Ferro Corp. Q4 2008 Earnings Call Transcript

| About: Ferro Corporation (FOE)

Ferro Corp. (NYSE:FOE)

Q4 2008 Earnings Call

March 3, 2009 10:00 am ET


Jim Kirsch - Chairman, President & Chief Executive Officer

Sallie Bailey - Vice President & Chief Financial Officer

David Longfellow - Director, Investor Relations


Michael Harrison - First Analysis

Jason Miner - Deutsche Bank

Mike Sison - KeyBanc

Jonathan Grassi - Longbow Research

Robert Felice - Gabelli & Company


Good morning and welcome to the Ferro Corporation’s 2008 full year and fourth quarter conference call. All participants will be in a listen-only mode until the question-and-answer session. (Operator Instructions) This conference is being recorded. If there are any objections, please disconnect at this time.

Now, I would now like to turn the meeting over to your host, Mr. David Longfellow, Director of Investor Relations. Mr. Longfellow, you may begin.

David Longfellow

Good morning and welcome to the Ferro Corporation’s 2008 fourth quarter earnings conference call. Today, we will provide information about our financial results for the full year and the three-month period ended December 31, 2008 and actions Ferro are taking to address the current economic challenges.

Joining me on today’s call are Jim Kirsch, Chairman, President and Chief Executive Officer, and Sallie Bailey, Vice President and Chief Financial Officer. Following their prepared remarks, Jim and Sallie will take your questions.

I hope you have all had an opportunity to review the press release we issued yesterday. Copies of the press release are available on the Investor Relations portion of Ferro’s website, which is located at www.ferro.com. Also available on our website is a reconciliation of reported results to non-GAAP amounts discussed on this conference call.

Before Jim begins, I want to remind you that statements made on this conference call about the future performance of the company may constitute forward-looking statements within the meaning of federal securities laws. These statements are subject to a variety of uncertainties, risks and other factors related to the company’s operations and business environment that are listed on our earnings press release and in the company’s quarterly report on Form 10-Q for September 30, 2008.

Forward-looking statements reflect management’s expectations as of today, March 3, 2009. The company undertakes no duty to update them to reflect future events, information or circumstances that arise after the date of this conference call, except as required by regulations. Any redistribution, retransmission or rebroadcast of this call in any form without the expressed written consent of Ferro is prohibited.

A dial-in replay of today’s call will be available for seven days. In addition, you may listen to or download a replay of the call through the Ferro Investor Relations website.

I’d now like to turn the call over to Jim.

Jim Kirsch

Thank you, David and welcome to everyone on the call this morning. I will focus my remarks this morning on four critical topics. First, our results in 2008, concentrating on the dramatic slowdown in demand we experienced in November and December. Second, the actions we are taking across Ferro to improve our cost structure and respond to the abrupt global decline in customer demand. I will then discuss the factors contributing to the delay in the filing of our Form 10-K and finally, I’ll discuss our current outlook.

Let me begin with the discussion of the 2008 results, particularly the decline in customer demand that we experienced in the last two months of the year. I’ll start it by saying I’m extremely proud of our world wide team for the aggressive action they took during 2008 and that they continue to take in 2009. We are making progress and initiatives that will unlock future earnings potential for Ferro.

That progress was evident in our reported results through the September quarter, as we generated 14% sales growth and a 23% increase in segment income during the first nine months of the year. These results were achieved during a period when the U.S economy was already in a recession and while we served in a number of worldwide market segments that shows significant weakness and despite the most abrupt global economic slowdown in decades during the fourth quarter, we generated a 4.5% increase in full year 2008 sales and a 23% increase in adjusted earnings compared with 2007.

We also generated the cash to reduce debt, including of balance sheet receivables factoring by over $100 million, during the fourth quarter. However, we were not able to cut cost fast enough during the fourth quarter to match the abrupt drop in customer demand.

December 2008 sales declined by 25% compared with December 2007. As many of our customers sharply curtail their production and reduced inventories. In January and February, sales appear to have stabilized at/or near the levels we experienced at the end of 2008, in most of our markets.

Our cost control initiatives have intensified, as a result of the decline in global demand in late 2008, but we have been taking aggressive action to improve our cost structure since the middle of 2006. Over the past two and half years, our restructuring programs around the world have generated annual cost and expense savings of more than $45 million in aggregate and the programs we have completed or currently working on are expected to generate an additional $40 million in annual cost reductions over the next two years at normalized production levels.

We know these restructuring approach create value for shareholders as we generate nearly $1 of annual cost on expense savings for every dollar of restructuring expense. We have taken a number of other steps within the business to respond to the global recession. We have reduced fixed cost by closing facilities. During 2008, we closed plants in Netherlands, Mexico, Portugal, the United States and Brazil as we consolidated our manufacturing operations.

Between 2006 and 2008, we reduced our breakeven level as we lowered our annual fixed manufacturing costs and SG&A expenses, by approximately $50 million. We have lowered operational cost to reduce staffing and production schedules at our manufacturing facilities around the world. In December, most of our worldwide factories operated with temporary shut downs, short work weeks or other production cut backs and we’ve continued to take these actions since beginning of the year.

Across all of Ferro, we reduced staffing by 12% during 2008, with about two-thirds of the reductions occurring in the fourth quarter. These actions cut across all regions and functions within the company and are reinforced by a global hiring freeze. We are seeing the full benefits of these actions as we move into 2009.

We continue to take aggressive action with an additional 2% staff reduction in January. Our total global headcount has been reduced from 6,700 to 5,725 since January of 2008. We have asked our employees around the world to sharply curtail discretionary spending and they are responding. Our SG&A expense dropped by approximately $14 million from the third quarter of 2008 to the fourth quarter.

Discretionary spending controls contributed to this decline along with favorable foreign currency rates and lower incentive compensation accruals. We are generating cash through asset sales and working capital reductions. During the fourth quarter we lowered our total debt financing including off balance sheet receivables factoring by over $100 million, through a combination of proceeds from the Fine Chemicals business sale and reduced working capital requirements.

As we monitor our customer orders, region-by-region economic activity and our internal rolling forecasts, we will continue to take the actions necessary to operate the business in a responsible manner. Our focus throughout Ferro in 2009 is debt reduction, supported by cost and expense control and additional restructuring.

We have reduced our capital spending plan for 2009 to $35 million, a 50% reduction from 2008. In January, we lowered our dividend which will reduce cash outlays by approximately $24 million on an annualized basis. We have eliminated most salary increases for 2009.

In addition, we have made additional changes in our benefit plans and human resource policies that will reduce 2009 expenses. For example, we have suspended certain company contributions to our 401(k) for an annualized savings of $3.5 million.

We continue to focus on working capital reductions mainly related to inventory. Over the next few months, we expect that lower raw material costs will contribute to the inventory reductions as declining commodity costs are passed through our supply chain and as we continue to find ways to run our production facilities more efficiently.

I have talked about our ‘Win from Within’ operating philosophy at Ferro, in a number of conference calls over the past several years. This philosophy has been an important part of the momentum we have build and the improvements we have achieved. As I have communicated our employees over the past few months, I have stressed at staying focused on the tenants of ‘Win from Within’ remains vitally important to our organization.

We will continue to take action with philosophy, we will take accountability for our decisions and delivering on our commitments and we will work hard to manage our response to external factors that are out of our direct control.

Let me now turn to the factors involved in our decision to delay the filing of our 2008 Form 10-K. During this delay, we expect to complete discussions with our lenders regarding an amendment to our credit facility. This amendment is intended to provide additional flexibility under our debt covenants. So, that we can operate effectively through this period of reduced demand and continue the restructuring programs that will generate improvements to our long-term cost structure.

We had very productive discussions with our lenders regarding a revised credit agreement amendment earlier and had reached agreement on terms that we thought provided the relief required with respect to the financial covenants. We have planned to go effective with this amendment on February 26. However, last Wednesday, February 25 we are notified by a bank that participates in our precious metal leasing program, but is not party to our lending agreement that they would require cash collateral for all future leases. Despite the fact, that the leases are already collateralized by the metal itself.

We are concerned with this action will prompt other [inaudible] to take similar actions. The total balance of our metal leases varies between $8 and $9 million troy ounces with the majority related to silver. At current market prices, this equates to approximately $150 million.

To provide cash deposits for all these leases would require us to borrow the full value of the leases through our credit facilities. We have sufficient capacity in our credit facilities to finance the borrowing. However, we need to ensure that the changes we are negotiating in our debt covenants provides sufficient relief to accommodate the additional leverage and interest expense that result in the additional cash deposits. Therefore, we delayed closing the credit amendment process.

Now, let me spend a few minutes discussing the current conditions we see in each of our businesses and across the regions in end market applications, where we participate. In our Inorganic Specialties business, sales have stabilized around the levels we recorded at the end of 2008, and we expect only very modest increases as we go through the fourth quarter, de-stocking appears to be continuing throughout the supply chain and is expected to continue through the end of the quarter. We do expect de-stocking will light up in the second quarter, although this will vary by application and by customer.

We continue to take action to reduce our production and support staffing through a combination of permanent headcount reductions, fewer shifts and reduced hours. This is a very dynamic situation and we will continue to make adjustment to our resources as necessary. From a regional perspective, we continue to see significant weakness globally, although Europe is marginally weaker than the other regions.

In our Organic Specialties business, we continue to take significant cost and expense reduction actions to deal with weak markets in the U.S and Europe. In this business, as in Inorganic, we have seen stabilization in sales at the levels we recorded in December. The impact of the global downturn in the Polymer Additives business has been moderated to some extent by our ability to move volume from the commodity, PVC additives markets to applications such as personal care, household cleaners, oilfield additives and pharmaceuticals.

These non-traditional markets for our products continue to provide better margin opportunities unless the volume declined in the PVC markets. Some de-stocking appears to be continuing this quarter, but we do not believe the amount is significant. We expect North American sales to begin recovering one to two quarters ahead of Europe, but the timing of that recovery is still uncertain.

In our Electronic Materials systems business, we see similar external environment although there are differences by product area. Our dielectric materials business has seen the most significant reductions in demand as many capacitor producers have announced extended production interruptions. However, because of the strong cyclical nature of the dielectrics market, we have worked to make our cost structure more variable on this business. We have responded to the weak orders with significant staff reductions.

Our surface finishing business is experiencing sales that are apt or slightly above the levels we recorded at the end of 2008 and we are seeing more stability in customer forecasts. Sales of our precious metal powders and pastes including our solar materials have been affected by both softening demand and lower precious metal prices. The decline in precious metal prices reduces our sales, but doesn’t affect our profitability since these costs are largely passed through to customers without markup.

We did experience softer demand for solar materials at the end of the fourth quarter, although the decline in orders was less than many of our other businesses. Demand in Europe and Japan was less affected than orders from China and Taiwan. De-stocking doesn’t appear to be a large factor in this market as we believe most of the inventory reductions in advanced materials happened at the end of the 2008 fourth quarter.

Let me now turn to our current business outlook. Clearly, the key driver for our financial performance during 2009 will be sales volume. As consumer demand stabilizes and our customers complete their de-stocking, we expect to see modest improvement in sales compared to the rate of sales we recorded in December.

However, like most other companies we have limited visibility into the timing, sustainability of that improvement. As I noted previously, we estimate that sales during the first quarter will continue at about the level we experienced in December. This would result in 2009, first quarter sales that are below what we recorded in the fourth quarter of 2008, since October sales, we are at a higher level. Our cost and expense reduction efforts will make a positive contribution to first quarter earnings.

However, like many companies our pension expense will be significantly higher in 2009 than it was in 2008. This change was driven by the decline in the stock and bond markets during the second half of 2008. Our cash contribution to pensions is expected to decline slightly during 2009, so the increase in pension expense doesn’t have corresponding impact on our cash flows for the year.

Nevertheless, our annual pension expense reflected in our income statements will increase by approximately $20 million. Because of the unusual level of uncertainty in our forward forecast, we are not providing a specific range or ranges for future quarter sales and earnings per share during this conference call. We plan to resume providing quarterly estimates in the future when our visibility returns to more normal levels.

I’d like to turn the call over to Sallie, who will review the financial results in more detail before we open up the call for your questions. Sallie.

Sallie Bailey

This morning, I‘ll begin my remarks with a recap of the 2008 full year results and then review our performance in the fourth quarter. I will then discuss some of the factors driving our performance during the first quarter of 2009. Reconciliations of our non-GAAP results discussed in this conference call are available on our website.

Please note that the results for our Fine Chemicals business are included in discontinued operations for 2008, as a result of the sale of the business in the fourth quarter. Results for prior period have been adjusted to report Fine Chemicals in discontinued operations as well.

In addition, as we announce in December, we have consolidate our U.S receivable securitization program, so it is no longer off balance sheet financing. This consolidation was a non-cash event however the balance sheet reflects the result in increasing receivable. The elimination of the note receivable from Ferro finance corporation and the elimination of our investments in Ferro Finance Corporation, a non-current asset.

Now let me turn to the 2008 results; Ferro reported a loss from continuing operation of a $1.26 per diluted share for 2008. Included in the results were pre-tax charges of $116.5 million, primarily related to impairments of goodwill and other assets and restructuring charges. Our net sales for the year were $2.2 billion, an increase of 4.5% compared with net sales of $2.1 billion in 2007.

The sales increase was driven by product price increases, including pass-through for precious metal cost and favorable changes in foreign exchange rates. Foreign currency effects contributed about three percentage point of the sales increase. For the year, improvements in price and product mix were largely offset by declines in sales volume. Together the combination of product prices, mix and volume contributed approximately one percentage point to the increase in sale.

Gross profit was essentially flat and gross profit percentage declined to 18% of sales from 18.7% of sales in 2007. The change was driven by the sharp drop in volume we experienced in the fourth quarter. During 2008, we recorded charges of $3.1 million related to asset write-offs and other cost involved in our manufacturing rationalization program.

Adjusting our 2008 gross margin for precious metal sales and special charges, gross margin was 21% for the year compared with 21.5% in 2007. The decline was driven by the drop in volume during November and December and was delivered despite raw material cost increases of about $80 million year-over-year.

SG&A expense for 2008 was $297.1 million. SG&A declined to 13.2% of sales for the year, down from 14.7% of sales in 2007. The SG&A expense decline was driven by a number of factors including headcount reductions, limitations on discretionary spending throughout the business and lower incentive compensation accrual.

The 2008 SG&A expense included net charges of $3.9 million, primarily related to corporate development activities that were partially offset by insurance settlements and litigation proceeds. Restructuring charges for the year were $25.9 million, an increase from $16.9 million in 2007. The primary driver for these charges continues to be the manufacturing rationalization project in our in-organics business in Europe.

During 2008, we also completed other significant restructuring projects around the world, including the closing of pigments plant in Brazil and the United States, Polymer Additives facility in Portugal, especially the Plastics operations in Mexico and a numerous other cost expense reduction project throughout our worldwide operations.

Total segment income for 2008 was a $143.9 million, down 2% from 2007. Segment income increased in our Electronic Materials, driven by increased sales of advanced silver and aluminum pastes used by solar cell manufacturers. Segment income as a percent of sales, excluding precious metals increased to 18.5% in Electronic Material. As we made significant progress towards our long term business model of 40% gross margin and 20% segment income margins.

Segment income also increased in the Pharmaceutical segment, driven by improved product mix. Segment income declined to performance cutting, Color and Glass Performance Materials and Polymer Additives, as a result of the sharp decline in volume during the fourth quarter.

In the year-to-date results through September, income had increased in each of these segments compared to the prior year period. Segment income also declined in especially Plastics during 2008, as a result of continued weak orders particularly from U.S. based automotive, building materials and appliance customers.

As part of our reconciliation of segment income to income from continuing operations before taxes, we reported unallocated corporate expenses of $37.4 million for 2008, including special charges of $7.1 million. In 2007, unallocated corporate expense was $59.2 million, including $20.1 million in special charges.

The primary drivers of the higher special charges in 2007 were legal settlements and higher accelerated depreciation charges. Interest expense was $50.1 million for the year, down from $57.8 million in 2007. The reduction was driven by lower interest rates, partially offset by higher average borrowing level.

In addition, we recorded a $5.5 million loss on the extinguishment of debt during 2008. The loss included call premiums and tender costs including unamortized discounts in fees related to the refinancing of our 9% and 8% Senior Notes with a new five years 6.5% convertible note for offering.

During the fourth quarter of 2008, we recorded impairment charges of $80.2 million related to goodwill and other assets in especially Plastic and Electronic Material business. For the year, our loss from continuing operations was a $1.26 per share including charges. Excluding the $116.5 million in special charges from our 2008 financial performance would result in pre-tax income of $59.9 million. Applying the tax rate of 36% would result in earnings of $0.87 per share on an adjusted basis.

This is an increase of 24% from the 2007 adjusted earnings of $0.70 per share on a comparable basis. Despite the challenges faced in the fourth quarter. Spending for capital was $73.1 million including capital expenditures of $2.3 million related to our discontinued operations.

The major capital projects during 2008 included our new facility in Suzhou, China facility. Our European manufacturing rationalization project particularly the porcelain and enamel consolidation from Rotterdam to Spain and the continued ramp up of our World-Class Color Plant also in Spain. Depreciation and amortization was $73.5 million for the year.

Total balance sheet debt on December 31, 2008, was $589.5 million compared with $526.1 million at the end of 2007. The 2008 end of year balance includes the proceeds of our U.S. accounts receivable securitization program, which was consolidated to our balance sheet in December.

In addition, we had net proceeds of $16.7 million from off balance sheet international receivable factoring. Total balance sheet debt was $606.2 million on December 31, 2008, including the receivables factory. This was a decline of $16.6 million from total debt of $622.8 million at the end of 2007 and a decline of $107 million from total debt at September 30, 2008. The decline in debt over the final three months of 2008 was driven by the proceeds from the sales of our Fine Chemical business and reductions in working capital.

Now, turning to the fourth quarter results; net sales were $432.2 million. The fourth quarter sales decline of 22% from the prior year period illustrates the work contraction in customer orders that Jim discussed in his comments. By comparison, sales for the first three months of 2008 increased by 40% over the first three quarters of 2007.

A portion of the sales decline in the 2008 fourth quarter was related to lower precious metals prices. Precious metal sales were down by $23.1 million in the 2008 fourth quarter compared with the prior year period. This is an important element of our reported sales in electronic materials, our total net sales in the segment declined by 19% in the fourth quarter. However, sales excluding precious metals declined 8%.

In contrast, over the last several years exchange rate had a negative effect on the fourth quarter sales comparison. Exchange rate differences contributed three percentage points to the sales decline in the quarter. However, since the bulk of our cost and expenses are incurred in the local currency around the world, the strengthening of the dollar had only a minor effect on our quarterly income.

Reported gross profit for the fourth quarter was 15.1% of sales, down from 17.9% in the fourth quarter of 2007, the driver for the decline was volume. At lower customer orders in our inventory reductions during the quarter, translated into lower utilization of our manufacturing plants and as a consequence, higher fixed cost absorption per units.

SG&A expense in the fourth quarter was $62.9 million. This was a decline of $21 million from the fourth quarter of 2007 and a reduction of $14 million from the third quarter of 2008. The decline was driven by a reduction in headcount in response to economic conditions, our efforts to limit discretionary spending, changes in foreign currency exchange rates and lower incentive compensation accrual.

Our fourth quarter results include restructuring charges of $3.7 and the $80.2 million impairment charge. In addition, the results include additional net benefits of $3.2 million recorded in miscellaneous income primarily due to accruals for contingencies. Interest expense was $11.7 million in the fourth quarter, down from $13.1 million in the prior year period.

Our loss for the quarter was driven by the impairment, restructuring and other special charges as well as the drop in sales volumes. Excluding the $80.8 million of special charges from our fourth quarter, would result in a pre-tax loss of $9 million. Applying a tax rate of 36% would result in a loss of $0.14 per share on an adjusted basis.

Our pension expense will increase in 2009, as Jim noted earlier, while our cash pension contributions will declined by about $1 million. The pension expense falling through the income statement will increase by approximately $20 million. However, this incremental pension expense is a non-cash item in 2009.

We also expect an increase in our interest expense in 2009. As we complete our credit agreement amendment process, our interest rates will be reset to higher market base rate.

In addition the cash deposit is associated with Ferro metal leases will increase borrowing cost.

Thank you for participating in this morning’s call and I’d now like to turn the call back to Dave to begin the question-and-answer session. Dave.

David Longfellow

Thank, you Saline. Operator we are now ready to begin the question-and-answer session. Can we have the first question please?

Question-and-Answer Session


Your first question comes from Michael Harrison - First Analysis.

Michael Harrison – First Analysis

In terms of the credit agreement and this hang up on the precious metal cash deposit. This is similar situation to what your lenders were reporting back in late 2006 and I believed in the early 2007?

James Kirsch

Its similar situation, but different circumstances.

Michael Harrison – First Analysis

And are you still negotiating on whether you are going to need to provide cash deposits or is that something that’s finalized and what you’re working on now is kind of going back to the drawing board on other components of the agreement.

Jim Kirsch

It’s a discussion on a case by case basis.

Sallie Bailey

Hi, Mike this is Sallie we are still, as Jim had mentioned going on a lesser by lesser basis, but we are also taking action to decrease the reliance the company has on precious metal and I think Jim mention that in his comment.

James Kirsch

Let me give an example Mike, in 2006 at this time frame we had about $14 million troy ounces of metals in our system, which by the way as all collateralized by the metal because we never take title of it or less stores own it. We when in efficiency reduction campaign and are still on that have reduced that to that $8 million to $9 million troy ounces I mentioned little earlier.

We are still heading down that path and we’re operationally and with customers working to take more metal out of our system and we think given our track records it is a good opportunity for us to reduce the total metal in our system pretty substantially.

Michael Harrison - First Analysis

Alright and then in terms of the covenants they we’re going to see under the new agreement, will there be a complete waver for certain amount of time or are you just working to get more on headroom in terms of the covenants and may be how long should we expect until you have to be back under that 3.5 times net debt to EBITDA?

Sallie Bailey

Yes. Mike we are negotiating relief for the term of the agreement which then extends into 2011, so it’s a reset of the levels versus the waver.

Michael Harrison - First Analysis

Alright, any guidance in terms of the how much we might see interest expense increase next year?

Sallie Bailey

Yes. We would at this point wait until we complete the negotiations with the lenders and the agreement will be posted at that time.

Michael Harrison - First Analysis

That’s fair. Jim, kind of a strategic question here, looking at the margin improvement strategy, you’ve been working on for as you said about two and a half years now, obviously that has some components of improving pricing in mix, making sure you are getting paid for the value that you are adding as well as some components are pulling out fixed costs, restructuring and improving your manufacturing foot print.

Looking at where current demand in volume levels are and may be where you expect those volumes to be over the next several quarters. Do you think you could have been more proactive or should have been proactive in pulling out fixed costs in order to reduce you break even point and two, to what extent do you still have opportunities to reduce your fixed cost base if volume and demand remain at these low levels?

James Kirsch

That’s a good question, Mike. I think you can always be more proactive. I mean at the end of the day, know about how much to do in retrospect you can always find more and your examples of that would be; we closed facilities here in Georgia and Toccoa this past year in the fourth quarter and in Brazil in the third quarter. Those were not originally on our radar screen. So, one could suggest that they should have been, maybe we could have got them earlier.

On the other hand, I think we have been extraordinarily aggressive and for the size company we have detecting on a fixed cost out we have in time frame which we done so, I think it’s a real credit to the people doing it. Having said that, even with the reduced capital spend that I identified in the earlier call, we anticipate at normalized volumes the completion of what we call Phase IV, which should be shutting down Limoges in France and some other activities we have identified. We’ll reduce our overall cost structure and deliver savings of about $40 million over the next 24 months.

I’ll tell you in this time frame, like any other distressed economy time frame, if you will the ugliest pop up and we are finding them and we are attacking them in our other opportunities for us and we are going to be very aggressive with those, part of that however the timing of that is seems some what on volume, affordability and liquidity because at the end of the day, as we look forward this game in 2009 is about liquidity and de-leveraging. So the first action you should expect out of us, our focus on cash, focus on liquidity and focus on delivering the balance sheet.


You next question comes from Jason Miner - Deutsche Bank.

Jason Miner – Deutsche Bank

First just wanted to focus on the $40 million savings for a second, I think Jim you said something about that you could get those out of a sort of normalized level. I just want to make sure I kind of get a sense of what that means. Is that kind of that the new, let me see if I get the numbers right here, say ex precious metals we did around $2 billion in sales last two years. Is that sort of that level where we would be able to get those savings or is that more of at a Q4 run rate closer to $400 million a quarter?

James Kirsch

No. It’s clear than out of Q4, your somewhere in between, in my view its somewhere between the $1.8biliob, $1.9 billion of revenue and that’s really, the reason is not at two, it is the earlier cost reduction work we’ve already accomplished.

Jason Miner – Deutsche Bank

From a competitive point of view two other thoughts on that chain. Is there any significant market share shifting taking place, I know all these markets are shrinking and the kind of declines you are seeing out in line with a lot of what we are hearing elsewhere, but is there anything you would highlight in terms of share?

James Kirsch

Yes, I would as a matter of fact. I appreciate the question and the opportunity for the platform, clearly in several of our businesses we continue to gain share and we have to be careful because you want to make sure as you gain share, you are taking at a manner that still gives a value to your shareholder and pricing and so on, but certainly in our tile business, we continue to see that, in our electronic materials business we continue to see that opportunity and as we broaden in Polymer Additives away from PVC, I would say organic share were gaining margin, which is actually more important think gaining share.

So, as a combination of those activities, the expense in cost reduction we have identified; my expectation is with any kind of demand bounce, we should see exponential enhancement in margin expansion as opposed to incremental, having said that, I will tell you that the target of 10% operating margins in 2010 has been moved off the table simply because of the demand side.

As I said early on, when I introduced that goal that you are the singular carve out was short of a global recession, we would get there and if you looked at second and third quarter last year, we are operating at about a 9.5% margin basis. So, we are moving in the direction and delivering on the commitments we made.

Jason Miner – Deutsche Bank

Just on that PVC shift, can you shed a little more light on how you entered these new markets, just to help me understand what’s going on in that business?

James Kirsch

We have unique operational chemistry available to us in various our Polymer Additive facilities and we do some things that nobody else does. Things line Benzyl chlorides for instances in molten salts.

In terms of combining our operational capabilities with certain chemistries, we found that by essentially derivatizing some of our product line, we could enter more and newer markets for us like down-hole mud for oil field drilling applications. The net of that is, if you get a higher bank for your buck in terms of product produced in pounds or product produced that we do in PVC driven market. It’s the addressable market is relative, we think it’s about a third of our overall Polymer Additives business and we’re pushing up against that.

We think, we’ve moved about 25% of our business and we think we’ve got another 5% or 10% to go, but we continue to explore for room and opportunity.


Your next question comes from Mike Sison - KeyBanc

Mike Sison – KeyBanc

Jim, when you think about cost saving picking in 2009. Is there a sale level or a sort of if you hit 450 your breakeven 475 your breakeven and I understand it’s going to be a difference between the components of that, but is there just sort of a general fro some if we can take look at to understand where breakeven is now?

James Kirsch

I think, if you look at the revenue that we drove in the fourth quarter, well that includes precious metals, it’s about $430 million. Lot of it is very, very depended on mix and I think if we can continue to move into a higher value mix and maintain some of our price versus the raw material decline we’re seeing with the cost structure, my expectation is that if we can continue to nudge that up over the next quarter or two, with the cost savings and restructure we’ve done, I think we’ve got a general short in the second, third quarters of making some money.

The first quarter as I mentioned, as a consequence of reduced revenues, because the revenues in the first quarter are going to be less than total revenues in the fourth. I expect our results to be marginally less that we’ve seen in the fourth quarter.

Sallie Bailey

Mike, this is Sallie. I think one sentence to remind you all when you’re thinking about that is to think about this incremental pension expense that we have. It’s our intension to try to make that as transparent to you all as possible so that in the conversation to what Jim has just said, that you’ll be able to see that as we go forward, but it is a non-cash item for 2009, but I just don’t want you all to decide with that.

Mike Sison – KeyBanc

Okay. So, we are coming out at pretty weak levels here in the first quarter, is there is a sequential improvement into the second quarter which doesn’t necessarily mean a great year-over-year improvement, would that get you to a need to be at a breakeven, though the normal March, present February; I mean April versus March, June so on and so forth.

James Kirsch

Let’s put this right. I think we’ve got to be in terms of breakeven in the revenue range of $470 million to $480 million. I think, when we get to that level, we’re going to be bouncing right along that breakeven range. Plus or minus a couple of percentage points, I think that’s a pretty accurate number and I would have told you, if you looked at the numbers in 2006, it was substantially higher than that.

Mike Sison – KeyBanc

Right, right. Then the electronics, the process you’ll be considering is very good. I guess the question I have is, so it’s been really a nice market for you guys this year. It didn’t seem like it got hit terribly in the fourth quarter. Is that business going to slow or there is sort of a lot of divergence in opinions of what’s going to happen in 2009?

James Kirsch

Mike, I don’t have the facts going forward either. I mean read all those diverging opinions and I took an opportunity earlier this year to go to Germany and visit with some of our largest customers and they have no more visibility frankly than we do, but I think probably the most skewed observation was made by the CEO, actually our largest solar customer. His observation was “Look, we are not going away.”

This is a very receptive audience out there, whether its government people, etc, towards this cheaper alternative energy source long-term and we think scale and technology is our competitive advantage and we are continuing to press that forward.

If you look at the top 15 solid players in the world in terms of thick film, we are the number one supplier to 12 or 13 of them and again, I don’t think that market is going away. Will it slow? Yes, I think it’s certainly going to be slower than our market we saw really started in late ’07 and went throughout 2008.

As we mentioned the overall, EMS revenue was down about 8% without precious metals in the fourth quarter, as opposed to what we saw were a much more significant reduction in the other businesses. I think, some of that is due to less de-stocking if you will then, than in some of these end markets that we saw and things are more related to automotive than appliance. So, I think it’s going to be noisy, but it’s going to be a good market for us as we move down most through time.

Mike Sison – KeyBanc

Okay and last question, your raw materials were negative $80 million I think for you in 2008. You guys did a great job of keeping ahead in pricing. So, I would imagine those raw materials are going to be down, maybe even to the similar degree as it was up. How much of that would you be able to hold and gain to margin expansion in ’09?

James F. Kirsch

Well, I’ll tell you that at the end of the quarter, and we’ll see that the margins look like, but we certainly are working hard to hang on to some and our expectation is we are going to expand margins as a consequence.


Your next question comes from Dmitry Silversteyn and Jonathan Grassi - Longbow Research.

Jonathan Grassi - Longbow Research

Well, this is Jonathan Grassi for Dmitry. On the credit facility that you are going to utilize as a cash collateralization for the precious metals, assuming you use that $150 million, how much is going to available still on the credit facility?

Sallie Bailey

Well Jonathan, if you look at year end liquidity, at the end of the year, would have used a $120 million of the $300 million, but we also had availability through and the asset securitization in the U.S. as well as some international factoring programs.

Jonathan Grassi - Longbow Research

So, you’ll have about $75 million to, how many millions?

Sallie Bailey

I think as you know liquidity is all about at a point in time. So, the formal public information that I can really share with you at this point is where we were at the end of the year, but I think we certainly feel like if a 100% of the leases ended up being collateralized, then we have sufficient liquidity to run the business; to the revolve or other options.

Jonathan Grassi - Longbow Research

Okay, that’s what I was getting at. Then, I guess this regards to if you’re looking to sell some of your businesses, which businesses are garnering the most attention and is there any business that you guys don’t have in the sale block or are not willing to part with?

James Kirsch

I think historically if you go back, I’ve been very open about the fact that some of our businesses are less strategic to us than others and one of the examples of that would be our refined chemicals business which is part of the organics platform.

This environment, it’s a little different than it was a year or two ago, but as we look at opportunities, I’ve also said very clearly that we want to build on the inorganic platform in the company, and we have some very highly valued businesses that we would like to grow. Through a combination of organic growth and in fact, built on or tuck under type acquisitions which we did with Fluid Logic last year.

So I’ll let you drive your own conclusions, but the businesses that won’t enable us to reach our top quartile performance goals and our aspirations have remained unchanged. We are trying to put ourselves in a position to play in that type of top quartile game, and if you go look at what that means, it suggests that our EBITDA margins and our operating margins have got to be substantially improved from where we are.

So, we are going to look to continue to do that, we are going to look for the opportunity to add high gross margin and operating margin businesses that enable us to parlay our core competencies in particle engineering and color and glass pasting and so on to return more value for the shareholder.

Jonathan Grassi - Longbow Research

Okay, thank you and then just finally, obviously you’ve done a pretty nice job on pricing relative to our raw material cost. Can you discuss how your tile business and your electronic materials business has performed on that platform relative to the rest of the company?

James Kirsch

Sure. In both cases, we’ve covered versus raw materials in both our tile and in Factory and Electronics raw materials is not nearly as bigger deal, as it is in the other businesses; it’s only just big to tile.

Clearly in terms of the combination of volume, mix and price, we’ve outperformed two to three quarters, the raw material issue. Price, again we stayed up with raw material issues in the fourth quarter, we were severally impacted by the volume mix and a slow down in November, December on tile. The net of this is if I look at the company, we had about $80 million of total raw material cost impact in 2008 and we had about roughly $90 million or so improvement in price. So we covered some margins, but not all as I’ll put it to.

Then I’ll make one other comment about volume and mix. We were positive on volume and mix, by a little over $10 million in a recessionary year globally, through three quarters of 2008, the volume mix declined. The impact on our operating profit in the fourth quarter alone was about $40 million.

So, as you look at our volume mix total, it’s down for the year, but the majority of that, virtually all of that happened in November and December. So, we were tracking fairly nicely in a very difficult global economy with volume, mix and price, improvements in SG&A which Sallie identified for you and enhancements in our cost structure which is why you are seeing these margins of 9% and 9.5% in the second and third quarter.

So, we have a model that works. What we need now is to continue to stay the course, consistency of purpose, deliver on what we said we’d do, continue to take cost and expense out to deliver value to customers and we need a little help from volume. We get that help and things are going to be fine.


Your next question comes from Robert Felice - Gabelli Company.

Robert Felice – Gabelli & Company

Hi, most of my questions have been answered, just a couple more. I guess first, have your banks expressed a commitment to not alter the size of the facility as a condition to an amendment. I mean I just want to get a sense as to how confident you are, that your liquidity won’t be constrained over the coming months, as a result of the additional debt you have to take on, as a result of the precious metal?

Sallie Bailey

Well Rob, that’s exactly why we didn’t close the agreement on the 25 and we are in negotiations with them right now. We have not talked about the size in the agreement, because the amount we currently have under the revolver, we think its succession as well as the other liquidity source we have, and I’ll add that we will continue to talk with our precious metal pass-throughs as we get through this amendment process to either decrease the collateralization, the double collateralization of the leases or remove that.

Robert Felice – Gabelli & Company

Okay, and then over the next six months, how much are you aiming to reduce net debt by, and are you considering additional asset sales in order to potentially de-lever at a quicker pace?

James Kirsch

Yes, I’d like to accelerate the delivering Rob, and yes we are considering other assets sales to do that, and that’s frankly no different than the strategy we put forth in early ’06. So, as we look to de-lever in the most effective manner, certainly divestiture will be a part of that strategy.

Robert Felice – Gabelli & Company

And should we expect something on that front over the next three to six months? Would that be a fair assumption?

James Kirsch

In this environment that’s difficult to tell you. You should know that we are active, let’s put it that way.

Robert Felice – Gabelli & Company

Okay and assuming no divestitures just for a moment in terms of free cash flow generations, how much would you expect to reduce net debt, over the next six months. You have a specific target you can point to there?

Sallie Bailey

Yes Bob, I think we prefer not to put an answer on the specifics of that, and just rather reinforce the point Jim made in terms of our commitment to de-leveraging, and I think the best way to do that is to point you back to what we were able to accomplish in the fourth quarter, where we de-leveraged by $107 million, just over half of which was due to the sale of the Fine Chemicals business and the remainder was due to decreases in our working capital, where accounts receivable and inventory, generation of cash exceeded these by payables.

Robert Felice – Gabelli & Company

Okay and then I guess lastly you mentioned $20 million of higher pension expense, should I assume at that’s pretty much smooth $5 million per quarter through ’09.

Sallie Bailey


David Longfellow

All right, thank you. That concludes our question-and-answer session. Jim, would you like to make a few closing remarks.

James Kirsch

I would. Firstly, we thank you all for your questions and your participation today and listened to what we had to say, we really appreciate it.

It’s obviously a very challenging economic environment and rightly a great deal of the attention is paid to near term issues such as customer loans, credit conditions, liquidity, changing production forecast for various end use applications and markets. I also think it’s very important to remember why we are working so hard to respond to these issues quickly and take some of the difficult actions we’ve taken and more that we’ll have to take. We strongly believe that ours is a valuable business as distinguished by strong customer relationships, built around high quality products and customer formulations.

It’s important to remember that we had leading positions in world wide markets from conductive phase for solar sales to enamel for glass and metal and to tile coatings. It’s also important to remember we have an in depth understanding of how customers apply our products, how to partner with customers to improve their functional performance and how they help them maintain competitive manufacturing costs, with the strong customer basis diversified regionally and by application.

We have a strong cash flow that’s paid for the restructuring programs that are improving our cost positions. We are going to continue to manage the business to take advantage of these strengths and extend them in our future and we’re going to continue our initiatives to aggressively pick out fixed costs in SG&A to lower our breakeven sales level. By doing so, I believe we are building a business that will deliver improved earnings leverage, certainly as economic conditions recover. David.

David Longfellow

Thank you. For copies of our press release, replays of this call or access to our SEC financial filings please go to our website at www.ferro.com and click on Investor Information. Thank you and have a good day.


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