Ferro Corporation
Q1 2014 Earnings Call Transcript

Published: 24 Apr 2014

[Operator:]

Ladies and gentlemen, thank you for standing by. Welcome to the Ferro Corporation 2014 First Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded today, Thursday, April 24, 2014. I would now like to turn the conference over to John Bingle, Treasurer and Director of Investor Relations. Please go ahead, sir.

[John T. Bingle:]

Thank you. Good morning, and welcome to Ferro Corporation 2014 first quarter earnings conference call. Joining me on today's call is Peter Thomas, 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. We'll address your questions at the end of the call. Our quarterly earnings press release was issued last night. You can find the release, as well as the reconciliation of reported results to non-GAAP data that we'll discuss this morning, in the Investor Information portion of Ferro's website, 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, 2013. Forward-looking statements reflect management's expectations as of today. The company undertakes no duty to update them to reflect future events, information or circumstances that arise after the date of this conference call, except as required by law. A dial-in replay of today's call will be available for 7 days. In addition, you may listen to or download a replay of the call through the Investor Information section at ferro.com. Any redistribution, retransmission or rebroadcast of this call in any form without the express written consent of Ferro is prohibited. I'd now like to turn the call over to Peter.

[Peter T. Thomas:]

Thanks, John. Good morning, everyone, and thank you for joining us. It's been just 2 months since our last earnings conference call, and there are no significant changes to the key messages I presented in late February. So this morning, I'd like to return to 4 key themes from the last call and give you an update on where we stand. First, one of the key takeaways from the last call was that 2014 would be another year of transition with significant focus on our cost-saving initiatives to drive earnings growth. We remain on track here and continue to be committed to our 2015 targets including

[Jeffrey L. 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 on the supplemental financial data that is posted in the Investor Information portion of our website. My comments, in general, will focus on adjusted information to provide comparability of information from period to period. I will cover 3 primary topics, and then we'll get into your questions. First, I'll provide a quick recap of the quarter. I will then give an overview of the performance of each of our reportable segments. And finally, I will conclude with a discussion of our outlook for 2014. Now turning to our results for the quarter. For the first quarter of 2014, on a GAAP basis, we reported income from continuing operations of $0.20 per diluted share. This compares to income of $0.11 per diluted share last year. On an adjusted basis, diluted earnings per share were $0.19 in the current quarter versus $0.10 last year. There were a few notable adjustments in the current quarter, including, as Peter mentioned, a charge of approximately $2.5 million associated with economic instability in Venezuela, with the charge recorded in 2 different lines on the income statement. We recorded a $1.6 million charge in other income and expense for the devaluation of the Venezuelan bolivar and recorded a $900,000 charge in SG&A to establish valuation reserves against U.S. dollar denominated accounts receivable of Venezuelan customers, as these customers do not have access to hard currency. In SG&A, we also recorded a gain of $1.7 million associated with the favorable ruling on a baht refund claim in Thailand. That gain partially offset the previously mentioned $900,000 receivables valuation reserve and certain other items that net to approximately $1.2 million. In the quarter, we also incurred $4.4 million of restructuring and impairment charges associated with our ongoing cost-savings initiatives. Further, it should be noted that income taxes have been adjusted to reflect a 36% effective tax rate. During the remainder of my remarks, I will refer to adjusted numbers which will exclude the items I just noted. In addition, discussions about sales and sales-related profitability measures, such as gross profit margin, will reference value-added sales. As a reminder value-added sales exclude precious metal sales, as precious metal sales, in general, are passed through sales to our customers. Excluding precious metal sales removes the volatility in our results associated with the movements in precious metal pricing. Value-added sales were $378 million in the first quarter of 2014 versus $387 million last year. Adjusting for the impact of business lines exited during 2013, including solar in the North American and Asian metal powders product lines, which accounted for approximately $7.6 million of sales in the first quarter of 2013. Value-added sales were essentially unchanged year-over-year. Additionally, in the quarter, sales were adversely impacted by continued product deselection of phthalates in the Polymer Additives segment, driving an approximate $11 million reduction in sales for that segment. Adjusting for this loss in the 2013 dispositions, sales for the company's underlying businesses increased by 3%. On a regional basis, comparing the first quarter of this year to the same period last year, value-added sales excluding divestitures increased 4% in Europe and Asia-Pacific and 10% in Latin America. Sales declined by 9% in the U.S., driven primarily by the deselection trend in the Polymer Additives segment. Excluding the impact of phthalate deselection in the U.S., nearly all the $11 million previously referenced company sales in the U.S. declined by approximately 3%. Adjusted gross profit, adjusting for charges and excluding the impact of precious metal sales, was $89 million in the first quarter of 2014 compared with $80 million last year. Adjusted gross profit as a percentage of value-added sales increased to 23.6% versus 20.8% last year. The primary drivers behind the increase in gross profit were our cost-reduction initiatives, coupled with increased production volumes, particularly in Performance Colors and Glass and Tile Coating Systems, and improved business mix, partially offset by lower sales and profitability in Polymer Additives. Excluding special charges in both periods, adjusted SG&A was $57 million compared with $61 million in the prior period. Our current run rate for quarterly SG&A expenses is approximately $55 million, adjusting for special charges and certain other expenses that were seasonally high in the first quarter. Those expenses include an approximately $2.3 million impact related to stock-based compensation. The largest portion of that unfavorable impact is due to the GAAP requirement to accelerate the expense of stock option grants to retirement-eligible participants. For the quarter, we achieved $43 million of adjusted EBITDA, resulting in an EBITDA margin of 11.3%. This compares to the first quarter 2013 adjusted EBITDA of $32 million or 8.2% EBITDA margin. In March 31, 2014, net debt was $317 million, an increase of $33 million from December 2013. During the quarter, we paid our U.S. required 2014 pension contribution which drove the majority of the change in net debt. As of March 2014, our U.S. pension plan is approximately 95% funded on a GAAP basis. Our liquidity remains strong. At the end of the quarter, we had approximately $190 million of availability on our $250 million revolving credit agreement. The following significant cash flows occurred during the quarter as part of the $33 million increase in net debt. As previously mentioned, EBITDA was $43 million. We had restructuring payments of $9 million, capital expenditures of $12 million, a working capital use of $13 million, interest payments of $11 million, cash tax payments of $1 million; pension and retirement contributions of $25 million; and all other net of $5 million. Our precious metal consignment obligation was $30 million at quarter end, approximately equivalent to the level at year end 2013. We currently have no demands for cash collateral related to the precious metal consignment program, and we have trimmed participation in the program back to adjust to our current level of precious metal requirements. And I'm saying this for John Bingle, however I believe there are opportunities for additional reductions in our precious metals, John.

[John T. Bingle:]

Noted.

[Jeffrey L. Rutherford:]

I would now like to provide a brief overview of our year-over-year first quarter results for our reporting segments. Again, the analysis is based on value-added sales. Pigments, Powders and Oxides. Value-added sales and gross profit declined by 24% and 15%, respectively. Included in this change, however, is the impact of divesting the solar and metal powders and flakes product lines. First quarter 2013 value-added sales from the dispositions was approximately $8 million, and the associated gross profit was $2 million. Adjusting for those dispositions, sales declined by 3%, and gross profit improved by nearly $1 million. Included in the current results -- current quarter results is approximately $1 million of value-added sales for toluene and other transactional services associated with the sold product lines. These toluene sales have no impact on operating results. Sales declined in both surface polishing and pigments product lines, with the majority of the decline coming in the U.S. market. In pigments, demand declined in U.S. construction-oriented channels, primarily for paint and plastics additives applications mainly attributable to winter weather conditions. The surface finishing demand was soft in the first quarter, primarily due to inventory control measures taken by a key customer. Segment gross profit improved in the quarter, primarily due to improved manufacturing efficiencies and favorable raw material book -- raw material pricing. In the Performance Colors and Glass segment, value-added sales increased by $6 million or approximately 8% to $93 million, driven primarily by increased volumes of approximately 7% in higher pricing, partially offset by a less favorable product mix. Value-added sales increased in all product categories, with the greatest gains coming in automotive and electronic materials. Value-added sales increased in all regions, with particular strength in the U.S. and Latin America. Gross profit improved by $7 million or 26% to approximately $34 million, with the gross profit margin improving to 37% from 31%. Gross profit increased primarily due to higher volumes, stronger pricing and improved manufacturing efficiencies. In Performance Coatings, sales increased by 3% or approximately $4 million. Sales in the tile coating solutions accounted for the majority of the change, with sales improving by nearly 4%. Porcelain enamel sales increased by 2%. Demand for tile products was particularly strong, with volume growth of 11%, partially offset by lower selling prices and mix. Demand for frits and glazes and digital inks were the largest contributors to the sales increase, partially offset by a reduction in demand for more commodity-oriented colors and related coatings. Average selling prices for tile products have declined due to lower raw material costs, in addition to lower average selling prices for digital inks associated with the increasing competitive pressures. Despite the lower selling prices and increased competitive environment for digital inks, profit margins for the tile product line improved by over 350 basis points due to higher manufacturing volumes, product reformulation activities and improved manufacturing efficiencies. For the Performance Coatings segment, sales increased by approximately 6% in Latin America, 3% in Asia-Pacific and 3% in Europe. Sales declined 3% in the U.S. Segment sales benefited from increased volumes, but higher volumes were partially offset by a lower pricing, primarily due to lower raw material costs. Segment gross profit increased by $5 million with gross profit margin increasing to 23.2% from 20.6% last year. Gross profit and the resulting margin increase were driven primarily by increased volumes and reduced manufacturing costs, including the benefit of restructuring activities. Sales in Polymer Additives declined by 14% or $11 million. The sales have been adversely impacted by changes in environmental regulations pertaining to phthalates that have driven product replacements by certain customers, primarily in the United States. Regionally, sales declined in the U.S. by approximately $13 million, partially offset by a sales increase in Europe. The deselection process in the U.S. is the result of the flooring industry moving away from the use of phthalate-containing materials. This changeover, as we've previously mentioned, is directly attributable to California EPA's Proposition 65 and the associated legal challenges in California. Gross profit from the Polymer Additives segment decreased by $1.4 million for the first quarter of 2013, with gross profit margins essentially unchanged at 10.7%. Gross profit was adversely impacted by the lower sales volumes and unfavorable manufacturing cost, partially offset by a more favorable mix. As previously announced, we are in the process of converting our European phthalates plant to dibenzoates and benzoic acid production capabilities, which will provide an alternative for the phthalate product offering. Production startup is expected to begin in the last quarter of 2014, with commercial sales expected in early 2015. Sales in Specialty Plastics increased 1%, reflecting increased sales of plastic colorants. Geographically, sales increased in Europe and Latin America by 5% and 6%, respectively, partially offset by a reduction of less than 1% in the U.S. Gross profit for the quarter increased 7% to $8 million, with the gross profit margin improving slightly year-over-year to 17.4% from 16.5%. An improved product mix and favorable manufacturing cost contributed to the increase in gross profit. Finally, I would like to provide some color on our outlook for the remainder of 2014. Based on our first quarter performance, we now expect adjusted earnings for 2014 to be in the range of $0.68 to $0.73 per diluted share. While first quarter earnings were good, we are mindful of the impact of instability in emerging markets and cautious about growth prospects. We continue to target sales growth at 3.6% as adjusted for 2013 dispositions and the impact of the phthalates deselection and gross margins in the range of 22%. From a sales perspective, as we have discussed in the past, we expect value-added sales growth to approximate global GDP plus 1%. We're expecting global real GDP weighted for the markets we serve to be approximately 2.6%. Therefore, we would expect our Performance Materials businesses, which had 2013 value-added sales of $1.05 billion, as adjusted for dispositions, to grow at a rate of approximately 3.6%. For the Performance Chemicals group, we believe the effective deselection will continue through the year, resulting in lost sales of approximately $30 million off of the group's 2013 sales base of $463 million. Excluding this loss, however, we expect sales growth of the underlying sales for the group, including the sales of other Polymer Additives product lines, to also be in the range of 3.6%. We are also reaffirming our longer-term 2015 adjusted earnings target of EPS, in excess of $1 per diluted share. And in case there is any confusion, our target for gross profit margin in 2015 is 22.5%. That concludes our prepared remarks. I'll now turn it over to John for the Q&A.

[John T. Bingle:]

Thank you, Jeff. Operator, we're now ready to begin the Q&A session. Please repeat the instructions and then we'll take our first call.

[Operator:]

[Operator Instructions] Our first question comes from the line of John McNulty of Crédit Suisse.

[John P. McNulty:]

Couple of things. First, I guess, can you give us a run rate as to where you are in the overall cost cut program toward that $100 million plus target?

[Jeffrey L. Rutherford:]

John, we haven't provided that. And as we have said, we came into the year at approximately $75 million on a run rate. And based on where we're at today and what we know is happening, we think that we'll end the year approaching that $100 million run rate but it will accelerate in the back half of the year. So we're not going to see -- we're kind of at that -- at the current run rate we're at coming into the year, we haven't -- this is not -- first quarter isn't a big quarter for us in changes because of everything we have going on in the first quarter. But we have a lot of things that are happening for cost reductions in both -- in cost of goods sold and in SG&A. And as those things happen, we'll realize those benefits and let you know.

[John P. McNulty:]

Okay. Now I appreciate the color. With regard to the pricing issue that you're seeing, it sounds like in the digital inks area. Can you quantify kind of what kind of pressures you're seeing? And if this is any, maybe, more aggressive or less aggressive than what you've seen in past periods kind of as the -- as you run into a recovery?

[Peter T. Thomas:]

Yes, this is -- the -- as I've mentioned during the last analyst call, we're in our fourth generation. So there are really 4 different levels of ink families out in the marketplace. And what you're seeing is the price pressure is mostly in the second and third generations. And most of the second and third generations would be in China where the price competition or pressure is the most significant. The more decorative areas, like Italy and Spain and certain Eastern European markets and Latin American markets, are usually in the infancy of the higher end-type products where there isn't price competition. So usually, it's -- right now, most of it is in Asia and, particularly, in China.

[John P. McNulty:]

Okay. Fair enough. And then just one other question. With regard to JV, it sounds like you've got some opportunities there, including one that you -- it sounds like you initiated earlier in this quarter. Can you walk us through how we should be thinking about the JVs, both in terms of their potential size, but also kind of what you contribute to it, whether there's capital required or not, and kind of how you're thinking about these as opportunities for growth going forward?

[Jeffrey L. Rutherford:]

John, they're all different. The one we referenced was in Indonesia, and it's a separate plant. It's in East Java versus our current plant in West Java. And what we've done there is we go in with the joint venture partner in a minority position with the rights to increase our ownership over time. Initially, we put in a small amount of capital, but we put in all the intellectual capital. And that's one method that we go into some certain foreign jurisdictions, where it helps to have the lead by a foreign national versus by Ferro Corporation. There are other opportunities in joint venture partnerships in places like India and China. But each one is different. It's -- there's not a standard way we would go into any particular relationship. Right now, those partnerships are not material. They could be. And that's why we're cautious about -- and there's nothing in any of our guidance relative to the performance of any of these joint venture partnerships.

[Operator:]

Our next question comes from the line of David Begleiter with Deutsche Bank.

[David L. Begleiter:]

Peter and Jeff, can you break out any weather impacts you've incurred in Q1? And are those costs or -- are those permanent or temporary in your view?

[Peter T. Thomas:]

Yes. That's actually a good question because we've been hearing a lot from other companies. But as it relates to the North American weather conditions situation, relative to us, it was only about $1 million to $2 million of revenue. And as it relates to whether or not we get it back at such a nominal amount, it just depends on what the demand would be in the second or the third quarter in terms of the paints and plastics businesses that were impacted. So really, not real material for us.

[Jeffrey L. Rutherford:]

And then as far as costs are concerned, obviously, we use a lot of natural gas for smelting and so forth, but it was -- but we estimate the impact to be less than $500,000.

[David L. Begleiter:]

Very good. And Jeff, on -- looking ahead, what's your sense on the cadence of the earnings for the remainder of the year on a quarterly basis?

[Jeffrey L. Rutherford:]

Well, as you probably would guess, second quarter will be our best quarter. It's always our highest sales quarter and it'll be our highest EPS quarter. Then we'll get -- we'll decline back down in the third quarter at or a little below first quarter results, and then fourth quarter will be our lowest quarter both from a sales perspective and an EPS perspective.

[David L. Begleiter:]

And just last, Jeff and Peter, I know, we have these targets of -- 2015 of probably $1 per share and about $100 million. Early to discuss what could that plus be in '15, '16, but how do we think about the earnings power of this organization in '15 and '16 going forward?

[Jeffrey L. Rutherford:]

Well, we've always said that on this base business, we have to push the operating profit margin to 10%. And that's going to be this set of assets. It's going to be 10% operating profit at that 3-point -- at GDP plus 1%. But the real leverage comes in 2 ways

[Operator:]

And our next question comes from the line of Mike Harrison with First Analysis.

[Michael J. Harrison:]

The gross margin in Performance Colors and Glass showed a bit of a step change this quarter. And I was wondering if we could get some more details on what drove that because it sounds like mix was actually unfavorable. So maybe some more detail on that and whether it would be mid-to-upper 30s level is a sustainable level for gross margin there in the rest of this year and into '15.

[Peter T. Thomas:]

Yes, and it's a good point because basically, for that business, it was just over 500 basis points improvement, which is quite a lift. Let me give you some flavor around that business to help round off the story. If you look at all the good things that happened to that business in the first quarter, all regions showed improvement in revenue and volume, which is a very, very important point. The raw material base for that business has remained stable. When you break down that business into the 3 categories of auto glass, flat glass and container glass, auto glass was unbelievably strong throughout all the regions, and for the first time in a long time, flat glass was very, very strong worldwide. So at the end of the day, with the volume pickup of nearly 6%, 7% for this business and the contribution margin that, I guess, Jeff alluded to earlier, you're seeing a nice generation of impactful gross profit improvement that a good piece of that is actually pretty sustainable moving forward. And we also mentioned that the teams were going through a pretty robust customer and product rationalization program. And if you follow those, most of those identify those customers that have poor gross margins. And rather than just firing them, we go back and share with them how valuable we are and we should work together to lift those. And that particular team has done a phenomenal job of implementing those programs in a way that we've been able to have some of our customers really appreciate the value proposition we bring to the market. And we've actually had some nice selected price increases. Another important point that you're seeing is sales for all other Performance Materials business, particularly color and glass, but all performance materials, in the Middle East and North Africa, we're up almost double-digits year-over-year in the first quarter. And overall, just a point of reference for you, auto glass was up 19% year-over-year. So that's what you're seeing in the color and glass business. You have commercial focus on the customer and having the commercial team’s only focus on driving value and delivering against the pipelines that are being preoccupied with a lot of things are really starting to take shape in the whole company. But in particular, in this business.

[Jeffrey L. Rutherford:]

I think another point that you ought to consider is going back to David's question from before. But what you get is just higher volume. This really shows the leverage ability of the model that the higher volume in sales volume is being expressed through the fact that we have very leverageable infrastructure. So higher volumes are going to drive much higher gross profits. And so when you look at it in detail, there is pricing in there. But the majority of what happened in glass is really the fact that we have a very leverageable model that can drive higher margins.

[Michael J. Harrison:]

And maybe just dig in a little deeper on the auto glass side. Is that really -- I know automotive was strong, particularly in Europe, but are you seeing increased opportunities for sort of sales per vehicle because of some of the products you're offering? Are you gaining new customers? Are there other things besides just the market that are driving the strength there?

[Peter T. Thomas:]

Yes. It's more than just the volume growth. What's happening is that, as we mentioned in the script, we have a superior product portfolio. We are the supplier of choice and we are getting a disproportionate number of developmental opportunities. And we have been for the past 2 years in a way that a lot of times, the demand for our products may start with the new model that was in design a couple of years ago. So we're benefiting from that. So it goes beyond just the builds. It goes through the R&D cycle for that industry, which could be, 3 to 5 to 7 years depending on the brand and the glass and the like. So we are just doing a really, really good job from an R&D and commercial basis.

[Michael J. Harrison:]

All right. And then a question for Jeff. You have the 7 7/8 notes that are callable at a relatively attractive price in August. Clearly, Ferro's credit profile has improved pretty dramatically since those were issued. Should we be assuming that a refinance is something under consideration for that chunk of debt? And what sort of rate do you think you could get if you issued new notes today?

[Jeffrey L. Rutherford:]

Yes. I mean, I guess the key portion of that question is under consideration. Obviously, every bank we know has given us a call, right? Even some banks we don't know have given us a call. There is opportunity from a rate perspective. I'm not going to predict rates. But obviously, the position we're in, even -- although we haven't seen any traction at the rating agencies, and so maybe they're a little behind on what everybody else sees, but we would expect -- it could be as much as 150-plus basis points off of what we're currently incurring.

[Operator:]

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

[Michael J. Sison:]

In terms of gross margin, equally impressive, all that you did in the first quarter. Could you maybe just give us a feel for overall, on an annual basis, what type of mix issues will be positive for you that we need to keep an eye on and maybe some of the negative mix issues we need to think about as the year unfolds?

[Jeffrey L. Rutherford:]

Well, as the year is going to unfold from a gross profit, and as we talked about from a sales perspective of -- and an earnings perspective, gross profit is going to follow that. We would expect gross profit in second quarter to be comparable to what we experienced in the first quarter and -- because of volumes. And then we're going to see a decline into the third and fourth quarters in gross profit rate. And that's how we'll get back to what we've guided relative to gross profits. And it's not so much a mix issue. Our favorable and unfavorable mix is getting to effect between materials and chemicals. We get a favorable mix as our high -- obviously, as our high-margin businesses grow and had plastics do not grow, right? That's a favorable mix for us overall. And that's going to continue. But what you should expect from a gross profit perspective is it is second quarter mark, gross profit comparable, maybe a little down from first quarter and then a decline in the third and fourth quarters.

[Michael J. Sison:]

Got it. And then, when you think about the expansion for the non-phthalate plants, maybe -- can you maybe walk us through sort of the return on capital hurdle rates? At what point do you think you'd break even? And then, what's the potential once you fill up that plant longer term?

[Jeffrey L. Rutherford:]

That investment, in particular -- that investment is different than any other investment we'll ever make here in that to some extent, that's a defensive investment. And we have -- we already have an investment in that plant. Remember, that's a hosted plant by Monsanto, right? So what we have there is we had a -- we previously had an investment in that facility. It's in the high 30s. And we also had a contract with Monsanto that has costs associated with termination. So we get to take all those things into consideration as to what we were going to do with that asset. And we decided that our best course of action was because we had the customer relationships and just versus -- just to abandon those customers and customer relationships and working relationship we have with Monsanto and so forth, that we would invest in that plant and to help preserve the investment we already have. That plant will never be over the top value-creating plant. It'll be a good 15% to 20% value-creating facility. But -- and so it's going to create value, but it's not going to -- it's going to be at a modest level. But it's an important plant in that European marketplace because it'll hold -- it'll have a foothold in that dibenzoate market place in Europe.

[Michael J. Sison:]

Okay, great. And then last question. Peter, you talked about -- or maybe just talk about getting to a 10% operating margin. Post 2015, is it just simply growing the business to get there? And then on flip side, are there opportunities to buy things with your -- or your balance sheet's improving here, maybe augment some of the growth potential? And when could you start thinking about doing something like that?

[Peter T. Thomas:]

Yes, Mike. I'll answer part of it. I'm sure Jeff will add another dimension, too. We stated that we do have a corporate development process. It's identified, as we mentioned, 25 to 30 small- to medium-sized bolt-on acquisitions that would be very complementary to what we are doing now. And we've also mentioned that they're under $100 million. And as Jeff mentioned earlier, set it up nicely with all the infrastructure, things that we're doing, the fixing the wiring and plumbing, these complementary acquisitions will be easy to plug in with all the back office stuff so we can just focus on reaching the synergies or driving the value from the synergies as quickly as possible. So we feel pretty good about the setup of our new environment to do that. And when you look at that many opportunities, most of them are family owned or privately held. We would be considered a buyer of choice in that space. So the answer is yes. In the near-term, whether it's coming from our new organic pipeline, which is delivering great business results, or we have the inorganic opportunities for the next couple of years, that's why we're mentioning now in this meeting that the focus away from costs is starting and that we're going to be talking more about the growth opportunities. And they're there for us.

[Jeffrey L. Rutherford:]

Yes. And what I would add is obviously, you have to have access to capital to be generating cash to drive investments, right? And so, '15 is an important year for us because we're going to go free cash flow positive. And really, what we need to do at that point is we need to invest that -- we're not going to create a lot of value by paying down debt, right? We're going to create value by investing capital. And we have a pretty high hurdle rate for ourselves, that it has to be greater than 15% return or why are we making the investment? Because we're not in just to trade dollars. So we have a high hurdle rate. It's -- we set it internally at 15%. If we can't do that, we might as well give that money back to our shareholders and let them invest in something else.

[Operator:]

Our next question comes from the line of Rosemarie Morbelli with Gabelli & Company.

[Rosemarie J. Morbelli:]

Good beginning of the year. Could you talk about looking at one negative side, which would be on the ink additional company refresher? Could you give us the size of that digital ink? And then, how much percentage-wise you sold into China versus in those areas such as Italy, Spain, Latin America, where you are selling the higher-margin, I am assuming, higher-priced of fourth generation of inks?

[Peter T. Thomas:]

Yes. So right now, the -- what we will define as being the addressable market, the forecast for the end of this year is somewhere between $375 million to $400 million. But of course, you know we are one of the market leaders. We maintain our 30% share, if you will. As it relates to the $375 million to $400 million market, the fastest-growing region has been, for the past couple of years, in China in particular. And if you do a spread -- I won't be specific, but yes, you have the highest gross margins, and that business are in Europe, Eastern Europe, the Middle East and North Africa. Then it would be in Latin America and then Asia, particularly in China. And the difference is -- what made it typical, it's a commoditized version in China. And that's why the ramp-up in China, the growth is mostly in the second generation, if you will, the order technology and moving into the third. And as you know, we've introduced the new inks. We have a life span before it becomes really competitive of maybe of 18 months. That, as I've mentioned before, has a higher gross profit. That's over 40%. Now one of the things we've been able to do and Jeff mentioned in his sector about the tile gross margin actually moving up. Even though we have the competitive intensity, what we have been able to do with the second and third generations is that we've been able to reformulate those products in a way with substitute raw materials that would still maintain a very nice gross margin above what the margins would typically be in Asia. So we just keep continuing to speak to it because what's really -- an interesting dimension here is truly what the accessible market is. Because when you look at this product line, and Rosemary, you remember this. You -- when we had Analyst Days, we would present that. In 2011, we thought the market this year would be $200 million. Now, it's double that. And the reason why that is, is that the decorative part of the tile business is not just digital inks. Remember, it's the -- just base coatings or it could be [indiscernible], it could be screen printing. And we look at those other 3 areas where decoration occurs, that market could be a couple of billion dollars. So the question has always been in this space over the last 3 years. At what rate will that commodity, really lower-profile type of a design for a lot of the emerging markets in their infancy, at what rate will that $2 billion convert. And no one really knows that. But I can tell you with the price erosion taking place in China, there's no doubt in anyone's mind that the accessible market and growth of the Chinese market will be greater because of that, because of the cost is coming down. So there are always -- as the market leader, we have the responsibility to keep developing the new-generation products. And that's what we're doing. And that's why our portfolio for inks is higher than everyone else's.

[Rosemarie J. Morbelli:]

That is helpful. And Peter, looking -- or Jeff, looking at announcement or your comments regarding combining 2 small facilities, that one from the U.K. going into Germany, one is going from New Jersey to Upstate New York. Is that the beginning of a more -- a much larger manufacturing consolidation? And do you have any feel for how much more savings you could get from that?

[Jeffrey L. Rutherford:]

Those 2 are probably more opportunistic than any grand -- beginning of any grand strategy. Let me say this, and we've talked about this before. We know -- I'm looking at our March report on return on invested capital EVA by location. There are 0 U.S. plants that don't create value. Our #1 value creator in the world is Kenyan plant, and the #2 is still is 4150 or our porcelain enamel plant. So in case, John, if I quiz you later on, those are the answers. There is one plant in Asia Pacific that has negative value. There's one plant in South America that is value-destroying. There are 4 plants in Europe that are value-destroying. There are 6 plants within our organization that have to get to a point where they're creating value or we need to consider what we're going to do with the investment. They know who they are. Everyone knows who they are. We -- they're in our monthly reporting package. There is no overall strategy right now because we're still in, we're still in our restructuring phase. Some of these plants, we still have not gone in and taken out the excess costs that we need to take out. We need to do that. At that point, so sometime later this year, we're going to be making the calls relative to whether we have to take some investment action or not. These -- but these 2 plants were more opportunistic. They were not the start of that strategy.

[Rosemarie J. Morbelli:]

Okay. And those costs bound -- that you are doing, that you still need to take, those are included in the $100-million-plus of savings?

[Jeffrey L. Rutherford:]

No. No. Any impact from -- if we would take action on those plants, any positive impact would be incremental to the $100 million.

[Rosemarie J. Morbelli:]

Okay. And then the other thing, that's very helpful already. And then lastly, if I may, if we look at your cash flow generation, so first of all, could you remind us -- in addition to the $65 million in CapEx that you are spending in 2014, can you remind me of the cash cost of the restructuring? And then when you talk about 2015 being cash flow positive, do you have a dollar amount estimate of that positive cash flow?

[Jeffrey L. Rutherford:]

Okay. Yes, I -- what we're looking at in '14 is restructuring payments in our model of $20 million. And we talked about CapEx, working capital use of somewhere around $20 million, taxes around $10 million, interest, $25 million. Pension, we've made the U.S. We've got some foreign pension contributions of probably around $27.5 million to $28 million, okay? And then some net others. So that's what makes up our '14 cash flow. When we look at '15, no restructuring is in that -- is in our '15 guidance. So anything we would do for clients would be possibly be incremental to that. But there's 0 of restructuring CapEx back to $50 million working capital at a normalized use based upon sales growth. So let's say, 7% to 10% taxes in the teens; interest, $24 million; pension, probably around $25 million; other miscellaneous in both years is probably around $8 million to $10 million. And then, it's a combination of the increase in EBITDA and the elimination of restructuring payments results in cash creation.

[Rosemarie J. Morbelli:]

Okay. So if I look at 2014, since I have the numbers for those, and I add up -- you said that you are going to use $25 million of cash, right? Which means that you would have generated the cash flow of all of those items plus the $25 million that you are spending in extra? Am I [indiscernible]

[Jeffrey L. Rutherford:]

Yes. And the other thing to remember for '14 is the bonus payment for '13 was made in '14. And we've -- we, embarrassingly, now that we made double bonus, right? So there's $10 million tick up in cash flow '14 to '15 when we get -- assuming we get back to the client bonus payment.

[John T. Bingle:]

Operator, we have time for one additional question.

[Operator:]

Our next question comes from the line of Jeff Zekauskas with JPMorgan.

[Jeffrey J. Zekauskas:]

Can you just comment on phthalates plasticizer pricing and whether you believe that's reached the bottom or whether it still has further to fall or maybe whether it's even turning up? And then just in clarification of Jeff's remarks to Rosemarie, did you say that all of your outlays for restructuring will be completed in 2014, and there won't be any residual ones that will go over into '15?

[Jeffrey L. Rutherford:]

Let me answer that in the first few. Of what we have announced, it'll be -- the payments should be completed in '14. But that would exclude, as I've mentioned earlier, anything associated with capacity rationalization. So any planned actions would not be included in that stake.

[Jeffrey J. Zekauskas:]

And these charges that you had yet to take?

[Jeffrey L. Rutherford:]

Yes. We -- you mean relative -- we have not -- we have not...

[Jeffrey J. Zekauskas:]

You have yet to book them?

[Jeffrey L. Rutherford:]

Anything related. We haven't done anything related to any major plant...

[Jeffrey J. Zekauskas:]

Rationalization.

[Jeffrey L. Rutherford:]

Rationalization at this point. That's right.

[Peter T. Thomas:]

Okay now, and then relative to the phthalates pricing issue. I mean, for us, remember we're in the specialized market of butyl benzyl phthalates, and you know that the world market or accessible market for phthalates is in the billions, $4 million or $5 billion, and we participate in the fast fusion part, which is an addressable market of about $450 million, where we've always had a leadership position. And that's where that really originated. As it relates to that market, since it was in the decline mode over the past 18 to 24 months, there was price erosion taking place so that we could maintain the position as long as we can to prepare for our conversion, both in the U.S. and in Europe. And now that the deselection has really hit us, we have been -- now we started in a we'll call it nice-price harvest mode. Both in Europe and North America were actually -- our prices are going up as another mechanism now of going ahead to and generating some more profitability as we go into the dibenzoates phase. So we are -- we do have price increases in those product lines. And they're actually pretty significant in Europe right now.

[Jeffrey J. Zekauskas:]

And what's caused the shift from the downward price movement to the positive price movement?

[Jeffrey L. Rutherford:]

Well, we have the fine balance. Anytime you're switching your technology and mining down at a site and trying to start a new one, there's a balance of do you force your customers to go away from you or do they do it to you? And it's always that balance. So as we were preparing to do dibenzoates, we wanted to manage how quickly -- before it really hit us, how quickly we wanted to lose that volume so that we can prepare to offset, particularly in North America, some of that lost volume with new products. And I'm pleased to say that when you drill in the Delaware River, what you'll find, the increase in our benzyl chloride has been phenomenal. We have a strong increase in phosphate esters, and right now, you've heard us talk about our new platinum series, which is another new, non-phthalate plasticizers. And I'm pleased to note today that we have our first large commercial hit. And it's with a major customer. And so all that additional business and volume is helping to offset some of that lost absorption we have in North America. So it's just the mechanism of managing as tightly as you can the loss of the business and when you start price harvesting and the like. So for us, the phthalates prices are going up. That's the short answer for you.

[John T. Bingle:]

All right, 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 www.ferro.com and click on the Investor Information links. Thank you for your time this morning, and have a good day.

[Operator:]

Ladies and gentlemen, that does conclude the conference call for today, and we thank you for your participation and ask you to please disconnect your lines.