Ferro Corporation
Q4 2012 Earnings Call Transcript

Published: 5 Mar 2013

[Operator:]

Good morning, and welcome to the Ferro Corporation's Fourth Quarter 2012 Earnings Conference Call. [Operator Instructions] As a reminder, this call is being recorded, Tuesday, March 5, 2013. I would now like to turn the meeting over to your host, Mr. John Bingle, Treasurer and Director of Investor Relations. You may begin, sir.

[John T. Bingle:]

Thank you. Good morning, and welcome to the Ferro Corporation 2012 Fourth Quarter Earnings Conference Call. Today, we will discuss our financial results for the 3-month and 12-month periods ended December 31, 2012 and provide our initial outlook for our financial performance in 2013. Joining me on today's call are Peter Thomas, Interim President and Chief Executive Officer; and Jeff Rutherford, Vice President and Chief Financial Officer. Today's call has 3 parts. First, Jeff will begin by providing some commentary on our fourth quarter and full year 2012 numbers. Then Peter will outline the current state of Ferro and our strategy to enhance shareholder value. Jeff will conclude with the discussion of guidance for 2013 and some longer-range targets. In lieu of a question-and-answer session at the conclusion of the call, we will be reaching out to analysts and investors over the coming days and weeks. Our quarterly earnings press release was issued this morning, and copies are available on the Investor Relations portion of the Ferro's website, which is located at www.ferro.com. Also available on our website is a reconciliation of reported results to non-GAAP data discussed on this conference call and a short presentation that captures many of the discussion points of today's call. Before we begin, I want to remind you 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 10-K -- Form 10-K for December 31, 2012, which was filed today. Forward-looking statements reflect management's expectations as of today, March 5. The company undertakes no duty to update them to reflect future events, information or circumstances that arise after the date of this conference call except as required by law. A dial-in replay of today's call will be available for 7 days. In addition, you may listen to or download a replay of the call through the Ferro Investor Relations website. Any redistribution, retransmission or rebroadcast of this call in any form without the express written consent of Ferro is prohibited. I'd now like to turn the call over to Jeff.

[Jeffrey L. Rutherford:]

Thank you, John, and good morning, and thank you to those on the call with us today. As John mentioned, reconciliations of non-GAAP results discussed during this conference call are contained in our press release and the posted supplemental financial data that can be accessed from the Investor Information portion of Ferro’s website. To begin, our reported net loss attributable to Ferro shareholders in the fourth quarter was $63.9 million, or $0.74 per diluted share. The reported results include pretax special charges of $59.3 million, as well as results of the solar paste product line, which incurred a $4.1 million loss for the quarter. The special charges fall into 3 categories

[Peter T. Thomas:]

Thanks, Jeff, and thank you to everyone for joining our call this morning. I'd like to set the stage for my remarks by first revisiting how we came to where we are today. As many of you who have been following our company know, for several years and prior to 2012, Ferro was following a projected path toward growth, with the expectations that our EMS business, led by the solar paste product line and portions of the Color and Glass business together, would deliver organic revenue growth significantly greater than GDP. In 2012, it became clear that the strategy needed to be changed. Consequently, our board implemented management changes and refocused the company's strategic vision to more fully concentrate on value creation, specifically through Ferro's core competencies. And today, we are driving a comprehensive global set of actions to drive profitability and cash flow by cultivating new business development across geographies and delivering higher-value applications in target markets. So let me be clear, our goal for 2013 and beyond is to position Ferro to deliver consistent, predictable growth and shareholder value. Now, these efforts will require rationalizing the infrastructure that was designed to support a high rate of growth in EMS and Color and Glass. However, we are determined to transform the business, and the board and management team are fully aligned and absolutely focused on implementing this strategic vision. In the near term, our focus is to simplify the organization, streamline processes to enhance operational efficiencies and substantially reduce the infrastructure and support costs. We have already begun to see the benefits of these initiatives and believe that costs can be reduced by more than $50 million over the next 2 years. This is a time of significant opportunity at Ferro, and in considering our next steps, we took stock of the fundamentals of our business. We provide our customers world-class products and services. We are a leading global supplier of a range of performance chemicals and materials to the building and renovation, automotive, packaging, consumer and industrial markets. To go a step further, Ferro has well-established products and leadership positions in diverse niche markets, a global reach, including solid customer and channel relationships. This is made all the more stronger by our ability to leverage our current position and further capitalize on these connections. Technology and application expertise involving a proven history of innovation, dedication to research and development and a long-established reputation for quality and consistency and, finally, a dedicated and motivated leadership team and a talented global workforce that, with our shared core set of values and commitment to service, affords us a global approach with a regional expertise. Our technical competencies include long-recognized expertise in particle engineering, color and glass science, formulation and optimization, surface application technology, polymer science and organic synthesis. With these core strengths and technical competencies as our foundation, we identified what needs to be done to configure the organization and are implementing the steps to create value for our shareholders. Specifically, we will, one, improve the company's return on invested capital; two, streamline our core operations and reduce operating costs; and three, pursue high-return growth investments. Let me elaborate more on these 3 distinct components that comprise Ferro's value-creation strategy. First, we will divest or curtail investments in substandard operations and assets with inadequate returns on invested capital and as we will refocus on our core competencies. As we recently announced, we have sold assets related to our solar paste business. We received approximately $11 million for the sale, but more importantly, we eliminated a $16 million negative drag on operating profit while also eliminating a major portion of our precious metal lease commitments. Precious metal leases are now at their lowest level in the last 10 years. We are also further optimizing facilities and leases, which has already generated estimated proceeds of approximately $7 million, along with annual cost savings of $4 million. We also have established a company-wide process to rectify or eliminate underperforming customer relationships. We have been very successful in this approach in the Plastics, Polymer Additives and Performance Coatings product lines, and since November, we have been applying the process to all of our businesses. We will continually and rigorously review all product lines, assets and relationships to determine their current and future potential to create value and generate cash and take appropriate action when necessary. Assets that cannot generate sufficient returns are being redeployed, divested or curtailed. Second, we will streamline our core operations in order to reduce operating costs. To do so, first, we have simplified our organizational structure. As of January, we moved from 8 business units to 5 business units and from 3 manufacturing organizations down to 2

[Jeffrey L. Rutherford:]

Thank you, Peter. Our 2013 forecast assumes slow but positive economic growth in the major regional economies around the world. We expect sales growth to be approximately 2%, excluding solar and the impact of changes in foreign currency rates relative to 2012 levels. While we don't expect a robust rebound in Europe, we anticipate demand for our products in the region will improve modestly as the year progresses. We expect to generate $25 million to $30 million of additional profit through our cost savings initiatives, and these savings, along with the positive impact from the solar paste asset sale, will be the primary driver for increased earnings. The savings, however, will be partially offset by inflation and the need to normalize incentive compensation accruals. Taking all this into consideration, we expect adjusted earnings in 2013 to be in the range of $0.25 to $0.30. Cash flow is expected to be approximately breakeven for the year. Given the timing of our cost savings program, we expect the first quarter will be the earnings low point for the year, coming in at $0.02 to $0.05 adjusted earnings per share. Additional assumptions that are part of our outlook include the exclusion of special charges, including restructuring and impairments and the pension mark-to-market adjustment. In addition, no acquisitions or acquisition-related costs have been built into the plan. As Peter mentioned, capital spending for the year will be approximately $50 million. Our capital plan provides for $25 million to be directed to maintenance and EH&S projects, with the remainder used to fund growth initiatives. The current year growth-oriented capital expenditures do not generate substantial new revenue until 2014. Interest expense is expected to remain about the same as the $28 million recorded in 2012. Ongoing pension expense, excluding mark-to-market adjustments, is not expected to be material as our significant pension plans are frozen and expected return on pension assets will approximate service and interest costs. Worldwide pension contributions are forecast at approximately $20 million in 2013. Depreciation and amortization expense will be approximately $50 million. We expect to update these estimates on our regular earnings conference calls during 2013. In addition, we have announced 2015 sales and earnings targets of top line sales growth at 4% per year, gross profit as a percentage of sales greater than 21%, SG&A expense as a percentage of sales less than 13%, EBITDA margin of approximately 11%, maintenance CapEx will be $25 million and EPS of $0.75 to $0.85. That concludes my remarks. I'll now turn the call back over to Peter.

[Peter T. Thomas:]

Thanks, Jeff. I would like to address recent actions in the marketplace. As I'm sure you are aware, yesterday, Ferro confirmed that its Board of Directors had previously received and rejected an unsolicited proposal from A. Schulman to acquire all the outstanding shares of Ferro common stock for $6.50 per share in cash and stock. Ferro's board, in consultation with financial and legal advisers, unanimously determined that the A. Schulman proposal is not in the best interest of shareholders and that continued execution of the company's value creation strategy that we outlined today will deliver greater value to our shareholders. So that concludes our prepared remarks, and thank you for participating in our fourth quarter earnings conference call today. And as we mentioned at the outset of the call, we will not be conducting a question-and-answer session on today's call. We will, however, be reaching out to analysts and investors for follow-up discussions. If you have any questions, please contact John Bingle, our Treasurer and Director of Investor Relations. Thank you all again.

[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 all lines. Thank you, and have a good day.