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Edited Transcript of FOE earnings conference call or presentation 28-Feb-19 1:00pm GMT

Q4 2018 Ferro Corp Earnings Call

Cleveland May 6, 2019 (Thomson StreetEvents) -- Edited Transcript of Ferro Corp earnings conference call or presentation Thursday, February 28, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Benjamin J. Schlater

Ferro Corporation - Group VP & CFO

* Kevin Cornelius Grant

Ferro Corporation - Head of IR

* Peter T. Thomas

Ferro Corporation - Chairman, President & CEO

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Conference Call Participants

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* David Wang

Deutsche Bank AG, Research Division - Associate

* Jacob P. Schowalter

Seaport Global Securities LLC, Research Division - Associate Analyst

* Michael Joseph Sison

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

* Rosemarie Jeanne Pitras-Morbelli

G. Research, LLC - Research Analyst

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Presentation

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Operator [1]

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Good morning. Thank you for joining the Ferro Corporation 2018 Fourth 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, Head of Investor Relations and Corporate Communications.

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

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Thank you and good morning, everyone. Welcome to Ferro's fourth quarter 2018 earnings conference call. This morning we'll be reviewing Ferro's financial results for the fourth quarter ended December 31, 2018. I am pleased to be joined today by Peter Thomas, 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 Investor 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 and our view may change as conditions and circumstances change.

Please refer to the forward-looking statements disclosure in the earnings release and the earnings presentation. Also, today's call will contain various operating results on both the reported and adjusted basis. Description of these non-GAAP financial measures and reconciliation are included in the earnings release and the presentation deck. We encourage you to view that information in conjunction with today's discussion. It is now my pleasure to pass the call over to Peter.

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

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Thanks, Kevin, and good morning, everyone. Ferro reported another strong year of growth in 2018. Revenue increased 15%, adjusted EPS increased 16% and adjusted EBITDA increased 12%. Ferro generated strong cash flow with free cash flow conversion of more than 51%. In addition, as of the end of 2018, we delivered our 10th consecutive quarter of organic growth. To the Ferro team around the world, I extend my congratulations on these excellent results.

Ferro's year-over-year improvement in financial performance demonstrates that we now have a portfolio of businesses substantially stronger than we had several years ago when we implemented our value creation strategy. We had elevated the quality of our portfolio by divesting non-core assets and making acquisitions that expand our leadership in higher growth, higher margin niche markets.

Now in the Dynamic Innovation and Optimization phase of our strategy, we are investing in advanced technology platforms within our portfolio to drive new product development and fuel organic growth. At the same time, we are advancing optimization initiatives to improve productivity and efficiency, such as the Americas manufacturing consolidation project we announced in January.

We are pleased with the innovation and optimization objectives achieved today and excited about the opportunities ahead. You can see the positive results produced so far and the favorable trajectory that has developed in the charts included on the first page of our earnings release. We believe Ferro is positioned for long-term sustainable value creation.

For 2019, we expect to continue to generate growth and revenue and profitability that compares favorably with our industry. Our peers are reporting softening in some market and we will not be immune to such condition. However, Ferro will continue to bring new products to the market as we expand into new markets and we will continue to optimize our operations. We remain confident that Ferro can favorably grow revenue and profitability in 2019 even if at a somewhat slower pace than 2018.

With all the talk about uncertainty in macroeconomic conditions, let's focus a minute on the optimization side of our strategy. Optimization initiatives are designed to enable Ferro to lift profitability even when we encounter softness in market conditions. We see significant optimization opportunities within our business today and we are moving forward with initiatives so that we can drive profitability even if broader market conditions soften. The Americas manufacturing optimization initiative that we announced last month is one such opportunity. This initiative is expected to contribute $8 million to adjusted EBITDA in 2019 and approximately $30 million by the end of 2020.

Now taking the global perspective on our optimization initiatives, over the past 2 years, we have consolidated 6 manufacturing sites in our facility, and by early 2020, we expect to consolidate an additional 7 manufacturing site, including those affected by the Americas manufacturing optimization initiative. In other words, we are working hard on optimization now so that even if market conditions weaken in the future, we can still deliver market-leading improvement in profitability.

Now let me say a word about the fourth quarter of 2018. In the fourth quarter, along with the raw material cost headwinds that we encountered during much of the year, we also experienced mix in customer order patterns that negatively impacted margins as we previously reported. Seasonal destocking and inventory repositioning were higher than usual, particularly by customers of our higher-end tile products.

Previously these customers were carrying approximately 6 months to 8 months of finished good, but with the destocking in the fourth quarter, this was reduced to about 3 months to 4 months. As a result, we experienced a negative impact of margins due to a decline in high-end volume and a relative increase in middle-market volume.

And as we previously reported, Ferro’s Performance Colors and Glass products were pushed into 2019 due to capacity utilization and footprint optimization initiative. While we were disappointed with these circumstances at the end of 2018, we are pleased at the way our business model delivered a strong year-over-year growth in revenue and profitability. We also were pleased with the cash flow generated by the business in 2018 which gives us flexibility to invest in acquisitions, buy back shares, and pay down debt as appropriate.

Now I'll turn to the performance of our 3 business segments with fourth quarter and full year. In the presentation deck, you can see summaries on Slide 6 and 7, our fourth quarter and full year performance for our 3 main business segments. Let's begin with Performance Coating. In the fourth quarter, Performance Coating volumes increased 7.7%, while net sales on a constant currency basis increased 12.8%.

Organic sales increased 3.8%. Adjusted gross profit declined slightly to $36.5 million. Gross profit margin declined to 20.3% from 23.1%, reflecting the shift in mix and volume resulting from the destocking and inventory repositioning that I mentioned earlier. For the full year 2018, Performance Coating volumes increased 11.9%, while net sales increased 24.5% to $733.9 million.

Organic sales grew 3.7%. Adjusted gross profit increased year-over-year to $166.7 million. Gross profit margin for the year was 22.7%, compared with 25.5% in the prior year. During 2018, the Performance Coating segment was affected by significantly elevated raw material pricing.

Now we expect the destocking that we experienced in the fourth quarter to carry into the first quarter of 2019, but we anticipate improvement in the remainder of 2019 as high-end market inventories return to their usual size. Before moving to our next business segment, I should point out that to counter the industry challenges we encountered during 2018, the Performance Coating team did a great job in implementing price increases, reformulating products and optimizing plant staff.

Now let's look at our Performance Colors and Glass segment. In the fourth quarter, Performance Colors and Glass volumes declined 2.1% with net sales on a constant currency basis down 2.7%. Organic sales declined 4.1%. Adjusted gross profit increased to $38.7 million. Gross profit margin declined to 32.9% from 34.5%.

For the full year, Performance Colors and Glass volumes increased 12.7%, with net sales on a constant currency basis up 8.1% to $487.5 million. Organic sales grew 6.4%. Adjusted gross profit increased year-over-year to $167.5 million. Gross profit margin for the year was 34.4%, down from 35.9% in the prior year.

For over a year PCG's growth in the auto market has been strong as demand for our product applications increased and they took market share. In the fourth quarter of 2018, our PCG auto sales were down 2.7% as global auto builds declined approximately 6%, mainly as a result of a slowdown in Asia and Europe. For the full year 2018, our PCG auto business grew 7.4%, continuing our long track record of market outperformance driven by Asia which was up 14% and Europe which was up 8% and offset by a decline in the U.S. of about 7%.

Demand was muted in the quarter for Ferro's electronic materials with sales down 3% year-over-year. For 2018, sales increased 10.4%. Looking ahead, we are excited about the growth potential for this business. Our electronic materials go into sensors, dielectric and capacitors which are used in fast-growing areas like intelligent automation. The number of sensors per product and the variety of markets, for example, has been rising as products are made more intelligent and this, in turn, drives demand for our high-performance materials used in sensors.

Fourth quarter sales for our industrial product line declined by 10.3%, mainly as a result of customers delaying the orders for our Dip-Tech printers as they anticipated new printer technology that we unveiled late last year. For the year, industrial sales increased 11.2%.

Ferro is a technology leader in functional glass coating. We are leveraging our technical knowledge and innovation capabilities to fuel future growth in most of the markets that are in these megatrends including intelligent automation, 5G, smart cars and LED.

Now turning to the Color Solutions segment summary. In the fourth quarter, Color Solutions delivered strong sales and profit growth. Net sales on a constant currency basis increased 19.4% while volumes were down 1.2%. Organic sales increased 14.7%. Adjusted gross profit increased to $33.4 million.

Gross profit margin expanded to 34.1% from 31.1%. For the full year 2018, Color Solutions net sales increased 7.8% to $391 million, while volume was down 5%. Organic sales grew 5.6%. Adjusted gross profit increased to $129 million. Gross profit margin for the year increased to 33%, up from 32.5% in the prior year.

Fourth quarter sales growth for the Color Solutions business was due in large part to the continued strong demand for our surface technology product. We are seeing robust demand in this business from memory chip makers who use our highly engineered (inaudible) in their manufacturing process.

We experienced a softening in demand for full colors which are usually have been granular as customers worked on inventories due to slower housing construction. Demand for [CITPs] used in automotive applications also declined from a year ago. However, demand for our special pigments used in military application was strong.

Now a brief comment on our balance sheet. We are taking a prudent orientation to our balance sheet maintaining the leverage posture. We intend to deploy capital as we deem most appropriate for acquisitions, share repurchases and debt repayment.

So to sum it all up, Ferro delivered another very good year in 2018. We showed strong growth in revenue and profitability and generated significant cash flow. And again, I extend my thanks and congratulations to our associates around the world for another strong year.

With that, I'll turn the call over to Ben for his comments.

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

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Thank you Peter, and good morning everyone. I'd like to start out this morning discussing our consolidated financial results for the fourth quarter and full year 2018. Please note that the non-GAAP numbers I refer to are on an adjusted basis and growth rates mentioned on a constant currency basis.

All comparisons address the fourth quarter and full year of 2017. The financial highlights and results can be reviewed on Slide 3, 4 and 5 in the presentation accompanying today's call, which you can find on ferro.com in the Investors section.

Starting with the fourth quarter, we grew net sales 9.1% to $395.5 million with organic sales growth of 3.6%. Adjusted gross profit increased 3.5% to $108.8 million. Adjusted SG&A expense was $66.4 million or 16.8% of net sale. We grew adjusted EBITDA by 6.4% to $56.1 million or 14.2% of net sales and adjusted EPS increased 13.8% to $0.33.

Now turning to Slide 5, I'll go through our full year 2018 performance. We grew net sale 14.9% to $1.6 billion. Adjusted gross profit increased 7.4% to $462.3 million. Adjusted gross profit margin was 28.7%. Adjusted SG&A expense was $257.2 million or 16% of net sale.

We grew adjusted EBITDA by 12% to $259.1 million or 16.1% of net sales and adjusted EPS increased 16.3% to $1.50. With that, I'll review onetime adjustments for the fourth quarter and provide an overview of certain items within our financial statements.

For the fourth quarter, there were a few non-GAAP adjustments primarily related to our corporate development, acquisition and optimization activities, as well as our annual mark-to-market adjustment for our pension and other post-retirement benefit liability.

First, in cost of sales, we have adjustments of approximately $3.7 million for the fourth quarter, primarily due to acquisitions and costs related to optimization initiatives. In SG&A, we have onetime adjustments of $4.6 million in the quarter consisting of legal, professional and other expenses related to certain corporate development activities, certain optimization initiatives, including the manufacturing optimization we announced in January of this year.

Turning to restructuring and impairment, there was an adjustment of approximately $2.9 million in the fourth quarter related to actions to achieve our ongoing optimization initiative and acquisition synergies. In the quarter under other income and expense, we had an adjustment of about $17.6 million. This was primarily related to pension and other post-retirement mark-to-market adjustments of $18.3 million with an offset in earn-out adjustments related to acquisition that are beyond the measurement period.

Finally, we have adjusted out or removed a benefit in the fourth quarter of approximately $4.5 million as a result of clarification to the Tax Cuts and Jobs Act and the revaluation of certain tax asset in our Americas region. The fourth quarter adjusted SG&A expense was $66.4 million or 16.8% of net sale, compared with $67.8 million or 18.7% of net sale in the prior year quarter as stated on a constant currency basis.

Newly acquired businesses accounted for the increase. We continue to keep good operating leverage as we grow the top line while maintaining relatively flat SG&A at the base company level. Interest expense for the quarter was $8.7 million compared to $7.8 million in the prior year quarter and for the year, interest expense was $33 million compared to $27.8 million in the prior year.

We ended the year with an adjusted tax rate of 22.7% compared to a 27% tax rate in 2017. The decline in the rate year-over-year was primarily driven by the utilization of fully valued tax credit and the release of certain valuation around. We do not currently expect these impacts to repeat in 2019.

This brings me to cash flow. We were very pleased with the efforts our team has made to improve the efficiency of the balance sheet in 2019. For the fourth quarter, adjusted free cash flow from continuing operation was an inflow of $146.1 million, which compares to an inflow of $55.5 million for the prior year quarter. For the year we improved our adjusted free cash flow by 105.5% to $189.1 million, compared to $86.4 million in the prior year.

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 significant optimization project, acquisition-related items and restructuring activity.

The most meaningful component for the full year 2018 are as follows; starting with GAAP net income of $80.9 million, we had $57.6 million of depreciation and amortization; $21.9 million from working capital; $15 million of change in other balance sheet items; $7.5 million of other non-cash P&L items to arrive at cash generated from operating activities of $182.8 million on a GAAP basis.

Then we subtract $80.6 million of capital expenditures and cash received on other receivables of $7 million to arrive at $109.2 million of free cash flow for the year. Our practice has been to adjust this number for cash flow related to our strategic activities. These include, one, cash related to our optimization project; two, M&A-related cash flow; and three, cash flow restructuring programs.

The quantification of those 3 adjustments for the year are as follows; $58.4 million for the optimization projects; $12.3 million related to M&A; and $9.2 million related to restructuring. When we add these items back to our GAAP numbers, this brings adjusted free cash flow for the year to $189.1 million or 73% cash conversion. I'll also note that this figure reflects the benefit of approximately $57 million from the AR facility we closed in the fourth quarter. Without that benefit, cash conversion would have been 50.9%, consistent with our increased guidance.

Next, I'd like to share the company's capital deployment activity in 2018. In the fourth quarter, the company repurchased approximately 660,000 shares for approximately $11.8 million. In the year, the company deployed approximately $145 million in investment. The company repurchased 1.5 million shares for $28.8 million. We intend to continue repurchasing shares as circumstances improved and prudence warrant. In the year, the company also invested approximately $75 million on acquisitions and $41 million related to the optimization project we announced last month. And finally, the company ended the year with leverage of 2.8x, consistent with our expectations of being less than 3x.

So this concludes my prepared remarks on the fourth quarter and the full year for 2018. Now I'd like to spend some time reviewing our 2019 guidance. We expect to deliver sales growth in the range of 3% to 4% or 5.5% to 6.5% on a constant currency basis. Adjusted gross profit margin within a range of 30.2% to 30.5%, adjusted SG&A as a percentage of sales of 16.6%-16.8%. Other income and expense in the range of $5.5 million to $6.5 million. Interest expense to be in a range of $36 million to $39 million and we expect our tax rate to be between 26.5% and 27.5%.

These metrics translate to 2019 full year guidance of adjusted EBITDA in a range of $280 million to $290 million, which would be up nominally 8% to 12% or 10% to 15% on a constant currency basis over 2018. Adjusted EPS in a range of $1.55 to $1.65, an increase of 3% to 10% or 7% to 14% on a constant currency basis over 2018 and adjusted free cash flow conversion between 45% and 50%.

This cash flow should yield between $125 million and $140 million of adjusted free cash flow for 2019. From that range, we will subtract additional spending on the optimization project we announced last month and known restructuring actions. This cash generation, we anticipate leverage being 2.2x to 2.5x at the end of 2019 before any acquisition-related spending.

To be consistent with our previous practice, 2019 guidance reflects foreign exchange spot rate as of 12/31/2018. At a $1.147 for the euro, we have provided FX sensitivity 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 estimated that 1% overall change in foreign currency exchange rate 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 the sensitivity on euro, a 1% change would impact operating profit by approximately $1.1 million to $1.3 million.

At this point, keeping with prior practices, I would like to spend a few minutes bridging our adjusted EBITDA and EPS guidance. Starting with adjusted EBITDA of $259 million from 2018, you add organic growth of $5 million to $7 million, then you add $7 million to $9 million for optimization programs. Then you add $8 million to $10 million for price versus raw material tailwind. Then we add another $18 million for the acquisitions we completed in 2018 and finally, we subtract a headwind of $7 million due to FX. The sum of those items to the 2018 adjusted EBITDA of $259 million, equals our guidance range of $280 million to $290 million.

Now turning to our walk for EPS, starting at our adjusted EPS for 2018 of $1.50, we add $0.03 to $0.05 from organic growth, then we add $0.04 to $0.06 for our optimization program. To that, we add $0.05 to $0.07 from acquisitions we've completed in 2018. Then we add $0.05 to $0.07 for our price versus raw material tailwind and then we subtract $0.04 to $0.05 for the change in our tax rate from 2018 and subtract $0.03 to $0.04 for increased interest expense. Finally, we subtract about $0.05 for FX headwind. The sum of those pieces to the 2018 adjusted EPS of $1.50 equals our guidance range of $1.55 to $1.65 for 2019.

Further, I'd like to give some context into how we view the quarters for 2019. We expect the second and third quarter to be our strongest earning quarters similar to the earnings distribution in 2018 on an adjusted basis. Given the extent of the destocking in Performance Coatings in the fourth quarter and into the first quarter of 2019, we expect it to impact the first quarter's earning. We would expect the first quarter adjusted EPS to be in the range of 16% to 18% of the midpoint of our full year 2019 guidance range of $1.55 to $1.65.

In context, we are very pleased with the performance of the business in 2018 and a sustainable revenue and earnings growth. We are pleased with the way the business is positioned as a leading technology-based functional coatings and color solutions company and we remain focused on keeping the business agile to adapt to changing market condition.

With that, I'll now turn the call over to Kevin for Q&A.

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Kevin Cornelius Grant, Ferro Corporation - Head of IR [5]

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Operator, please open up the call for our first question.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Rosemarie Morbelli of G. Research.

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Rosemarie Jeanne Pitras-Morbelli, G. Research, LLC - Research Analyst [2]

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So just starting with something Ben just said, it looks as though if my math is correct that the first quarter EPS is going to be around $0.28 which compares with $0.36 last year. So what makes you comfortable looking at the full year, what are the improvements you are looking at in the next 3 quarters because you have to generate quite a lot of growth in those last 3 quarters? And I know Ben gives us the details of the pluses and minuses, but a little more of the underlying operations would be -- and markets would be helpful.

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

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Hi Rosemarie, it's Peter. It all starts with the fact that we did notice continued destocking at our higher-end markets, not only within tile, but a couple of the other businesses that continued through the first quarter and more importantly a lot of the tile products at the high end continued through the month of February. And if you take a look at that destocking in total for the company in the first quarter, it really makes up the difference from last year and you heard in my prepared remarks the magnitude of the destocking and it's actually a good news/bad news story when you reposition yourself in the higher end markets because companies typically have more finished goods inventory because they typically carry more SKUs because of the diverse market applications and that was the first time that we've seen something like that. In fact, you heard me mention that the high-end tile producers, which by the way is as close as we get to a consumer product that has fashion orientation to it that they typically would have 6 months to 8 months of finished goods versus the bottom cut or the mid-cut, which could be 2 to 3 months. So when there's an inventory destocking that we've seen for the first time since '16, it usually goes through the fourth quarter into the first quarter.

So we feel very comfortable where we sit today that all of destocking has taken place across all of our high-end markets throughout the business and we're already starting to see a repositioning of inventory, not just filling, there's also another dimension of destocking with higher-end markets that they reposition their inventory, their mix changes and that's why it typically takes a little bit longer for those markets because they -- since it is product-driven and it's some -- in the case of tile fashion statements they have to purge out and then take a look forward through their S&OP process what styles will be in demand over the course of the year and that repositioning had to take place and we're already starting to see the build. So we feel comfortable that the destockings over, we do see a demand picking up. You'll see more of it moving into certainly the second quarter. And why do we feel comfortable that we'll deliver? Again, it gets back to our model around our delivery and commitment of GDP plus 1 to 2. We'll continue to drive new products where we've seeded a lot of new application areas, you’ve seen it in Color Solutions where our growth rate was pretty solid in the fourth quarter and for the year. So our expectation again is that we will continue to outperform the market. And again, last year you saw it with automotive where we were up 7% while the market was down, we're going to be up again this year in that space where most of the reports suggest there will be a contraction in automotive. Yes, so if you take a look at 5 or 6 different submarket segments where we participate, we will continue to outperform the market and we're -- are launching a lot of new products this year. So we feel very good and confident that we'll deliver what we're saying.

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

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Rosemarie, the other thing to just add to what Peter said in terms of I think what Peter went through was a lot of context around the first quarter versus the other 3 quarters in 2019, just a data point on the first quarter versus last year is as you recall, the euro last year in the first quarter was much closer to $1.21, $1.22 versus $1.145 or so that we have in guidance for this year. So that $0.36 from last year has got $0.04 or $0.05 of currency in it.

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

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Okay. That is helpful. I am assuming that you expect the impact from FX to diminish as the year unfolds maybe in the second half?

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Benjamin J. Schlater, Ferro Corporation - Group VP & CFO [6]

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Of course, yes, as those rates get tighter that will happen in the third and certainly in the fourth quarter.

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

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So Peter, I apologize if you talked about it, but it came out -- came through very muddled, so I couldn't get everything you said. So when you talked about the high-end tile producers usually having 6 months to 8 months of inventories, where do they stand now and where does Ferro stands in the products that are sold into that particular market?

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

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Yes, so what we've noticed as a contraction about 50% through the fourth quarter and through February, so they're probably standing on our average estimate is somewhere between 3 months and 4 months and the expectation is through the course of the year, they'll ramp up to what would be a traditional amount. And that's why we feel comfortable that the volume will be coming back.

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

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And where is your inventory level? Is it about 3 months to 4 months as well? Did you come down at the same rate?

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

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Yes. You mean our…

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

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Right. On Ferro's inventory?

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Peter T. Thomas, Ferro Corporation - Chairman, President & CEO [12]

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At the customer here.

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

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Both please?

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

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At the customer level, they may only take a couple of months of our inventory and they're starting to rebuild their inventory level at that point. And as it relates to our tile inventory, do we discuss that individually? No, we don't go through that with each individual. Let me put it to you this way, we've done a very good job with cash conversion as you've seen. So we have ratcheted down our inventory across all the business segments.

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

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And one last question and then I'll get back in queue. Could you talk about the countries where you see the most issues in 2019? We know Europe is slowing, we know Asia Pacific is slowing, or at least China is. So if you could give us a little more, that would be helpful.

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

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Yes. So we see everything that all of our peer group sees and everything mentioned. However, what I will say again, because of our business model, we will continue to outperform the markets where we participate. So in China, most of what we see is a slowdown of automotive which was very important to us last year at about 14% growth. And this year, we do expect growth in that area not at the 14% level, but certainly above what the pundits are suggesting is 2% to 3% growth there. So we do feel good. Why do we feel good? It's for 2 major reasons. One, what you have to think about with Ferro is the content, forget about -- I think we need to make sure everyone understand, don't focus on inventory, don't focus on builds. You need to focus on content. The more glass the car has the more demand for Ferro glass. And I'll give you an example. If you look over the past 5 years, Ferro's content has increased by 30% because of more glass in a lot of the higher end cars in particular. I mean you see a lot of the cars have more glass roofs, panoramic views and that's good for us. So focus on the fact that Ferro, one, has developed new products that outperform the competition. And number two, the demand for our content is very significant. And so we feel really good about that both in Asia and also Europe where the 2 areas where people believe that automotive is slowing, we will not slow down as much. The third piece, just to give you an example, again in Mexico, which is pretty much truck-oriented, Ferro is the leader in that area for our types of products for truck production that's indigenous to Mexico and also export to the U.S. So we feel really good about that particular model. And again, every one of the businesses, I do want to mention this, we increased our market share across every business last year and we did it through new product introduction aligned with the market leaders in the spaces where we participate. It wasn't done on price. And again, don't forget, that's the backbone of our GDP-plus model because we're doing it now with the fifth year of a very strong vitality index, which means that we have all the technology with the market leaders and they typically launch this portion amount of new products. Of course, that carries us with them. So that gives them -- the math is on our side and it will be again this year as you can see by the growth that we showed between 5.5% to 6.5% and Ferro's proxy by the way, based on the data that we use is about 2.6%, 2.5%. So everybody should feel good about our ability to continue with another 4 quarters of organic growth.

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Operator [17]

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Our next question comes from Mike Sison of KeyBanc.

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

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Price mix is going to be a big -- a bigger plus this year. Can you maybe walkthrough which raw materials and maybe which segments will capture that positive price mix?

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

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Sure, Mike. For the most part, Mike, we're going to see the benefit in Performance Coatings. That's where we saw most of the headwinds last year. So if you think about last year, we saw a net headwind of about $9 million. Most -- the vast majority of that was in Performance Coatings. In fact, the other 2 businesses were about to push. And the tailwind that we'll see this year, also we'll see a lot of that reverse around. A lot of that we'll see in cobalt that we've seen a significant movement in cobalt from the first 2 quarters of last year. And so the biggest piece of the benefit that we'll see this year will be in cobalt. We're seeing it across a number of raw materials, but that's the biggest one.

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

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And then, Peter, can you maybe talk about the acquisition environment and I think your annual goal is to pick up $100 million in sales per year, how does that look? And any particular areas you're focusing on to add to your portfolio this year?

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

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Yes, so I'm glad you brought that up this -- we want to make sure, I think you caught it in Ben's prepared remarks, where we would talk about all these -- our framework would be a $100 million to $150 million of invested capital for our deals. And if you noticed last year, we introduced the concept of $100 million to $150 million of invested capital in the strategic investments. And the reason why we did that is because we knew we were spending more money on our optimization program and also we were buying back stock. And because of the sensitivity about the optimization project, we didn't really want to bring that up earlier and since we just started to buy back the stock we want to make sure that everyone understands, we're being very judicious and prudent about how much money we spend. So right now we would look at optimization projects -- additional optimization projects, more stock buybacks here in the near term, as well as our acquisitions to account for that $100 million to $150 million of invested capital for let's call strategic investment. However, that doesn't say last year we spent $75 million in deals that doesn't mean that we didn't have up to $150 million to $200 million, because at any point in time we do, and we continue to work on a whole range of deals and our pipeline has increased once again.

And what you'll hear us talk about aside from the -- we always talk about 5 that we're always in discussion with, which we are. We consider and honestly tell you that we're engaged with 5 different activities with discussion. But as it relates to the magnitude of the dialogue, what we've also decided is that because we have beefed up our M&A department and more people are engaged, we can probably take on a little more activity around having discussions so that we can increase that by a little bit with the idea that we may spend a little more time on looking at things that are not so much to add technology platforms, like we have the 20 that we have acquired, but something now that's more meaningful around extending the 3 businesses. Okay, what we mentioned -- and this is a very important point, that those 20 acquisitions that we did over the past 4 years if you really dissect them, you'll find that, as we stated, that we were acquiring leadership technology positions that we felt we needed to win moving forward. So when we started this journey, Ferro had a market leadership in about 17 different technology platforms and with the 20 acquisitions, we now have 51. And our technology portfolio is very, very sound and we believe we've covered all the gaps that we would feel existed in our leadership positions in a way that for the next 3 years to 5 years to 7 years, we're going to be in pretty good shape. So it's probably time for us to look out at things that might be a little bit bigger, not gigantic, I'm not talking about nearly hundreds of millions of dollars of things, but maybe something that's a little bit bigger than some of the deals we have done, to put equal time in those as well as the smaller deals, just to keep the momentum going. So we have about 13 of those right now that we're having conversations internally and externally with. So we feel pretty good about the pipeline, it still remains rich and we feel very good about that.

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Operator [22]

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Our next question comes from Mike Harrison, Seaport Global Securities.

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Jacob P. Schowalter, Seaport Global Securities LLC, Research Division - Associate Analyst [23]

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This is Jacob on for Mike. Sticking with M&A, just wanted to get an update how the integration is progressing on the acquisitions you've completed over -- in the second half of 2018, any notable success stories you want to point out?

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Peter T. Thomas, Ferro Corporation - Chairman, President & CEO [24]

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The acquisitions are running fine. The integrations are fine. If you look at -- we'll be running a make good for our Board coming up in April, and we were just reviewing it yesterday as a matter of fact and we felt very, very good on our presentation to the board on what we've been able to accomplish in terms of delivering against our synergy commitment. Remember those 20 deals represent about $150 million of synergies which would be over a 5-year period at the onset of when we acquire them. And what I can tell you about being specific is that we're ahead of schedule with delivering against those synergies. And we're not finding anything that's abstract or anything that concerns us and so we feel pretty good on our integration model and our ability to absorb those entities in a very efficient and orderly, methodical way.

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Jacob P. Schowalter, Seaport Global Securities LLC, Research Division - Associate Analyst [25]

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And then we've touched on the destocking and high-end tile coating. I was curious the underlying demand trends that you guys are seeing as we move through this destocking period, has that sort of stayed stable? Or has it improved in January and February? Maybe some comments on the underlying demand.

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Peter T. Thomas, Ferro Corporation - Chairman, President & CEO [26]

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Yes, so what's really interesting and this is a good point, thanks for asking it, if you look at our tile business for the year, all in on constant currency on a revenue basis, it was up 31.8% including the acquisitions, but it was up close to double-digit regardless, even in the fourth quarter. So the demand is still there, but remember we have a bifurcated kind of a business model with tile we have high-end and we also have the mid-cut and there still remains some straggling of lower end. And the demand at the lower end and the mid-cut continues to -- continued to be okay through the fourth quarter as you noticed because I mentioned that our revenue in volume was up in the fourth quarter for that business, but it was the high-end. So the good news is we expect a very, very good growth for the tile business again this year all win with all the businesses. And as I mentioned to Rosemary, we can see that the -- the higher end is starting to pick up, and always remember that when things go bad, the high-end will still be in demand because of the nature of the technology and you're talking about a differential of high-end tiles can range on a square meter price basis anywhere between $25 and $35 a square, yet the mid-cut that could be $8 or $9, the low-cut could be $3 to $5 and even when times are tough people will spend -- those who have the withal will continue to buy the high-end tile. We see no change in that dynamic other than the destocking that took place mostly because demand did slow down overall in the second half of the year and those inventory levels were built because demand in '16-'17 and the first half of '18 were pretty strong. And there are a bunch -- there was a new -- recently there was a tile show and that's typically where all the new designs take place and that's one of the reasons why things started up so late where all the new fashion was highlighted and put on display, and so all those customers are now ramping up with their new product line. So we feel really good about the continued growth in that business because of our leadership position, number 1. We have a low-cost position; and number 3, here we do have the market leadership position in the high-end now.

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Operator [27]

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Our next question comes from David Begleiter, Deutsche Bank.

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David Wang, Deutsche Bank AG, Research Division - Associate [28]

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This is David Wang here for David. I guess specifically on Europe, how is the underlying demand by end-market and country?

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Peter T. Thomas, Ferro Corporation - Chairman, President & CEO [29]

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Yes, so as everyone has noted, Europe we see a general slowdown in Europe, you can clearly see it particularly with us we would notice it more than anything in the pigment side of the business, but relative to what's coming out in terms of GDP growth for Europe or by automotive or construction, what we can tell you, we do see a softness, but again compared with the data coming out in every sub-segment, whether it's auto, whether it's construction, whether it's pigments, whether it's deco, whether it's sensors or whatever, we are outperforming the market as it's being presented by the trade documents. So we're -- we see it, but again our model is when things are really good we'll do better, when things are soft, we won't be as soft. And we're clearly seeing that now. And I think that's one of the really good things about what we've created here over the past 6 years is that in an environment which when things are great, we do better, if things are soft, we won't go down as much and that's exactly what you're seeing in 2019. Exactly the case that really underscores the value that we've created in this model to withstand headwinds like this. And the fact that we have a robust pipeline and optimization activities whether we get it from revenue, we certainly have a combined activity around cost management and optimization and greater efficiency and that's what you're seeing in '19. You're seeing the benefit of that major optimization program in addition to continued vitality index of about that 20% that's producing what we believe is a very strong guidance relative to the space.

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David Wang, Deutsche Bank AG, Research Division - Associate [30]

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And just on Q4 Color Solutions, I guess you guys have a good positive volume mix number in Q4 and you talked about volume down slightly. Does that mean there's that big mix contribution in Q4 for Color Solutions, and if so where does that come from?

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

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Yes. So I think I mentioned in my prepared remarks, but let me underscore it. With our vitality index and all of our R&D programs, we introduced the topic maybe about a year ago, a little bit more ago that we might have somewhat we define as being off-cycle activities, which means that if we have a new product introduction particularly in the high-end spaces, it takes time for gestation to take place in those spaces because of the high-end nature. And we introduced some new products in the beginning of the year that are finally starting to gain some traction in the second half of last year particularly in the fourth quarter now moving into this year that we have a hit on. And in this case, in that business, it has to deal with surface technologies and our position with proprietary and very interesting and technologically advanced polishing activities that we can't talk too much about, but certainly that has helped us in the second half of last year, mostly in the fourth quarter because it's starting to ramp up.

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Operator [32]

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Our next question comes from John McNulty, BMO Capital Markets.

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Unidentified Analyst, [33]

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This is [Pavasla Dia] for John. So the first one, regarding the 7 plant rationalization you mentioned, what are the segments that should benefit from this the most and can you remind us how the $30 million of profit lift is spread through the divisions?

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Peter T. Thomas, Ferro Corporation - Chairman, President & CEO [34]

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Here's what we can say on this, every business unit that we have will benefit from that optimization activity. And if you think about the remarks over the past 2.5 years there was more of we are going to create a state-of-the-art kind of a manufacturing capability that stretches across, one, Ferro in a way that makes us the most efficient producer with each one of those market segments with the most contemporary equipment automation; our supply chain activities; everything is very, very efficient and very contemporary. So each one of the businesses will benefit from that activity and that's probably something that is very important because we should do that and be the most efficient producer as the market leader around the world.

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Unidentified Analyst, [35]

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And then can you speak to the efficiency program in a bit more detail as in like do you have the ability to accelerate that program a bit given the slower macro backdrop right now?

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Benjamin J. Schlater, Ferro Corporation - Group VP & CFO [36]

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Yes. So the program continues to be -- to operate on schedule. Obviously, we're pushing that to be sort of as planned. The rollout of that new program is important from a cadence perspective, so we're actually marching pretty close to what we thought we would.

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Unidentified Analyst, [37]

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One final question from my side. Regarding some of the timing issues you saw in the color and glass business tied to some of the restructuring moves, how should we be thinking about that going forward? Do you foresee any other temporary blips as we progress through the year? Or was this kind of like a one-off?

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Peter T. Thomas, Ferro Corporation - Chairman, President & CEO [38]

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Yes. I think what's really important to note is that what you're saying is that our new product development pipeline program is working extremely well, maybe quite candidly a bit better than we might have anticipated. And yes, we have challenged a little bit here that the demand was a little bit greater than we could still fill in the short term, but we're adjusting to it and we'll be able to handle it going forward. And a lot -- that happens a lot with a lot of the new high-end technology activities across all businesses that it's maybe let's call it new to the world type activities and not just new to Ferro or just new-new, but new to the world. Sometimes you have some startup delays and we just have to catch up to it. And we had a little bit of a blip in the fourth quarter, but we feel very good here that we have that under control.

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Kevin Cornelius Grant, Ferro Corporation - Head of IR [39]

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Operator, we have time for one last question.

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Operator [40]

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Our final question comes from Rosemarie Morbelli of G. Research.

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Rosemarie Jeanne Pitras-Morbelli, G. Research, LLC - Research Analyst [41]

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Peter, I was wondering talking about your comments regarding acquisitions. What are we thinking -- what are you thinking in terms of potential size of Vetri, Nubiola, something bigger? And how much leverage are you willing to take in this uncertain environment?

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

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So what we're thinking, Rosemarie, again, I think you understand the model from the very beginning because you've been with us and as we started this process, we had a lot of discussions back in '12 and '13 about how we needed to build this business to be a successful model that was going to be orderly, methodical and we would define different phases and really define a bunch of strategic priorities around those phases in a way that everyone in the company was aligned, they were incented around those phases and we would just continue to move to a point where we are today where we could completely have a different Ferro. And you can see that particularly last year we had the best year in the history of our company particularly with most of the financial metrics, as you know we've double-digit. And of course, our stock doesn't reflect that. But of course, we did have double-digit growth in all those important financial metrics. But again we're at a point now where we feel very comfortable we plugged all the technology gaps. So now it's sort of like we need -- we want to add some more smaller technologies, but we'd like to do something a bit more meaningful. Again, maybe I would use Nubiola as a case that it'd be good to have another Nubiola-type. The financial metrics like that maybe a little bit bigger. But nothing that should cause anyone a concern because at the end of the day, quite candidly, Rosemarie, we worked really hard last year to prove to our shareholders that we are prudent around managing equally the balance sheet and the P&L. I mean, we have been able to manage this very, very well. And at the end of the day, if you asked us what's important to P&L or the balance sheet for the last half of last year and the fourth quarter, we would tell you it's the balance sheet. We had a commitment of delivering a certain level of cash and we wanted to get our leverage down, we did that. So our teams are very good around understanding that dynamic of, hey, there is a P&L time, there is a balance sheet time, but in the spirit, as we have to keep feeding ourselves every year. So even in that environment where some may think it was a little abstract for us, it shows you the strength of our business model that, one, we did grow double digits in every financial metric and shame on us for coming out with a guidance last year was so far more robust than everybody else that we end up kind of getting penalized for it. But at the end of the day, we delivered a record performance and we delivered the cash we said, we still had strong P&L performance. So again, right now, we're in a zone of we have to really, really in this environment watch the balance sheet and watch cash. We're not going to do anything stupid, right Ben?

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Benjamin J. Schlater, Ferro Corporation - Group VP & CFO [43]

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Yes. I mean, I think I would just underscore what Peter said there. We feel good about where we ended the year last year from a leverage perspective. You heard us go through sort of our leverage targets for the end of this year. I would say that what's included in those leverage targets is obviously the cash flow guidance. We would typically also have cash charges that we would add back to that for optimization and the restructuring charges, those charges we would -- in 2018 we would expect from a -- we announced these significant optimizations last month. We would expect additional CapEx related to that this year of about $20 million in addition to additional restructuring charges of about $10 million to $15 million. And then we have charges from a deal's perspective to get those synergies of let's say another $10 million to $15 million. And what we've done is we've built all of that into our leverage target this year. So the leverage targets that we covered on the call, we feel really good about, including sort of those onetime cash charges that I just went through. The only thing that wouldn't be included in there is any deal activity and then our share repurchases which to date this year, we've already made $20 million worth of share repurchases. So we're very, very focused on leverage. You will see leverage spike in the first half of the year. We could get up somewhere between let's say, 3.2x, 3.3x in the first half of the year before we then burn that off back to the previously mentioned target. So that's just to underscore sort of what Peter was mentioning around our focus around the balance sheet and leverage, in particular, going forward.

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Rosemarie Jeanne Pitras-Morbelli, G. Research, LLC - Research Analyst [44]

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And just wondering if you're still comfortable with your 2020 targets?

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Benjamin J. Schlater, Ferro Corporation - Group VP & CFO [45]

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Yes. We remain committed to those, Rosemarie. As we announced in November of 2017 our expectation was that we would continue the key pillars of those if you would is whatever the market does, we're going to do 1% to 2% on top of that. And then on top of that from a optimization perspective, we're going to get 2% every year. And we are -- we remained committed to those metrics through 2020.

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Kevin Cornelius Grant, Ferro Corporation - Head of IR [46]

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We would like to thank everyone for joining us on the call today. We appreciate your interest in Ferro and we look forward to discussing our results with you again next quarter. Thank you.

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Operator [47]

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Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines. Thank you and have a good day.