our operations on a year-over-year basis, we have removed from 2015 to $8.4 million of sales from our harvested Venezuelan JV. Net sales for 2016 on a constant currency basis are expected to be in the range of $1.17 billion to $1.185 billion. For the year, on a constant currency basis, we expect adjusted EPS to be in the range of $0.95 to $1 with adjusted EBITDA of $178 million to $185 million, which will generate free cash flow from continuing operations of between $80 million and $90 million. Free cash flow from continuing operations is equivalent to adjusted EBITDA, less cash expenses associated with operating the business. We have included a table in the earnings release, providing the detail of this cash flow metric for 2014 and 2015. Based on current FX rates, we believe translation to U.S. dollars will adversely impact our results by $0.05 per share for the year, putting our guidance on a FX adjusted basis in the range of $0.90 to $0.95 per diluted share. The other major component of our earnings guidance are included in our earnings release. For modeling purposes, we have also assumed the following. Depreciation and amortization will be approximately $44 million. Capital spending for the year will be approximately $35 million, $2 million for acquisition integration, approximately $23 million for maintenance and environmental, health and safety projects and the remaining $10 million for growth and cost reduction projects. Working capital will be a use of approximately $10 million. Cash taxes will be approximately $20 million and other cash items including pension contributions will be a use of $10 million to $15 million. That concludes our prepared remarks. I will now turn it over to John, for the Q&A session.

[John Bingle:]

Thank you, Jeff. Operator, we are now ready to begin the question-and-answer session. Please repeat the instructions to assist our guests and we’ll then take the first question.

[Operator:]

Thank you. [Operator Instructions] Our first question comes from the line of Mike – I am sorry, our first question comes from the line of David Begleiter with Deutsche Bank. Please proceed.

[David Begleiter:]

Hey, good morning.

[Peter Thomas:]

Good morning.

[David Begleiter:]

Peter and Jeff, you discussed that the cadence of earnings in 2016 and how you see Q1 playing out?

[Peter Thomas:]

Yes, John you want to add…

[John Bingle:]

Yes, thanks. What we see for next year obviously given the strategic activity you are taking on for the year that – the cadence of earnings will be weighted more towards the second half. So the first quarter will be somewhat in line, it is not little bit lower than Q1 of last year with a ramp into the year. And Q4, being higher than typical in terms of versus Q1 of this year.

[David Begleiter:]

Very good and Peter, just little more color on your confidence that you will see tile demand pick up in the back half of 2016?

[Peter Thomas:]

Yes, David that’s we are really excited about the prospect, as we mentioned in the last conference call, we felt that we were dropping out in the third quarter and moving into the fourth quarter. The good news on the tile business by the way as a point of interest, our tile business was actually equal to or slightly better than the third quarter, we haven’t seen that, since I have been here. So that suggest that the trough was there and we are actually starting to see the pick up now in all the regions that we are – that had fallen short last year. Let me give you the example, what that means in emerging markets, the good news is and you heard is highlighted in the script is that the governments are starting to intervene with housing projects. So let me give you the magnitude of what that means. So in Egypt it’s been announced that their government will start – which they have already by the way 2 million units. 2 million units would be equivalent, of 300,000 metric tons of our product which is a relatively large portion of – a yearly demand for us, and that will take somewhere between two to three years. So that is why we are pretty excited about and then obviously with this, you’ll see why we have been position ourselves in Egypt, with Al Salomi and having facilities there to absorb that growth. In addition, in Egypt, and other point of interest, if you’re not aware of it, is that there is a new Cairo that’s being built, right. In between Cairo and Suez, right in the middle of the desert, the infrastructure is being built, highways are being built and that still accommodate 10 million people. That will require over seven year period, of about 1 billion metric tons – 1 billion square meters of tile, which for us and anybody else is in the business, that represents 500,000 metric tons of demand for tile products over seven year period. So now, hopefully with that you’ll see, we have been aware of that for some time and that’s why we were postioning ourselves to take advantage of that growth, which we are by the way, a leader in that area. We’re also seeing housing projects that just started in Indonesia. There is 1 million units program currently underway. The square meter uses per person in Indonesia is a bit lower than in Egypt. But, be that is a way it would represent about 75,000 metric tons of product over a two to three year period. In Thailand, it’s the same situation. Projects have started, 1 million units, 75,000 metric tons of product over a two to three year period. So we feel good that we’re positioned to take advantage of those growth opportunities and we’re positioned appropriately.

[David Begleiter:]

Very good. Thank you.

[Operator:]

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

[Mike Sison:]

Hi, guys. Nice end of the year there. In terms of your outlook, though, I think there is a time where the box sort of let you to a little over 190 or so. Just curious what the shortfall is relative to that, is it just more the external environment, any thoughts there?

[Peter Thomas:]

Yes, we might, yes, it was just the external macroeconomic headwinds that we’ve faced over the last seven or eight months, since we were referring to that type of number.

[Jeff Rutherford:]

So that’s on the sales side.

[Mike Sison:]

Okay.

[Jeff Rutherford:]

Any other, there is a little more, and SG&A and strategic SG&A, that we’re investing. If SG&A is going to go up, we wanted to be in strategic not functional. So, we’ve seen some incremental investment from those previous models in strategic SG&A.

[Mike Sison:]

Okay. And then, so how much of the growth from the 155 that you achieved in 2015 is supported by the acquisitions that you’ve already completed?

[Peter Thomas:]

We put out a deck, Mike, I don’t know if you got a chance to see it or not. And we actually break that out.

[Mike Sison:]

I apologize.

[Peter Thomas:]

It’s just under $14 million of our $155 million comes from acquire acquisition.

[Mike Sison:]

Okay. And then, when you think about the growth you talked about in the businesses for 2016. It does sound like a lot of that is within your control capacity you’ve added, and you have good demand for those, for that type, for that organic growth?

[Peter Thomas:]

Yes. In fact, to be more specific, we did mention that our expectations, that will have sales volume growth of between 4% to 5%.

[Mike Sison:]

Right.

[Peter Thomas:]

And that is targeted, and of course our proxy GDP for the weighted sales to the areas that we supply is about 2.5. So there is a comment around our GDP plus one, orientation. But the 4% to 5% is targeted and we are confident that we will hit that number.

[Mike Sison:]

Great. Thank you.

[Operator:]

Our next question comes from the line of Rosemarie Morbelli with Gabelli and Company. Please proceed.

[Rosemarie Morbelli:]

Thank you. Good morning, everyone.

[Peter Thomas:]

Good morning.

[Rosemarie Morbelli:]

And congratulations on the great end of the year.

[Peter Thomas:]

Thank you.

[Rosemarie Morbelli:]

A little disappointment regarding, expectation for 2016. Is that mostly because of FX, are you seeing some of the markets that did well in 2015, slowdown to a certain degree and offsetting, the pick up on Performance Coatings?

[Peter Thomas:]

Yes, Rosemarie, overall, in your big markets, as you know, our automotive and construction. And, we are seeing overall – around the world now, there are pockets that we can discuss. But overall, automotive is growing but at a decelerated rate. And construction is growing at a decelerated rate. So there is, if you as those base markets go, there is growth, but again not as fast as last year and I think that’s pretty consistent with. But however, there are some pockets within automotive that we’re doing a little bit better and it’s with a lot of our new product introductions, we just introduced resistant auto enamels for windshields, which even others had decelerated grow in automotive, some of their newer models will have a disproportionate win by having those better products. And I can name probably five or six of those in different market segments. But overall, those core markets are growing at a decelerated rate.

[Rosemarie Morbelli:]

Okay. And when we look at the energy cost. I mean, I know that you use quite a bit of energy in those smelters. Are you benefiting at all from the lower price of natural gas or if – the lower cost that you have in Egypt, really as low as it will get regardless of the external environment. And then if you could address that in Spain, where you have other smelters. And I don’t think you’ll have any in the U.S. but can you confirm that please?

[Peter Thomas:]

Yes. Overall, your point is taken, we do use a lot of energy with our smelters and we are benefiting from lower energy costs. So that’s the first point. The second point is you know the cost per Mbtus vary around the world. So strangely enough in the U.S., we do have smelters reports enamel and it’s probably, right now the lowest cost in the world by the way. And Egypt, will probably be second, relative to where we participate. And we have a lot of government controlled gas pricing throughout the world. So where it is deregulated, we do have a good benefit and we’re holding on to that benefit at the margin level at this point.

[Jeff Rutherford:]

But I would add, the people who run that for us and in procurement, do a great job of identifying opportunities relative to the energy reductions.

[Peter Thomas:]

Yes, they’ve done a really good job as part of our reinvigoration of our procurement group, we put a new energy team together and we watch it daily as a matter of fact we get report. So, we’re very, very pleased with how that’s being managed.

[Rosemarie Morbelli:]

Thanks, and if I may ask one last question. You talked about investing $100 million in a year in acquisitions. Are we talking about the investment that you, I mean, the amounts that you are willing to pay for and how much if this is correct, how much revenues and how much EBITDA do you expect to get for that $100 million, and linked to that, what is your comfort level in terms of leverage?

[Peter Thomas:]

So, Jeff and I will answer that question. Our confidence level, Rosemarie is very, very high. As you know, we’ve done five acquisitions over the past 14 months. We’ve shared with everybody that we’re currently working on double-digits, if you will in – in various degrees of discussion. So, we feel highly confident that we can invest that $100 this year.

[Jeff Rutherford:]

And then we have the liquidity to do so you. Part of that would be from the cash flow, we’ve talked about the free cash flow we’re going to generate in 2016. From a standard model perspective, $100 million is – the benchmark for us to model, acquisitions – it’s not in. In the guidance we gave, we do not have any acquisitions in there, other than the ones we’ve already announced. So we haven’t build in the guidance, any benefit from future acquisition. Our base model and it’s just the base model is for $100 million of acquisitions in any given year. That could be $10 million acquisitions, it could be $100 million acquisition. But generally speaking, the model is based off of an EVA model that says, and we’ve said this before. In this first full year of ownership, so, if we buy something in 2016. In 2017, our expectation is the after tax return on invested capital of $100 million invested will be at or above 10%. And that 10% will grow over a regional period of time, we generally model them for five years to grow to 15%. So that’s the main focus when we look at value creation with acquisitions. But in generally speaking, our model is that $100 million would be $75 million of sales.

[Peter Thomas:]

And another point on that to Rosemarie, if you look at the past 14 months where we’ve done five acquisitions, it was well over $200 million. And as we’ve mentioned before the opportunities we’re looking at right now range between in terms of revenue, anyway between $60 million and $100 million. And those are the types of things that Jeff is referring to that we’re modeling. So, again to be clear we have a lot going on, we have a lot of conversations taking place and their strength in numbers. And that’s why we’re confident that we will deliver that $100 million again.

[Jeff Rutherford:]

And the only thing I would add Peters is, with that deck we put on our website. The last page in that deck is a visual depiction of our pipeline, our M&A pipeline that shows what’s – where things are in a pipeline, right. We constantly talk about active discussions obviously, we’re not going to promise anything or guarantee anything. But it shows how active our M&A group has been in the pipeline and kind of depicts where certain transactions may sit within that pipeline.

[Rosemarie Morbelli:]

And the big bubbles of the $100 million in revenues type of acquisition?

[Jeff Rutherford:]

Yes. That’s right.

[Rosemarie Morbelli:]

Okay. Thank you.

[Peter Thomas:]

Rosemarie, before you go, I want to answer a question that you asked. Always kind of asked, but I want to make a clear note. You mentioned in the past like when will you get back the gross profit from your acquisitions versus what you divested. So what I wanted to let you know today, we have harvested $408 million of businesses that had a gross margin or a gross profit dollars of $68 million. And we’ve replaced them with $210 million of acquisitions with slightly greater gross profit. And the margin spread between what we have sold and what we’ve bought, is – a difference between 16.7% gross profit for the old, and 33% for the new. And that’s part of the reason why you’re seeing the significant margin lift over the past couple of years starting out from 22.5% going up to 30%. So I just wanted to let you know that we have replaced in time those gross profit dollars now.

[Rosemarie Morbelli:]

Thank you.

[Operator:]

Our next question comes from the line of Dmitry Silversteyn with Longbow Research. Please proceed.

[Dmitry Silversteyn:]

Good morning. A couple of questions, first of all, on your expectations for the Performance Colors and Glazes and Performance Coatings businesses. Both of them are, you’re looking for only modest gross margin improvement year-over-year. Given all the restructuring and the higher margin acquisitions that you brought in some of them in the middle of the year. I’m surprised that you’re not guiding two more aggressive gross margin expansion in those businesses. Can you talk a little bit about what’s offsetting the – instead of the volumetric growth that you’re looking for in new products everything mix and the cost savings that you achieved there?

[Jeff Rutherford:]

Sure. We – and when we’re talking about gross profit percentage, correct?

[Dmitry Silversteyn:]

Correct.

[Jeff Rutherford:]

And there really isn’t anything offsetting that. What is going to happen and in 2016, as we’re going to get, we’re going to have organic growth or new product growth or capital growth. And as Peter said, it’s going to be between 1% and 2%. That’s going to come in, in our normal margin, at approximate 30%. Nubiola, which will annualize in 2016 is at a higher percentage, it’s in the low 30s. Now, Al Salomi, which is acquisition in Egypt, will come in at a little less than our average. Again, and we put this in our deck. Our Color and Glass business has the highest margin. And PPO and then the coatings business, this, Al Salomi is definitely in the coatings business and it will come at a normal rate of our coatings business. And then we bought our distributor Ferer, and they’ll come in at a – it’s small, but it will come in at a high margin, because basically we bought our distributors. And then there’s a little bit of improvement beyond that from direct and indirect purchasing. So overall, there’s nothing that’s offsetting any of our gross profit. In fact, we’re calling for an increase, which is an increase from mix, with a little bit of benefit in there from direct and indirect purchase.

[Peter Thomas:]

Again, if you, Dmitry, if you go back to 2012, if you look at the slide deck, it starts on 13. A good way of looking at this, our business base is today, this company had a gross margin of about 22.7% and here we are after three years almost to 30%. So we’ve been able to extract a lot of value out of the base business has diluted that significantly. So, in terms of our ability to just keep squeezing that base I mean we’ve already lifted about – over 800 basis points. So now we’re becoming more efficient at the cost level, doing some other things, and the acquisitions we’re making are helping to lift the margins going forward.

[Jeff Rutherford:]

And just to clarify, based on our guidance, we’re looking at approximately 100 basis points improvement in gross profit percentage. And approximately 150 basis points improvement in operating profit percentage.

[Dmitry Silversteyn:]

But best for the company overall, amassed with your PPO business growing 500 to 600 basis points in gross margin. So that was my question, I guess what you’re saying, if I can rephrase it as that you are sort of achieved the level of profitability that you’re looking to achieve for the two divisions, that we talked about the two performance divisions. And going…

[Jeff Rutherford:]

When you said 500?

[Peter Thomas:]

Yes. 500.

[Jeff Rutherford:]

Yes. Peter, go ahead.

[Peter Thomas:]

Yes, so our – the expectations for that business is the gross profit percent increase of 50 to 100 basis points.

[Jeff Rutherford:]

I think, I said 500 to 100.

[Peter Thomas:]

It’s been 200.

[Jeff Rutherford:]

Yes. Peter.

[Dmitry Silversteyn:]

Okay. So that – okay.

[Peter Thomas:]

Sorry about that.

[Dmitry Silversteyn:]

Okay. So that’s where the confusion…

[Jeff Rutherford:]

Now one thing I mentioned to you is that, we mentioned last call that we have a cost optimization team that’s been formed to look around the globe on continued optimization programs around, our manufacturing assets, which will include additional lien, or just efficiency, updating and/or even manufacturing rationalization activities. So as a forward look, now that we’re in the stage that we’re in and where you’ve executed through our three phases and we’re focusing on growth, we’re going back now to look for continued optimization in each of our regions. So that’s something more than we would probably be talking about in sequential quarters.

[Dmitry Silversteyn:]

Okay. All right. You guys did a really good job, sort of addressing that Middle East and the Asian opportunities for your businesses. Can you talk a little bit about your outlook for Europe, and then to obviously your position was – Nubiola acquisition domestically has improved. So can you talk about the North American market expectations as well and to sort of wrap it all up on the tile side of the business, historically tile has been more of a new construction and remodeling type of a category. But you know we understand that that remodeling is now becoming much more prevalent. So what used to be 80/20s may be now 50/50 between new construction and remodeling. Can you talk to that and how they sort of impacts the overall demand environment, particularly for the tile business?

[Jeff Rutherford:]

Sure. So I think there were four or five questions. So I’m going to take one by one. If I missed one, just bring it back up. Let’s start with your overall, we do see – you’re growing, but again at a decelerated rate versus last year. So, that would be both in, for us automotive applications and what we would call our industrial applications which would be flat glass. As you know, and you’ve heard from everyone through the calls since this earnings season, construction is not really robust in Europe, although there are pockets. And some of those pockets would be where we play on the commercial side we have flat glass coatings. So the automotive demand is growing, but again, at a decelerated rate. But overall, it’s still a nice picture for us because of the pockets that I mentioned again. We have new products for the automotive space, the new resistant enamels are doing extremely well. And also we have the new flat glass side one applications that we’re gaining share on but no one else has. And also in the, what we would define as the decorations segment would be beverage containers and food containers and the like, in which you’ll find is that we have new products in terms of organic gains that are being marketed and commercialize, we also are introducing new forehearth color pearls which will make glass containers look metallic-like and/or fluorescent and also luminescent pigment pearls that glow under black lights, if you’re at a club scene if you will. So we have a lot of new applications although, there is a deceleration. Our new product introductions are helping our space there. So that gives you – that’s why we feel reasonable about Europe. As it relates to the tile business, you’re right. In the faster growing markets like North America and [indiscernible] is a point of interest, we are the market leader in North America in the tile business, particularly on the high-end side. And you’re right, the renovation model is more prevalent in the higher valued markets around the world. So let me tell me, where they are and then I will tell you how we positioned ourselves with the acquisitions maybe you’ll become clear that we are trying to upgrade the quality of this business. But the faster and higher margin areas around the world would be the U.S. market, Germany, Austria, Holland and Switzerland. So when you look at those markets, a lot of them are renovation, a lot of them are high-end products. And we are the market leader in those spaces and that’s the differentiation that we have been talking about, we are trying to create with our tile business. We have done a lot of customer and product rationalization over the past couple of years and we’ve had some lumpiness, but we are now – this year at a point where you are going to see, they do the new dynamic taking hold. So, again we are positioned at the right places that where we want to compete with the right types of customers, with less competition and maybe they’re willing to pay us for the services that we provide. So what was the other question you have?

[Dmitry Silversteyn:]

I think you covered it. I was looking for North American possession with the Nubiola acquisition and sort of commentary on where the drivers are coming from, new construction versus remodeling. So thank you very much.

[Jeff Rutherford:]

Yes, let me mention another point, I like this question. At the Nubiola acquisition is turning out to be – in terms of cross-selling activities, is turning out to be a bit more significant than we thought. So to that point, there is a good driver and we see actually more opportunities in the Americas, if you will. So we are looking at how we can optimize that business even further to extract more value and that’s probably another cost program that we can discuss at a later time. But the cross-selling in fact, I will also say that cross-selling activities with Vetri are even more significant, which allowed us to position in those higher valued markets that I just mentioned. So what we want you to take from this is, what we are doing here is upgrading the differentiation of our businesses in a way that from this new point, where we’ve optimize the base businesses that we can continue to drive value with greater operating leverage that we have been talking about. So I think what you are going to see this year is finally the gestation of a lot of things that we have been doing to upgrade the business and differentiate it.

[Dmitry Silversteyn:]

Sounds good. Thank you very much.

[John Bingle:]

Operator, we have time for one additional call.

[Operator:]

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

[Mike Harrison:]

Hi, good morning.

[Peter Thomas:]

Good morning.

[Mike Harrison:]

I was just hoping that you could comment on the big sequential jump in SG&A relative to dollar terms and as a percentage sales, and maybe comment on why we aren’t seeing more SG&A leverage in the guidance that you’ve given with all the cost efforts and synergies that we should expect over time?

[Jeff Rutherford:]

Sure, Mike if you’ve seen – again, have you seen the deck we put out, that breaks down SG&A by category. And we really, we break, SG&A down to marble categories and what we’ve put in the deck is we’ve broken out between what I’d used to call value destroyers and value creators, then Peter laughs because it go back to three years ago when we started this – we’ve talked more on those terms. But we’re trying to generally now, we talk functional and strategic. And. So functional just to put, just to give the definitions, functional is non-operational. So its finance and account – it’s all areas I’m in right. Its finance and accounting, IT, HR, legal, EH&S in there, and other corporate like cost, treasury and so forth, right. And then strategic is all – the place where you create value, it’s going to drive sales or operational improvements. So, its sales in R&D, in operations, marketing and all the costs associated with the operations. So we differentiate between the two and what we really are looking for is leveraging that functional side. We really need to leverage their functional side, when functional goes up, right, either as a percentage or even in our world as dollars, we need to know exactly why we’re spending that money. So if you look at what happened in 2014 to 2015 on a constant currency basis. Functional is up for us and it’s off because of the acquisitions Peter referenced that in his earlier presentation. We allow for 1.5% of acquired sales to be increased in functionals. We’re not happy with that, we’re looking for ways to leverage that down. And we’re also looking for ways to offset inflation particularly, wage inflation within functional costs. And we’re going to be for guidance for 2016, as we’re going to be at a place where we’re only adding 1.5% for those acquired assets and we’ve also inflation. We want to do better, and we’re working, we have projects so we’re working on, nothing we’re ready to announce, but we’re on things to do better. And even more leverage to the functional end of that. When you get into strategics, it’s a different story, right. That’s where you create value, that’s where you drive sales, that’s where Peter talked about you do lean initiatives, that’s where you expand margins. And you got to be real careful cutting those costs, because it is going to affect sales or could affect our ability to achieve our operating margin improvements. So we are real careful, when we look at strategic costs. Now you are going to see from 2014 to 2015 that actually increased, both in the base business. And that’s related to where we invested, in sales and marketing into our operations, that’s not corporate cost, these are costs that are spend in a field that operates. These are important investments on our part. And we see and we talked about early, we are going to see a little bit more of an investment like that in 2016. And then above that in this chart, we put in there what are the strategic costs from our acquisitions. And what you are going to find is that when we get into 2016, as Nubiola anniversaries the acquisition we are going to see some incremental Nubiola costs come in to strategic SG&A. In fact, we think it is going to be approximately another $6 million, as we go forward. So then with what and we’ve talked about this – about our acquisitions. The first thing we do on an acquisitions we want to leverage that functional cost and leverage it from a direct and indirect purchasing perspective to get greater than 10% after tax return to invested capital. Then what we do along the way is start looking at other synergies like strategic SG&A. So we are careful that we don’t disrupt an acquisition early on. So you are going to see some better leverage, as we go through this, as we get into 2016, as we add additional. The real key here is when we add sales through acquisition or organic growth that we leverage that functional cost. That’s really where we are going to create value. We want to keep, you see those numbers on a constant currency basis, they are in the low 60s. We want to keep them in the 60s or even do better. That’s how we can really leverage SG&A and create incremental value.

[Mike Harrison:]

All right. And then, Peter you mentioned the Nubiola opportunities of handing out maybe even a little bit better that you had expected. There was a sequential decline in the pigments business. So can you comment on the seasonality of that Nubiola business or pigments overall with Nubiola, is it mostly driven by the coatings and constructions seasonality or how should we expect that to play out?

[Peter Thomas:]

Yes, you are right on Mike, that’s what that was, it was the impact in the seasonality of the coatings sector.

[Mike Harrison:]

All right. Thank you very much.

[John Bingle:]

Thank you, everyone. Before we close, I wanted to answer a couple questions that we’ve received outside of the call. The first was a comment on foreign currency and the fact that we’re expecting for 2016. We had noted in the press release, kind of our reference point for the euro. But it’s important to remember that our business is pretty complex. We sell into about 100 countries, and we manufacture in almost 20. So the impact that we’re going – that we expect to experience in 2016, really is driven by other currencies in addition to the euro on our top five currency pairs are, not necessarily, an order of waiting. But the euro, Mexico, Brazil, Argentina and Columbia. So those five currencies are the ones that are impacting us the most and of those five, the euro was down, project to be down about 1.5%, and then the remainder of those currencies vary between being down 15% to 30%. And then the last question that came up, that we have not already addressed, there was a question about the amount of shares that are being used in our future 2016 budget. And we are looking at a diluted EPS of 86.2 million shares. That incorporates the last share repurchase program that just was concluded. It does not include the expectation that we may purchase additional shares under the new authorization that was received by the Board to purchase another 25 million.

[Peter Thomas:]

Hey, John, and then we discussed something – asking about cash flow. So this is – I promise this is our last comment. Just to point out everybody, there is an extra table, Table 12, it’s hard to believe we have 12 tables, we Table 12 in our earnings release that shows how we look at cash flow, okay. And where we got and I’ve met – I reference this earlier, where we got the $75 million. And the other thing that we’d like to point out is our cash conversion. And again, I would ask everybody to reference the deck we put out on our website. And we talk about the progression in our cash conversions. Our cash conversion is just under 50% of EBITDA to free cash flow. So as our EBITDA increases, and we continue to manage, and we show the pieces we’re managing, we’re managing CapEx, we’re managing working capital, we’re managing cash taxes, right John, did a nice job on cash interest. He’s been helped by the interest rates, but has done a nice job and the government has helped this off relative to pension contributions, right but how reacting. So all those things are manageable, and we anticipate the same type of cash conversion going into 2016. So we feel good about our cash position. We talked about Antwerp, we need to move ahead on Antwerp, we’re controlling our restructuring costs, right. And then we have stock repurchase. But we feel good about our cash position and our cash flow. We’re being more transparent to shareholders, I do ask at people, look at Table 12 and look at our deck on cash conversion, if you have any questions, give us a call. But we see positives coming through on cash and we continue to work on – not paying as much in cash taxes and we continue to look at what we – what the capital markets look like for us. And I would say another opportunity is in working capital, we’re starting to push some things down relative to management of working capital. And who is identified by region, and management or working capital. So it’s all good, relative to cash flow but we can do better, we know that and we’ll continue to try to increase that conversion.

[John Bingle:]

All right. With that, we’re going to the conclude call. We appreciate your time. If there is any question, please feel free to give me a call. Thank you very much. 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. Have a great day, everyone.