U.S. Markets closed

Edited Transcript of FOE earnings conference call or presentation 1-May-19 12:00pm GMT

Q1 2019 Ferro Corp Earnings Call

Cleveland May 3, 2019 (Thomson StreetEvents) -- Edited Transcript of Ferro Corp earnings conference call or presentation Wednesday, May 1, 2019 at 12:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Benjamin J. Schlater

Ferro Corporation - Group VP & CFO

* Kevin Cornelius Grant

Ferro Corporation - Head of IR

* Peter T. Thomas

Ferro Corporation - Chairman, President & CEO

================================================================================

Conference Call Participants

================================================================================

* David L. Begleiter

Deutsche Bank AG, Research Division - MD and Senior Research Analyst

* John Patrick McNulty

BMO Capital Markets Equity Research - Analyst

* Kevin William Hocevar

Northcoast Research Partners, LLC - VP & Equity Research Analyst

* Michael Joseph Harrison

Seaport Global Securities LLC, Research Division - MD & Senior Chemicals Analyst

* Michael Joseph Sison

KeyBanc Capital Markets Inc., Research Division - MD & Equity Research Analyst

* Rosemarie Jeanne Pitras-Morbelli

G. Research, LLC - Research Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good morning. Thank you for joining the Ferro Corporation 2019, the First Quarter Earnings Conference Call. An archived replay of this teleconference will be available through the Investor Information section at ferro.com later today and will be available for approximately 7 days. I would now like to turn the call over to Mr. Kevin Cornelius Grant, Director, Investor Relations and Corporate Communications.

--------------------------------------------------------------------------------

Kevin Cornelius Grant, Ferro Corporation - Head of IR [2]

--------------------------------------------------------------------------------

Thank you. And good morning, everyone. Welcome to Ferro's First Quarter 2019 Earnings Conference Call. This morning, we'll be reviewing Ferro's financial results for the first quarter ended March 31, 2019.

I am pleased today to be joined by Peter Thomas, our Chairman, President and CEO; and Ben Schlater, Group Vice President and Chief Financial Officer.

The earnings release and conference call presentation deck are available in the Investors section of our website.

I'd like to remind everyone that some of the comments we are making today are forward-looking statements and are based on our view of conditions and circumstances as we see them today. However, those views may change as conditions and circumstances change. Please refer to the forward-looking statement disclosure in the earnings release and the earnings presentation.

Also, today's call will contain various operating results on both a reported and adjusted basis. Descriptions of these non-GAAP financial measures and reconciliations are included in the earnings release and presentation deck. We encourage you to review that information in conjunction with today's discussion.

It is now my pleasure to pass the call over to Peter.

--------------------------------------------------------------------------------

Peter T. Thomas, Ferro Corporation - Chairman, President & CEO [3]

--------------------------------------------------------------------------------

Good morning everyone. Thank you for joining us today. The first quarter proved to be challenging and tested our business as demand softened. Fortunately, we have a level of resiliency relative to any one market because of our diversified customer base. And an orientation to enable this but enables us to adapt quickly to market conditions. That's not to say that we are satisfied with the quarter's results, we are not. But we are focused on a longer view in making the right decisions to achieve sustainable growth.

Like many of the companies in our space, we experience softer demand during the first quarter in some of the markets in which we participate. In certain of the higher-end and niche markets that we moved into in recent years the order patterns and inventory destocking are different from what we see at the mid-level of the markets particularly in tile. This contributed to weaker demand in both the fourth quarter of 2018 and first quarter of 2019 impacting margins as well as sales.

Customers at the high end of the tile market that were stocking about 6 months of inventory shifted several months ago to maintaining 3 to 4 months of inventory. We anticipated that these customers would build back to a 6 month inventory level in the first quarter. But they have not yet done so. And it seems that some are still ordering just in time levels.

Absorption also played a role in the first quarter decline in earnings. The destocking we discussed contributed to lower volumes at some of our larger facilities, eroding profitability. We expect to offset these absorption headwinds in the second half of 2019 with increased volume throughput and benefits from our optimization initiatives. I'll comment further on the remainder of the year later in my prepared remarks.

We learned from this experience and we will use the knowledge we gained about this market dynamic as we go forward. From challenging circumstances we intend to make ourselves better. Economic conditions especially in Europe and China also affected our business in the first quarter because a significant portion of Ferro's revenue comes from Europe we felt the negative impact. Much less of our revenue comes from China but we still felt the effects of relative weaker demand there. I don't know that we have a clear line of sight to recovery from the slowdown in Europe but it's worth noting that government stimulus in China may improve conditions there and this may in turn positively affect Europe.

Closer to home weather was a factor in the United States construction markets, which impacted building projects and reduced demand from customers served by our Color Solutions pigments business. In addition, headwinds from foreign exchange rates negatively impacted sales by about $21 million. So all in all not a good quarter after strong performances in 2017 and 2018. But there were positives that demonstrate the flexibility of our business model and reinforce what we said about outperforming the markets where we participate. We believe we can outperform the markets because of the value we bring to our customers and our ability to increase productivity through optimization initiatives.

Examples of outperformance include automotive, industrial and surface technology sub-segments, all of which we expect will outperform their markets for the year. We remain enthusiastic about Ferro's position in relation to certain mega trends within society that should continue to create opportunities for growth in these businesses.

For example, we see exciting opportunities for our surface technologies business in connection with the move to 5G technology. And we see opportunities for our electronics business in North America as more and more smart technology is added to automobiles. We will continue to manage through this time of global macroeconomic uncertainty with judicious investment, managing leverage, and continuing to execute innovation and optimization initiatives.

Regarding optimization, we review optimization as a means to increase productivity and efficiency and become a better, more profitable company. We've built a culture committed to improvement, involving and getting better all the time by innovating, growing, updating and optimizing the business; never being complacent.

Optimization becomes even more crucial when managing through macroeconomic weaknesses. As previously discussed, we have implemented a number of optimization initiatives including consolidating manufacturing sites, logistical facilities and R&D labs. The largest of these the Americas Manufacturing Optimization Initiative, which we have discussed previously will begin contributing to Adjusted EBITDA this year. We have a number of other optimization initiatives underway or planned as well with opportunities throughout the company. Our optimization efforts include optimizing our portfolio to continue to position Ferro as an advanced technology partner, enhance our market position. After 20 acquisitions we are taking a good look at how best to optimize our portfolio going forward.

As appropriate, we'll provide more details on this and other optimization efforts currently under way or completed in the future.

Now let's turn to the performance of our 3 business segments in the first quarter. In the presentation deck you can see summaries on Slide 5. Let begin with our Performance Coatings segment. Performance Coatings' volumes were up 2.8%, while net sales on a constant currency basis were down 2.1% to $170.3 million. Adjusted gross profit decreased to $33.9 million from $41.1 million. Gross profit margin declined to 19.9% from 23.6%, reflecting the shift in mix and volume due to the destocking and inventory repositioning I described earlier.

The dynamic that we experienced with the high end of the tile market has given us a greater appreciation for the destocking process in the high-end segment of the market. We have now gone through a cycle of strong growth as well as a period of weaker demand and a reset by our customers of inventory levels. With the transition of our portfolio in recent years to sell more into the higher space. We now better understand this dynamic and our customers' purchasing habits.

Now let's look at our Performance Colors & Glass segment. In the first quarter Performance Colors & Glass volumes improved 9.4% with net sales on a constant currency basis up 5.3%. Organic sales improved 3%. Adjusted gross profit declined to $39.5 million from $41.2 million. Gross profit margin declined to 32.7% from [35.9%]. Sales increased by approximately 10% in our industrial business. Much of this increase was attributable to increased sales of our digital printing technology.

We believe we have a great opportunity with this technology to transition to flat glass market to digital printing. Our electronic materials business grew approximately 13% in the quarter. This was driven by sales of multi layered film paste and tapes for sensors, dielectrics and capacitors, which are used in heavy duty applications such as automotive, airspace and military applications.

After a strong year of market growth in (inaudible) 2018, sales in our automotive business were down low mid-single digits. We continue to see pressure in North America, which accounted for the majority of the decline in our automotives sales.

Europe was up low single digits but offset by decline in Asia Pacific. This performance was not a surprise as we expected 2019 to be weaker and we expect continued weakness in our automotive business throughout the course of the year. Decoration was down low single digits in the quarter compared to the prior year primarily due to strong demand for off cycle container glass in the prior year.

Now, turning to the Color Solutions segment, in the first quarter Color Solutions' net sales on a constant currency basis were flat while volumes were down 4.2%. Adjusted gross profit came in at $29.3 million as compared to $31.6 million in the prior year. Gross profit margin declined to 30.5% from 32.8%.

First quarter sales of our pigments were affected by softer demand in the construction and building market due to weather in the United States as well as a shift in the automotive market away from ultramarine blues. The slower start to the year in our pigments business was offset by a stronger demand for our surface technology products.

Now, let's talk a little bit about what lies ahead. Many companies in our space expect the second quarter to be similar to the first, relatively weak. Ferro's second quarters typically are strongest so we are optimistic about the second quarter ramping up from the first. We perceive there to be a general expectation in the markets we serve that the second half of 2019 will be better than the first half. We generally share those sentiments based on indicators that we see in our business, although I will not say that we have clear visibility into remainder of the year. Uncertainty around trade talks, Brexit and the auto markets in Asia cloud the horizon.

Looking still further ahead to 2020, although market conditions have softened since 2017, when we introduced our 2020 goals. We still have a pathway and we are focusing our teams on achieving those goals.

I'll now turn the call over to Ben for his comments.

--------------------------------------------------------------------------------

Benjamin J. Schlater, Ferro Corporation - Group VP & CFO [4]

--------------------------------------------------------------------------------

Thank you Peter and good morning everyone. I'd like to start out this morning discussing our consolidated finance results for the first quarter 2019. Please note that the non-GAAP numbers I refer to are on an adjusted basis and growth rates mentioned are on a constant currency basis compared to the first quarter of 2018. The financial highlights and results can be reviewed on Slide 3 and 4 in the presentation accompanying today's call, which you can find on ferro.com in the Investor section.

Turning to Slide 4, in the first quarter we grew net sales 0.7% to $387.5 million. While adjusted gross profit declined 9.6% to $102.9 million. Adjusted SG&A expense was $69.3 million or 17.9% of net sales and adjusted EBITDA declined to $47.9 million or 12.4% of net sales and adjusted EPS declined to $0.22.

For the first quarter they were a few non-GAAP adjustments primarily related to our corporate development acquisition and optimization activities. First in cost of sales we have adjustments of approximately $1 million primarily due to costs related to optimization initiatives. In SG&A we have one time adjustments of $2.8 million in the quarter consisting of legal, professional and other expenses related to certain corporate development activities and certain optimization initiatives, including the manufacturing optimization we announced earlier this year.

Turning to restructuring and impairment there was an adjustment of approximately $2.1 million in the first quarter related to actions to achieve our ongoing optimization initiatives and acquisition synergies. Finally in the quarter under other income and expense, we had an adjustment of about $100,000 related primarily to optimization costs.

Now moving to SG&A, in the first quarter adjusted SG&A expense was $69.3 million or 17.9% of net sales compared with $66.1 million or 17.2% of net sales in the prior year quarter as stated on a constant currency basis. Newly acquired businesses accounted for the majority of the increase, while base company SG&A was nearly flat year-over-year.

This brings me to adjusted free cash flow, adjusted free cash flow was in line with our expectations with the use of $45.3 million in the first quarter compared to $42.4 million use in the prior year.

We have reconfirmed our prior full year free cash flow conversion guidance of 45% to 50%. We define adjusted free cash flow from continuing operations as GAAP net cash provided by operating activity less CapEx. Then we add back cash used for our most recently announced manufacturing optimization, acquisition-related items and restructuring activity. The most meaningful components for the quarter are as follows. Starting with GAAP net income of $13.9 million we add $15.1 million of depreciation and amortization less $100 million for working capital plus $4 million of a change in other balance sheet items and less $0.5 million of other non-cash P&L items to arrive at cash used from operating activities of $67.5 million on a GAAP basis.

Then we subtract $23.3 million of capital expenditures and add cash received on other receivables of $20.2 million to arrive at $70.7 million of free cash flow use in the first quarter. Our practice has been to adjust this number for cash flow related to our strategic activities. These include one, cash related to our recently announced manufacturing optimization; two, M&A related cash flow; and three, cash flow from restructuring programs.

A quantification of those 3 adjustments for the year are as follows: $21.2 million for optimization projects, $2.3 million related to M&A, and $1.9 million related to restructuring. When we add these items back to our GAAP number this brings adjusted free cash flow use for the year to $45.3 million compared to the prior year at $42.4 million. The details of this calculation and the related reconciliation to GAAP operating cash flow can be found on Table 10 of the press release.

With respect to capital allocation, in the first quarter we repurchased approximately 1.4 million shares of our stock for approximately $25 million at an average share price of $17.35. Further, we ended the first quarter with approximately $470 million of liquidity and leverage of approximately 3.4x consistent with our expectation from our year-end call.

Now I'd like to spend some time reviewing our updated 2019 guidance. As I mentioned earlier, we are maintaining our adjusted free cash flow conversion between 45% and 50%. However, given the weakness that we saw in the first quarter and economic uncertainties, we have updated our adjusted EBITDA and adjusted EPS guidance. For the full year 2019 we expect adjusted EBITDA in a range of $250 million to $260 million and adjusted EPS in a range of $1.35 to $1.45.

In summary, we want to be clear that our guidance from our year-end call is updated primarily to reflect a review of the end markets with the other components remaining approximately the same. To add clarity to the guidance our EBITDA bridge from 2018 to 2019 is as follows. Beginning with 2018 EBITDA of $259 million we add the aggregate benefit from the Americas Manufacturing Optimization, net raw materials and acquisitions in a range of $22 million to $28 million for the year, which is largely in line with the original guidance we gave last quarter. Then we subtract $8 million to $9 million for FX updated slightly to reflect the euro to U.S. dollar exchange rate at $1.12.

Finally, we subtract $18 million to $20 million of organic headwinds, which reflects the current market landscape and economic uncertainties that Peter and I have highlighted today on the call. I would also note that roughly 2/3 of the organic headwind has been realized in the first quarter with the largest component related to destocking in our tile business and is already behind us. We expect the balance to taper off throughout the remainder of the year.

To sum up those pieces to the 2018 adjusted EBITDA of $259 million equals our guidance range of $250 million to $260 million for 2019.

Now turning to our walk for EPS. Starting at our adjusted EPS for 2018 of $1.50 we expect the aggregate benefit from the Americas Manufacturing Optimization, net raw materials and acquisitions to be within the range of $0.20 to $0.25 for the year again largely in line with the original guidance we gave last quarter. Then we subtract $0.05 to $0.06 for FX, again updated slightly to reflect the U.S. to euro exchange rate at $1.12. And from there we subtract $0.14 to $0.18 of organic headwinds again roughly 2/3 of which has been realized in the first quarter.

Finally, we subtract $0.08 to $0.09 for the change in our tax rate and $0.01 to $0.02 for increased interest expense both of which are unchanged from our guidance last quarter. The sum of those pieces to the 2018 adjusted EPS of $1.50 equals our guidance range of $1.35 to $1.45 for 2019.

To wrap up our comments on guidance, I would like to give some context to how we view the remaining quarters of 2019. We expect the second quarter to meaningfully improve from the first quarter with adjusted EPS in the range of 23% to 24% of our updated full year 2019 guidance of $1.35 to $1.45. Further, given the current macro themes and market conditions including the destocking in tile, weaker eurozone and softer growth in China we expect the third quarter to be our strongest quarter followed by the fourth quarter as our guidance calls for a stronger economy in the second half of 2019.

Further if raw material prices remain at current levels, we would expect sequential margin expansion in the second half of this year. Our 2019 guidance reflects foreign exchange spot rates as of 03/31/2019 including $1.12 for the euro against the dollar. We have provided FX sensitivities in the guidance section of the earnings release.

In 2018 Ferro generated approximately 40% to 45% of revenue in euros and approximately 25% to 30% in U.S. dollars. We estimate that a 1% overall change in foreign currency exchange rates, weighted for the countries where we do business, would impact sales by approximately $10 million to $12 million and operating profit by $1.5 million to $1.7 million. If you isolate for sensitivity on the euro a 1% change would impact operating profit by approximately $1.1 million to $1.3 million.

Finally, I would like to just build on what Peter mentioned that we are constantly reviewing and taking steps to keep the company as nimble as possible to adapt to changes in the macroeconomic landscape, focusing on what's in our control and maintaining our focus on cash and leverage.

With that, I will turn the call over to Kevin for Q&A

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Kevin Cornelius Grant, Ferro Corporation - Head of IR [1]

--------------------------------------------------------------------------------

Thanks Ben. With that operator, let's open up the call for our first question.

--------------------------------------------------------------------------------

Operator [2]

--------------------------------------------------------------------------------

(Operator Instructions). And we will proceed with our first question on the line from Rosemarie Morbelli with G Research.

--------------------------------------------------------------------------------

Rosemarie Jeanne Pitras-Morbelli, G. Research, LLC - Research Analyst [3]

--------------------------------------------------------------------------------

So looking at the results, Peter, it seems as though Performance Coatings is obviously where you are having the most issues. It is also your lowest margin business. Is there any consideration of selling it and immediately upgrading your portfolio and lowering your debt and potentially buying back stock? Is that something that management and the Board are considering?

--------------------------------------------------------------------------------

Peter T. Thomas, Ferro Corporation - Chairman, President & CEO [4]

--------------------------------------------------------------------------------

As you know we pride ourselves in having a whole range of opportunities with this portfolio whether it's inorganic, organic and the optimization initiatives that we're going to further define here. We are always in the interests of creating a better version of ourselves and we look at every opportunity to exercise that activity.

--------------------------------------------------------------------------------

Rosemarie Jeanne Pitras-Morbelli, G. Research, LLC - Research Analyst [5]

--------------------------------------------------------------------------------

Okay. I guess the answer is maybe yes. So now looking at your optimization program, I understand that it has been focused on North America and mostly the U.S. have you expanded those activities into Europe?

--------------------------------------------------------------------------------

Peter T. Thomas, Ferro Corporation - Chairman, President & CEO [6]

--------------------------------------------------------------------------------

Let me mention something to you because I like to always refer back to prior calls. A year ago, when we were further defining the optimization activity that we have announced, which represented $30 million plus. And we've mentioned we would see around $8 million this year, we would have the balance next year. I also mentioned that during the exercise that we were building an optimization pipeline that probably would add another $12 million to $15 million of profitability.

So what I will share with you today is that in this environment, which is very challenging, certainly we work by the rule, you really can't worry about what you can't control because certainly you don't have control of how you manage through it. And what I can tell you is that our organization as a whole has been phenomenal in embracing our strategy and the framework of the strategy and the fact that optimization is very important. And that's why it's phase 4. The idea is, 2020 targets, we get there with a combination of organic, inorganic and innovation as well as optimization activities. We have a lot of levers to pull.

And I will tell you now that our expectation going into next year is that by the end of year we will have a run rate of about $15 million of new opportunities and profitability on top of what we've already mentioned. I will -- you are going to ask the question about where are we, the answer is we did pull many of those levers some are staggering in, some we're including in this guidance. Some of them we're not because we will not do it until we have the right visibility because of the sensitivity of some of the projects.

And each quarter we will orderly, methodically like we always do, we'll share those details. But rest assured, we are not sitting back, we are not sitting here saying we just uncovered something. We've been planning this for a very, very long time. So it was easy for us to embrace, pull the trigger and start executing. Some of those projects are already done. And we have seen the value. And we are very good as you know around managing the optimization side of this business. So the news today is we are looking at a run rate of another $15 million next year.

--------------------------------------------------------------------------------

Rosemarie Jeanne Pitras-Morbelli, G. Research, LLC - Research Analyst [7]

--------------------------------------------------------------------------------

So that is in addition to the $30 million, just clarifying here?

--------------------------------------------------------------------------------

Peter T. Thomas, Ferro Corporation - Chairman, President & CEO [8]

--------------------------------------------------------------------------------

Yes. And it's -- if you go back a year ago, I did kind of mention that we had another $12 million to $15 million hiding in there. That when the time was right that we would pull the trigger and we're doing that.

--------------------------------------------------------------------------------

Rosemarie Jeanne Pitras-Morbelli, G. Research, LLC - Research Analyst [9]

--------------------------------------------------------------------------------

And then if I may. I am sorry.

--------------------------------------------------------------------------------

Peter T. Thomas, Ferro Corporation - Chairman, President & CEO [10]

--------------------------------------------------------------------------------

Or we have done it already.

--------------------------------------------------------------------------------

Rosemarie Jeanne Pitras-Morbelli, G. Research, LLC - Research Analyst [11]

--------------------------------------------------------------------------------

So if I translate what Ben talked about regarding the second quarter. Then your second quarter is going to be still substantially lower than last year second quarter at about $0.34 versus $0.44. Are you expecting the second half, while improving, are you expecting it to be above 2018?

--------------------------------------------------------------------------------

Benjamin J. Schlater, Ferro Corporation - Group VP & CFO [12]

--------------------------------------------------------------------------------

Yes, I think that that's implied in the guidance, is that if you do the math on the second quarter we will see in the second half of the year a recovery from a year-over-year perspective.

--------------------------------------------------------------------------------

Rosemarie Jeanne Pitras-Morbelli, G. Research, LLC - Research Analyst [13]

--------------------------------------------------------------------------------

Okay. And then…

--------------------------------------------------------------------------------

Peter T. Thomas, Ferro Corporation - Chairman, President & CEO [14]

--------------------------------------------------------------------------------

Rosemarie, what's really important to note is that through all this we are really back to what one would find -- define as being a normal order pattern for our business. Here in the second quarter I think we've been pretty clear. We feel really good about the sequencing of the second quarter being better than the first, the third quarter being better than the second. And I think there's a bit of an interesting dynamic that could be surfacing in the fourth quarter depending on -- we certainly know we're going against an ugly period last year. And we know that the level of destocking where we sit today doesn't appear that's going to be as dramatic certainly, because no one's really building their inventory levels up in an explosive way.

And so I think the fourth quarter could be a very interesting fourth. But remember and I think it was in maybe it was in '17 we had a 9% year-over-year improvement in the fourth quarter from the prior year. So the fourth quarter could be a pleasant surprise for us. And I think if we keep doing what we are doing, and I know we will, we may have an interesting fourth quarter to show.

--------------------------------------------------------------------------------

Rosemarie Jeanne Pitras-Morbelli, G. Research, LLC - Research Analyst [15]

--------------------------------------------------------------------------------

Are you anticipating this pattern, the new pattern for the high-end tiles to remain more or less the way they are meaning that they are not going back to building 6 months inventory supply, but just sticking to the 3 to 4 months or even buying just on time, is that in your projections?

--------------------------------------------------------------------------------

Peter T. Thomas, Ferro Corporation - Chairman, President & CEO [16]

--------------------------------------------------------------------------------

That's a good point. And that's a -- I am glad you brought this up. Because we didn't get it through the script and we were hoping it would come up. It's a very interesting dynamic, we have discussed in the past, the high-end top producers typically would keep 6 months worth of inventory. It's swelled to 7 to 8 months during the [heyday] of the first half of last year. And then it precipitously dropped.

And in the middle of that activity, as we were planning for the first quarter, as you all know, we did have -- we're so close to our customers and they were telling us that their objective was to build -- rebuild the inventories through the first quarter on a run rate basis that would be equivalent to, what they defined as normalcy and maybe 4 to 6 months instead of something less.

In the meantime what's happened, if you track the tile market, right at the time where things were coming down in destocking there has been a very, very substantial change in the demand, in the type of tile that's moving forward. And a lot of it has to deal with the larger sizes. I mean I not sure if everyone knows but part of the high-end tile means that they have tiles that are 3 by 5, 3 by 6, 5 by 6 and some that could be as large as 5 by 9 that would go into the industrial -- let's call commercial construction markets.

So while all this destocking took place coming out of this, the demand for the type of tile, moving into the new year has been more of the larger size, which is more expensive. And there is a lot of value to Ferro in those tiles because we really are the market leaders in supplying all the things that are necessary to give the design and the scale. So rather than rebuilding their inventory with the old stuff, they are orderly, methodically ramping up to what one might define even a repositioning of their inventory because they believe that the demand rather than coming from residential maybe in the near-term more of construction oriented. We do see our construction by the way in Europe was up 8%, so that's between glass and this larger tile exercise that we're speaking of.

So I think we had a dynamic here of the flush out, but they are being orderly, methodical around just in time with the old products, but they were incrementally built through the course of the year with the bigger products. And I think the bench point was very well taken, more than 2/3 of our issue organically is gone.

And what I can tell you, we did a lot of work, roughly the destocking cost the company maybe $26 million or so and $9 million to $10 million of gross profit. So we have not built that adjustment into any of our forecasts. In fact, if you separate the tile business from the rest of Ferro, what you're going to find through the course of the year, where we stand today, is we'll have of course a 3% growth, which is good in this environment. And we haven't made all the necessary adjustments for the time. We're kind of leaving that the way it's coming in, we're listening to the customers, they are being very orderly methodical. And we don't want to make any decisions on what we think they are going to do or not do. We want to leave it at this point where it is until we get into the second quarter because we'll have a better line of visibility with it.

--------------------------------------------------------------------------------

Operator [17]

--------------------------------------------------------------------------------

We will proceed with our next question on the line, it's from the line of Mike Sison with KeyBanc.

--------------------------------------------------------------------------------

Michael Joseph Sison, KeyBanc Capital Markets Inc., Research Division - MD & Equity Research Analyst [18]

--------------------------------------------------------------------------------

In terms of the $18 million to $20 million sort of current landscape of demand, what needs to happen to get that back over time? And maybe walk us through the segments and what type of volume growth you need to see?

--------------------------------------------------------------------------------

Benjamin J. Schlater, Ferro Corporation - Group VP & CFO [19]

--------------------------------------------------------------------------------

Look I think it's a lot of what Peter said, so if you think about the impact from the destocking in the first quarter, I think a piece of that is sort of the rebuilding of that inventory in the Performance Coatings' piece of the business. That would be, my sense is, as the single largest piece. Peter just reflected that. We -- he said we have not built that into the guidance, which is the case. To the extent that -- that, that comes back, that can come back in a quarter or 2 and could be a pretty significant lift to the numbers. Again, we have not reflected that in 2019.

So that's Performance Coatings. Performance Colors & Glass, we're really not seeing anything from an overall weakness perspective. I mean there's puts and takes, auto is a little slower, electronics is much, much stronger. And then with respect to Color Solutions, we have seen slowness there in pigments, primarily related to construction, both in the U.S. and in Europe.

And it looks like the second half of the year will be better from that perspective. So I think that when you run rate the second half -- if the second half of the year comes in as expected and you run rate that, and we get an annualized impact from that, you will see a piece of that come back.

--------------------------------------------------------------------------------

Michael Joseph Sison, KeyBanc Capital Markets Inc., Research Division - MD & Equity Research Analyst [20]

--------------------------------------------------------------------------------

Okay. And then I think a lot of companies are looking for a second half improvement if you will. Some have given some thoughts in the event that there is no improvement. So in the event there is no improvement in the second half, how does your outlook sort of change relative to where it is now?

--------------------------------------------------------------------------------

Peter T. Thomas, Ferro Corporation - Chairman, President & CEO [21]

--------------------------------------------------------------------------------

I think what we're showing, Mike, reflects what we think. A reasonable case is building in that -- if there is some softness it's there. I think what we're trying to do is be as predictable as we possibly can at this point. We're giving you our best case, we see -- we don't see anything that is really chaotic or abstract to the end that you're referring to. We have a lot of sensitivities modeled but I don't think it's really germane to even go there. Right now this is what we see. We've mentioned that the core business looks like 2% to 3% for the balance of the year. The tile business we haven't built in that the pickup and the type of inventory level we've discussed. I have given you the dynamic that the destocking cost us $26 million in revenue. And about $9 million of gross profit. So you can do some math around that if tile picks up how you might want to build that into your model. If people get back to a position of normalcy with that inventory, that's one way of looking at it. And Ben you may want to give the other dimension.

--------------------------------------------------------------------------------

Benjamin J. Schlater, Ferro Corporation - Group VP & CFO [22]

--------------------------------------------------------------------------------

Yes, I think Mike the second half is -- I think there's two ways to look at it. One is what's happening relative to the broader economy. And two, what happened relative to the first half. And I think that those were slightly different answers.

From the first half perspective, the first quarter was down so significantly the second half is -- it's sort of an easier comp, when compared sequentially. And that's sort of what we reflected in the forecast. I think if you look at the second half with respect to what we're expecting from an overall economic perspective it will be sort of a lift from the first half but that is mostly because destocking is behind us. I would say we have been relatively conservative from an overall organic growth perspective in the second half.

--------------------------------------------------------------------------------

Peter T. Thomas, Ferro Corporation - Chairman, President & CEO [23]

--------------------------------------------------------------------------------

Yes Mike, let me add a couple of more things, I know we're talking about the sensitivity about what Mike argues is a downside but I think you heard what I mentioned, that complements what Ben said. Let me give you another perspective because I think it's fair and balanced to discuss it. One thing that's very important to know, the rate of absorption increased while continuing to drive our margin of improvement particularly in the high ends. Because you could see how a [damage] does in the third, fourth and first quarters, if you will. The second thing is the raw material tailwinds will continue regardless of what the sensitivity is, about the economic environment.

One thing too, we know that what we're seeing with our -- in discussions with our customers around the world that positive trade agreements could spark higher auto and construction markets where we participate. We're already around the world in different areas, I mentioned who else is telling you that construction is up 8% in Europe. If you look at automotive applications I can share regional situations, where we're growing double digits.

We know that the lower [backs] in China will favorably support our positions but more importantly it's what it does to Europe rather than what it does to China indigenously. Because we know, based on our contacts with the Chinese government, certainly they are -- it's making efforts to boost sales around the automotive and coatings market. So we have -- where we participate, we're hearing that from our customers, things will happen there, we feel very comfortable.

And again although Europe is soft, we will continue to outperform our European GDP, driven by what we've already mentioned with auto and construction. But there is even in this environment, as I mentioned, automotive in Europe is up and so was construction. And don't forget the driver around our digital printing is gaining traction in the flat glass market.

So that's what helps spur in this soft environment, that technology is getting traction. And again, at the end of the day what I have just highlighted with you, we have a focus on delivering those optimization programs that are $15 million on a run rate. So I think that you have heard us -- a discussion from me, the onset around, we believe we're giving you a fair represented case. Ben highlighted and I just summarized on, hey take a look at what isn't in here and try to use that information to decide how you want to build your own sensitivities. We've done it on the low end and the high end and we feel what we've done here is a fair representation of what we see it without any -- we are not economists, we are not foreign exchange experts, we are -- I mean we are sitting here being as accurate and predictive as we possibly can with a lot of probability at this point.

--------------------------------------------------------------------------------

Operator [24]

--------------------------------------------------------------------------------

We will get to our next question on the line from John McNulty with BMO Capital Markets.

--------------------------------------------------------------------------------

John Patrick McNulty, BMO Capital Markets Equity Research - Analyst [25]

--------------------------------------------------------------------------------

With regard to the fixed cost absorption that you had in the first quarter I guess one, can you quantify what that was? And then also, do you feel like you are running at more normal rates at this point, so we don't see that as a drag going forward.

--------------------------------------------------------------------------------

Benjamin J. Schlater, Ferro Corporation - Group VP & CFO [26]

--------------------------------------------------------------------------------

Yes sure, hey John it's Ben. If you look at the year-over-year headwind from a gross profit perspective, at the base company level between lower volumes and absorption almost 3/4 of the overall headwind is from lower volumes and absorption. So it's the vast, vast majority of it. We are -- and we would expect, and it's included in the guidance, absorption to return to more normal levels as we get into the end of the second quarter. And so we do show that sequential improvement quarter-over-quarter between now and the end of the year.

--------------------------------------------------------------------------------

John Patrick McNulty, BMO Capital Markets Equity Research - Analyst [27]

--------------------------------------------------------------------------------

And then with regard to the M&A pipeline out there I mean you were certainly more aggressive with buying back your stock in the quarter, I guess, how do you see the pipeline and how does that compare to your stock at these levels and the sense of urgency to be buying back stock and taking advantage of the lower price?

--------------------------------------------------------------------------------

Peter T. Thomas, Ferro Corporation - Chairman, President & CEO [28]

--------------------------------------------------------------------------------

Yes, so John it's Peter. First of all our M&A pipeline is no different than what we've discussed. We continue to run parallel paths around the technology buys versus what we acquired as a real company. And also I mentioned in my prepared remarks that after 20 acquisitions we believe we've stuffed our pipeline -- technology pipelines across all the businesses in a way that in addition to doing what we would normally do as we have been, we are looking at things that could be maybe a bit more impactful to the business, that would complement the more of an adjacent play at a bigger scale versus what we've already created. Because remember, where we are is that we now have about a 15 share in a $10 billion to $12 billion market versus 12 where we -- where it's a $4 billion market and we had a 50.

We've reached a point where we're managing the spread between organic growth and inorganic growth, I mean as we were moving up in the early days, we were more inorganic than organic then the vitality index pumped in. And we're sitting at a nice balance. We needed to get the organization to this point before we move forward. Because we're using a lot of math around how do you, what spread between inorganic and organic do you run for a while in the way that'll let your organization adjust to it. And then now we are at a point where we want to do -- we believe we need to be a little more impactful on creating a better version of Ferro.

It doesn't mean that we are going to stop it because right now the first half of this year we are working on, and rightly so, optimization activities, making sure we feel good about what we're doing with our capital structure. And of course, we are trying to see if we can do something more meaningful. And of course, everything whether it's big or large takes the same amount of time. But the orientation for the first half of this year is getting the infrastructure optimized, looking at some bigger things while we still are moving along with the deals.

Right now, I can tell you we continue to always look at 5 in that zone that I have mentioned that we could pull the trigger on. But I can also tell you we are looking at 3 or 4 things that are more meaningful. So we're expanding more ground here in term -- our ground of looking at expanding the business.

So we'll see what happens I mean, we -- in the second half of the year. I'm sure that something will go on whatever that is. And at that point we keep making the adjustments on how we want to manage the capital structure. Ben, do you want to add anything to that?

--------------------------------------------------------------------------------

Benjamin J. Schlater, Ferro Corporation - Group VP & CFO [29]

--------------------------------------------------------------------------------

No.

--------------------------------------------------------------------------------

John Patrick McNulty, BMO Capital Markets Equity Research - Analyst [30]

--------------------------------------------------------------------------------

And then I guess just a last question. You had mentioned in some of the prepared remarks around the opportunities in 5G. Can you help us to think about what the scale in terms of revenues might be over the next couple of years in those opportunities for you?

--------------------------------------------------------------------------------

Peter T. Thomas, Ferro Corporation - Chairman, President & CEO [31]

--------------------------------------------------------------------------------

Yes, I will tell you as much as I can because we are under a lot of secrecy agreements. But as it relates to 5G with us. And I know you know the chemistry. A lot of it has to deal around, let's call them ceramic filters for telecommunication, as well as strong vehicle to vehicle communications, as well as linking with cell phones, and also what can be done from the house to the car.

So there a lot of novel things that are going on. I wish I can tell you more because it's very exciting. But if you want to quantify something like that right now our pipeline for those activities would be over and above our vitality index. You remember John, I think when we were out with you, we talked about developing another layer -- an innovation vitality index if you will.

And that pipeline is growing nicely. And 5G for us in that particular pipeline could be as much as $100 million and we've only been working on it in the short period of time. And again the margins are really rich there. But they are fast-paced and we are under secrecy agreement but we are gaining traction with that. So we're very excited.

That's one of the things that I did want to mention. With all this destocking that's taking place and people are focusing on their businesses, we've had more, a very intriguing R&D conversations with our customers in terms of advancing the technologies. As you know when you are in a rapid growth mode like was seen in '16, '17, and '18 everybody is busy just getting the job done, while some time has been freed up and I can tell you that our R&D teams working with all our top customers. The discussions between the R&D organizations have been more robust than I have seen since 2015.

So I think sometimes that's a feeder for the future. And again we are the partner of choice with all the technology platforms we've amassed. And I did have a discussion about that in the last couple of calls. I mean right now, Ferro is sitting on what we call as roughly 55 leading technology platforms that we've acquired 34 on over the last 20 acquisitions.

So you can imagine with more free time, like that's out there and all the intellectual property, with all the market-leading companies there are a lot of interesting things going on that going forward will certainly help our current vitality index as base organic growth but then help us build the innovation vitality index.

But we will start reporting against I think we are going to feel comfortable we have a couple things that could hit here. But we are under secrecy agreement but as they commercialize we will start discussing that that vitality index does that help you?

--------------------------------------------------------------------------------

John Patrick McNulty, BMO Capital Markets Equity Research - Analyst [32]

--------------------------------------------------------------------------------

Yes, no that's very helpful, thanks very much for the color.

--------------------------------------------------------------------------------

Operator [33]

--------------------------------------------------------------------------------

We will get to our next question on the line from Kevin Hocevar from Northcoast Research.

--------------------------------------------------------------------------------

Kevin William Hocevar, Northcoast Research Partners, LLC - VP & Equity Research Analyst [34]

--------------------------------------------------------------------------------

Peter, I think you mentioned in the prepared remarks some - a shift in auto -- in the auto market away from ultramarine blue. Could you elaborate on that a little bit? And how much of the weakness in Color Solutions was driven by that versus how much -- I know you quantified that the tile destocking? Do you have a sense for how much the weather impacted the Color Solutions business?

--------------------------------------------------------------------------------

Peter T. Thomas, Ferro Corporation - Chairman, President & CEO [35]

--------------------------------------------------------------------------------

Probably slight -- I would estimate 2/3 of the Color Solutions piece was due to the slowdown with weather and maybe construction overall. The ultramarine blue discussion has to deal with variations of grays and blacks. And it seemed like the last 6 months there were certain ultramarine gray kind of automotive colors that weren't being produced as much. However, it's starting to come back. So basically anything that was negative with Color Solutions, from where we sit today, are turning positive. And that's why I mentioned, if you take all of our businesses including Color Solutions here, blow them up for the last 3 quarters from an organic perspective other than tile, we're looking at 2% to 3% organic growth, where we sit right now.

So it's coming back, I mean I think the -- that was a short term [key] we wanted to mention too because it's funny that in times like these we -- the type of color of an automobile that a consumer wants could vary depending on moods. We've learned a lot around the high end of the markets with the colors and the other things we do depending on economic situations will dictate the type of color orientation. So I think that the mood is getting better, when the mood is better the ultramarine blue, grays and violets will come back and we're starting to see that. Does that help?

--------------------------------------------------------------------------------

Kevin William Hocevar, Northcoast Research Partners, LLC - VP & Equity Research Analyst [36]

--------------------------------------------------------------------------------

Yes, very helpful. And on the price and raw material front, looks like looking at the Q raws they are a little bit of a headwind here in the first quarter and pricing pretty much a little bit more than offset that. How do you see that dynamic going forward? Do you expect raws to maybe flatten out in the second quarter and then maybe turn into a tailwind in the back half or -- and similarly on pricing, pricing seemed to hold up well given the -- relatively weak demand environment. Do you expect that to continue to offset and hopefully more than offset the raw materials as you try to get back margin that was lost over the last couple of years on that price raw dynamic?

--------------------------------------------------------------------------------

Benjamin J. Schlater, Ferro Corporation - Group VP & CFO [37]

--------------------------------------------------------------------------------

Yes, I think it will happen -- we feel it'll happen just as you described. It will flatten out in the second quarter. We'll start to see some benefits there. And then we expect to get sequentially better in the third and fourth quarter.

--------------------------------------------------------------------------------

Operator [38]

--------------------------------------------------------------------------------

We'll get our next question on the line from Mike Harrison with Seaport Global Securities.

--------------------------------------------------------------------------------

Michael Joseph Harrison, Seaport Global Securities LLC, Research Division - MD & Senior Chemicals Analyst [39]

--------------------------------------------------------------------------------

Just continuing on the questions related to ultramarine. I seem to recall that you were adding some additional ultramarine and micronized iron oxide capacity in Columbia that was supposed to be coming on stream early in 2019. Did that come on stream as expected? And kind of how does that impact the, I guess, supply and demand dynamics around ultramarine?

--------------------------------------------------------------------------------

Peter T. Thomas, Ferro Corporation - Chairman, President & CEO [40]

--------------------------------------------------------------------------------

The answer is yes. And quite candidly it's good that we've added that capacity and we're planning additional capacity expansions as we speak.

--------------------------------------------------------------------------------

Michael Joseph Harrison, Seaport Global Securities LLC, Research Division - MD & Senior Chemicals Analyst [41]

--------------------------------------------------------------------------------

All right, and then also maybe to just continue on some of the pricing discussion. You've been pretty aggressive and gotten some of the best pricing you've gotten ever in my history with the company, as I look over the past several quarters. Do you have any sense that in pigments or in tile or maybe in any of your other businesses, you've reached a point where you've pushed maybe a little bit too hard on pricing and maybe you're in situations where you're starting to see customers walk away or look for alternatives? Or you've pushed them intentionally too hard and lost some volume that way? Just maybe comment on that kind of pushing on pricing versus maintaining or losing volume dynamic?

--------------------------------------------------------------------------------

Peter T. Thomas, Ferro Corporation - Chairman, President & CEO [42]

--------------------------------------------------------------------------------

Well, now you just hit one of the reasons why we wanted to reposition the portfolio into the high-end market. The higher up we are in the markets the more our ability to raise prices and keep it. Because people realize they are paying for our technology. And at the end of the day, we always have competitors' intensity, like I have always joked with you in the past Mike, (inaudible) we have a nice fight in the telephone booth anymore that doesn't exist. We pick and choose where we want to play and then the high end of our position in every market segment we serve we can maintain a nice level pricing, and we're being orderly methodical about it.

If we choose, for whatever reason, to answer the second part of your question, do we look at every pound that goes out the door to every customer, the answer is yes. Do we know that for every manufacturing location, the answer is yes. Do we know what the gross margin is for every pound that goes out our plants, the answer is yes. And we use that in our marketing and sales activities to determine what our pricing policy would be in order to lift the margins to a point where they are acceptable. And if that's successful, it's great, if it's not that would be a leading indicator of the type of volume we would want to extract from the portfolio. But in this optimized environment, we will also remove the fixed cost. This will constantly enhance the portfolio of the company.

--------------------------------------------------------------------------------

Kevin Cornelius Grant, Ferro Corporation - Head of IR [43]

--------------------------------------------------------------------------------

Operator, we have time for one last question.

--------------------------------------------------------------------------------

Operator [44]

--------------------------------------------------------------------------------

Certainly, we'll get our next question on the line from David Begleiter from Deutsche Bank.

--------------------------------------------------------------------------------

David L. Begleiter, Deutsche Bank AG, Research Division - MD and Senior Research Analyst [45]

--------------------------------------------------------------------------------

Peter just back on the high-end tile coatings destocking. To be clear, did it continue into April?

--------------------------------------------------------------------------------

Peter T. Thomas, Ferro Corporation - Chairman, President & CEO [46]

--------------------------------------------------------------------------------

Yes, there were a couple of companies but not for the reason of just destocking. It's because some of the very high-end customers that are moving faster with the leadership positions in the larger tiles for construction and home use like for countertops or tabletops, they were a little more weaning out their old capacity, so they can reposition with the new stuff. It was more of a repositioning rather than a destocking if you will. That's how I would look at it.

--------------------------------------------------------------------------------

David L. Begleiter, Deutsche Bank AG, Research Division - MD and Senior Research Analyst [47]

--------------------------------------------------------------------------------

And how would you --

--------------------------------------------------------------------------------

Peter T. Thomas, Ferro Corporation - Chairman, President & CEO [48]

--------------------------------------------------------------------------------

Because those are the same customers, David, that as they're coming out of it, because of the gross margin of those products that's helping the absorption, as we discussed.

--------------------------------------------------------------------------------

David L. Begleiter, Deutsche Bank AG, Research Division - MD and Senior Research Analyst [49]

--------------------------------------------------------------------------------

And how would you quantify the impact in Q2 in Performance Coatings from either absorption issues or destocking issues or some combination of the both versus the $26 million and $9 million you had in Q1?

--------------------------------------------------------------------------------

Benjamin J. Schlater, Ferro Corporation - Group VP & CFO [50]

--------------------------------------------------------------------------------

David, it's Ben. So we should see that come back and improve in Q2 from a destocking perspective. As Peter said, most of that was out of the way in April and we should see sequential benefit in Performance Coatings in the second quarter both from volume absorption as well as raw materials.

--------------------------------------------------------------------------------

Peter T. Thomas, Ferro Corporation - Chairman, President & CEO [51]

--------------------------------------------------------------------------------

We would like to thank everyone for joining us on the call today. We appreciate your interest in Ferro. And we look forward discussing results with you again next quarter. Enjoy the rest of your day.

--------------------------------------------------------------------------------

Operator [52]

--------------------------------------------------------------------------------

Thank you very much. And that does conclude the conference call for today. We thank you for participation as we disconnect your lines. Have a good day everyone.