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Ferro (NYSE:FOE)

Q1 2013 Earnings Call

April 25, 2013 10:00 am ET

Executives

John T. Bingle - Treasurer and Director of Investor Relations

Jeffrey L. Rutherford - Chief Financial Officer and Vice President

Peter T. Thomas - Chief Executive Officer, President and Director

Analysts

Michael J. Harrison - First Analysis Securities Corporation, Research Division

Michael J. Sison - KeyBanc Capital Markets Inc., Research Division

Rosemarie J. Morbelli - Gabelli & Company, Inc.

Abhiram Rajendran - Crédit Suisse AG, Research Division

Kevin Hocevar - Northcoast Research

Dmitry Silversteyn - Longbow Research LLC

Christopher W. Butler - Sidoti & Company, LLC

Operator

Ladies and gentlemen, thank you for standing by. Welcome to Ferro 2013 First Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded, Thursday, April 25, 2013. I would now like to turn the conference over to John Bingle, Treasurer and Director of Investor Relations. Please go ahead, sir.

John T. Bingle

Good morning and welcome to Ferro Corporation's 2013 First Quarter Earnings Conference Call.

Before we cover our earnings results, it's important to note that we had a second important announcement last night. The company's Board of Directors appointed Peter Thomas as Ferro's next President and Chief Executive Officer effectively immediately. It's a pleasure to introduce Peter in his new role for the first time. Congratulations, Peter.

Joining me on today's call, along with Peter, is Jeff Rutherford, Vice President and Chief Financial Officer. Jeff will start the call by covering our new reporting structure, which aligns with our recent business reorganization and he'll review first quarter results. Peter will follow with a discussion about our progress in executing against the Ferro value-creation strategy, and he will provide further details on our cost-reduction initiatives. Finally, Jeff will provide an overview of our outlook for the full year and the revised earnings guidance. We'll address questions at the end of the call.

Our quarterly earnings press release was issued last night. You can find the release as well as the reconciliation of reported results to non-GAAP data that we'll discuss this morning in the investor information portion of Ferro's website.

Please note that statements made on this conference call about the future performance of the company may constitute forward-looking statements within the meaning of federal securities laws. These statements are subject to a variety of uncertainties, risks and other factors related to the company's operations and business environment, including those listed in our earnings press release and more fully described in the company's annual report on Form 10-K from the end of the -- end of December 23 -- 31, 2012.

Forward-looking statements reflect management's expectations as of today, April 25, 2013. The company undertakes no duty to update them to reflect future events, information or circumstances that arise after the date of this conference call except as required by law. A dial-in replay of today's call will be available for 7 days. In addition, you may listen or download a replay of the call through the investor information section of ferro.com. Any redistribution, retransmission or rebroadcast of this call in any form without the express written consent of Ferro is prohibited.

I'd now like to turn the call over to Jeff.

Jeffrey L. Rutherford

Thank you, John. Good morning, everyone. As John mentioned, you can find reconciliations of our non-GAAP results discussed during this conference call in our press release and also in the supplemental financial data that is posted in the investor information portion of our website.

During the first quarter, we accomplished a great deal with respect to our value-creation strategy, with much of what we have accomplished having a direct and meaningful impact on our first quarter results. The accomplishments include the following: We completed the solar asset sale with Heraeus in early February. We completed a pharmaceutical transaction at the end of March, and if you have seen in our 10-Q, pharma is now being reported as a discontinued operation. We amended our credit facility, reducing the size by $100 million, resulting in lower bank fees and incremental covenant cushion. We initiated several cost savings projects, resulting in significantly reduced SG&A costs, including the signing of the agreement with Capgemini, which will allow us to further drive costs out of our back office support structure while improving efficiencies and enhancing controls. And finally, we realigned our commercial operations and began reporting the businesses in the revised reporting segment structure.

Let me quickly touch on the change in reporting structure. We have reorganized our businesses to better align commercial and manufacturing operations with the markets we serve. Our reporting will mirror these changes and reflect how the performance of our businesses is evaluated, strategic decisions are made and resources are allocated. The company will now have 5 reporting segments: Specialty Plastics, Polymer Additives, Performance Coatings, Performance Colors and Glass, Pigments, Powders and Oxides. Electronics Materials is no longer a separately reported segment, and its remaining product lines following the solar divestiture have been divided between the Performance Colors and Glass and the Pigments, Powders and Oxides segments. In conjunction with the changes to operating segments, we have changed the profitability metric used by management to evaluate segment performance. Going forward, we will use segment gross profit as a segment profitability metric. Our historical metric was segment operating income, which included SG&A expenses directly incurred by each segment as well as allocated cost. Beginning in the third quarter of 2012, the company revised its approach for managing SG&A expense by shifting accountability for controlling costs to the applicable functional leaders across individual sites versus the historical management by the segment teams. The new reporting structure incorporates this change. This change was made to facilitate and accelerate our SG&A expense reduction programs, which we began in late 2012. An example would be that all finance, accounting and IT costs worldwide are ultimately my responsibility to manage and more importantly, it is my responsibility to assure cost effectiveness of these functions.

Now turning to our results. Our first quarter reported diluted earnings per share from continuing operations attributable to Ferro shareholders was $0.11 per diluted share. On an adjusted basis, diluted earnings per share for the continuing operations was $0.10, exceeding our prior guidance of $0.05 to $0.07 per share. The stronger-than-expected earnings are due to the implementation and benefits of our cost savings initiatives, which are being realized more quickly than we forecasted. While reported and adjusted EPS are nearly equivalent, there are several nonrecurring items included in the first quarter GAAP results that are significant and warrant highlighting. Most of them were directly attributable to the actions we have been taking on our value-creation strategy. First, the company incurred $9.5 million in restructuring costs for the quarter as part of our cost savings initiatives. We recorded several items for the solar transaction, including a $9 million gain on the sale of solar assets, an approximate $700,000 loss due to inventory write-off associated with the disposition, and an approximate $300,000 cash loss during the brief wind-down period of the solar operations in the first quarter.

The reported interest expense of $7.3 million includes the charge of a little over $600,000 for the write-off of deferred revolver fees associated with the recent amendment of the revolver. And during the quarter, the company realized other items that resulted in a net charge of approximately $1 million. In addition to these items, the company also recognized an $8.7 million loss associated with the sale of the Pharma business, which was reported in discontinued operations, and was partially offset by positive results in the first quarter for Pharma of approximately $300,000. As I continue my remarks through the quarterly results, I will refer to adjusted numbers, excluding the onetime items mentioned above. Net sales for the quarter were $418 million compared with net sales of $460 million in the first quarter of 2012, reduced buy and changes in pricing and mix accounted for the entire decline in net sales at approximately 5% and 4%, respectively. Value-added sales, which exclude precious metal sales were $387 million versus $418 million in the first quarter last year, a decline of approximately 7%.

On a sequential basis, comparing the first quarter of '13 with the fourth quarter of '12, net sales increased 4.4% and value-added sales increased 7.5%. It's important to note that our businesses have rebounded nicely off of a weak fourth quarter and all segments performed better than budget in the quarter from both a sales and a gross profit perspective. On a year-over-year basis though, sales were off in all segments.

There are several notable trends that I would like to highlight that are embedded in the year-over-year comparison. The company exited 2 businesses that adversely impacted the sales comparison. The solar business with value-added sales of approximately $5 million last year and the borate mine in Argentina that impacted sales by approximately $1 million.

In the first quarter of 2012, business was very strong, making the comparison difficult. As an example, in Specialty Plastics, the first quarter of 2013 benefited from -- I'm sorry, of 2012, benefited from several customers that increased purchases to adjust inventory level after de-stocking in late 2011 and several other customers that prepurchased large volumes based on commodity pricing concerns. The company as discussed on our last earnings call, continues to review its products and customer portfolios and is rationalizing these portfolios and exiting business that do not meet our profitability requirement.

Sales have declined in several businesses such as Plastics and Coatings as the pricing in these businesses is sensitive to raw material input costs or because the pricing is driven by raw material based pricing formulas and commodity prices have declined. In Polymer Additives, sales have been adversely impacted by expected changes in environmental regulations pertaining to certain plasticizers, which is resulting in customers migrating to alternative products, particularly in Europe.

In summary, the sales have improved on a sequential basis off the fourth quarter. There continue to be market challenges. Efforts by the commercial organization to expand in the growth markets like northern Africa and Turkey, coupled with our focus on niche markets and strong positions in certain end markets like automotive, have provided a moderating offset. Not withstanding pockets of sluggishness in the world economy, our momentum is buoyed by our cost-saving initiatives and restructuring. Cost takeouts have had a positive impact on both gross profit and SG&A.

Adjusted gross profit was $80 million in the first quarter of 2013 compared with $86 million last year. The reduction in gross profit dollars resulted from lower sales volumes, particularly in Performance Coatings and Polymer Additive segments. Coupled with the exit from the solar paste business, despite lower sales, gross margin levels were maintained primarily due to cost reductions in business mix. Adjusted gross profit as a percentage of value-added sales was basically constant on a year-over-year basis at 20.8% versus 20.7% last year. In addition, adjusted SG&A expenses were $61 million in the first quarter, a reduction of $10 million or 14% compared with the same period last year. Actions taken in 2012 and early 2013 link to the sale of the solar paste assets and the company's cost-saving initiatives were the major drivers of the SG&A reduction. Of the $10 million SG&A reduction, approximately $5 million was associated with exiting the solar paste product line. Reduced headcount was the primary driver of lower SG&A costs.

For the fourth quarter, we achieved $32 million of adjusted EBITDA, resulting in an EBITDA margin of 8.2%. This compares to the first quarter 2012 adjusted EBITDA of $28 million with a 6.8% margin. For the quarter, cash flow from operations was a use of $17 million. Working capital in the period was a use of $12 million, while capital expenditures were $8 million and depreciation and amortization was $13 million. Other cash payments included restructuring of $8 million, taxes of approximately $2 million, interest of $12 million and pension of $8 million. These outflows were partially offset by $30 million of asset sale proceeds. At the end of the quarter, net debt was $308 million, a decrease of $9 million from the December of last year.

Our liquidity remains strong. At the end of the quarter, we had approximately $240 million of availability on our $250 million revolving credit agreement and another $20 million on our U.S. asset securitization program. Our precious metal consignment obligation was $93 million at quarter end and we currently have no demands for cash collateral related to the precious metal consignment program. There have been no recent changes in our precious metal leasing program participation. We are in compliance with all of our debt covenants and based on current forecast, expect to remain in compliance.

That concludes my overview of the quarterly results. I'll now turn the call over to Peter.

Peter T. Thomas

Thanks, Jeff, and good morning, everyone. Thanks for joining us today. As you have already heard from Jeff, we are making excellent progress in our value-creation strategy, and I want to take a few moments to expand on this topic. However, I want to first acknowledge and thank our global team for their contributions to our progress. Our team is working diligently to create a leaner, more efficient organization. I'm very proud of the focus on enhancing value for our shareholders, while maintaining our high standards for product quality and providing outstanding service to our customers.

As you know from previous announcements and our discussions with many of you, there are 3 key value drivers underlying our value-creation strategy. Our team is moving ahead aggressively with all 3. The first key value driver in our strategy is improving return on invested capital. Our commitment to improving returns on invested capital has penetrated the Ferro organization. We are rigorously reviewing all product lines, assets and relationships to determine their current and future potential to create value and generate cash and we're taking appropriate action when necessary.

As part of the value-creation strategy, we divested the solar pastes and pharmaceutical businesses in the first quarter and we are taking corrective action with other product franchise that are not meeting our expectations. We're also looking to sell or exit excess or underutilized assets. As an example, we have been moving aggressively to sell or exit real estate assets that are no longer needed. In the first quarter, we disposed of 3 idle European properties in Holland and Spain and in Italy.

The real estate actions I just noted have generated over $3 million in cash and approximately $1 million in annual savings. The second driver is streamlining core operations and reducing operating costs. On April 8, we announced an increase in our estimate for cost savings to $70 million by 2014. This new target was an increase of $20 million over the prior goal, driven partially by the new agreement we entered into with Capgemini. While some have taken -- have been skeptical of our targets, I'd like to assure you that we are confident that the $70 million is achievable. We have spent a great deal of time assessing our operating structure and identifying opportunities to restructure our organization and activities to become leaner and more efficient.

I'd like to point out that our cost take-out projects actually total $85 million in savings. Of this, we have modeled $70 million of savings with $30 million realized in 2013 and $40 million in 2014. Generally, our cost savings initiatives fall into 3 distinct buckets: Business realignment, operational realignment and corporate and back office support realignments. The business realignment savings represent approximately 25% of the estimated savings. Principal projects include the restructuring of our Performance Coatings businesses in southern Europe, reorganization of the Color and Pigments businesses in Europe, with a focus on the commercial structure of these product groups and business organizations in Latin America and Asia. Our operational realignment initiatives represent about 30% of the savings. As we noted, our 5 businesses now align under 2 supporting operations organizations, Performance Materials and Performance Chemicals. With this new structure, we have eliminated a good deal of functional redundancy and captured related savings by moving to regional or global structures for manufacturing, supply chain and logistics, procurement and EH&S. We also have a number of Lean initiatives underway that we expect to generate efficiencies and improve processes across the company.

Finally, reductions in corporate-related costs and back office operations will drive about 45% of the savings. The savings will be generated across multiple functional areas including information technology, finance and accounting and human resources. The cost-reduction opportunities include both internal cost reductions and the cost of services associated with third-party vendors. The recently signed agreement with Capgemini will allow us to further reduce support costs while improving back office processes, increasing efficiencies and enhancing operating controls.

Through March, we have realized a savings run rate of approximately $30 million. We have reduced employee headcount by approximately 6% or 322 positions since we announced our 10% reduction in force initiative last October. Again, we are quite confident that we will be able to achieve our estimate of $70 million in savings through diligent execution. Each of our savings initiatives has an assigned individual to manage the project and deliver planned savings. I am fully confident that our team will continue to deliver.

The third key value driver in our strategy is pursuing high-return investments. As we've previously announced, we plan to limit capital expenditures to $50 million a year for the foreseeable future, with half of that amount reserved for maintenance capital. The remaining $25 million will be earmarked for growth projects. We are pursuing opportunities to grow our current product lines beyond basic GDP growth, opportunities that are strategically important and have return on invested capital substantially greater than our cost of capital. Our investments in digital inks and glazes for the tile market as well as our expansion into Northern Africa, Eastern Europe and Asia are excellent examples of the growth projects that we plan to pursue. Our future growth initiatives will focus on migrating our product technologies into higher valued applications and expanding into developing markets, in each case requiring that these initiatives complement current market or technology positions. As an example, in the first quarter, we launched a glass pasting operation at our joint venture in Zibo, China, extending our leadership position in glass coloring and coating systems into this growing region. The new production line will allow us to more effectively serve container, appliance and architectural glass manufacturers with our high-end products. With this new capacity, we're now backward integrated and have a highly competitive cost position in this important market. We're bullish about prospects for expanding profitable sales and capturing market share in China and other parts of Asia.

Before turning the call back to Jeff, let me emphasize that our goal for 2013 and beyond is to deliver consistent, predictable growth and shareholder value. Our global management group understands the urgency of their efforts and the importance of our value-creation strategy, and they are delivering. Our successful execution has driven the improved earnings in the quarter and the increase in guidance for the full year. We are determined to maintain the momentum we have achieved in generating greater value for our shareholders, and we expect to share news about other value-creation initiatives soon, as they develop.

I'll now turn the call over to Jeff to discuss our outlook for the remainder of the year. Jeff?

Jeffrey L. Rutherford

Thank you, Peter. Our 2013 forecast assumes slow, but positive economic growth in the major regional economies around the world. We expect sales growth to be approximately 2%, excluding Solar Pharma and the impact of changes in foreign currency rates. As we've indicated in the past, we expect to generate $30 million of additional profit through our cost savings initiatives, and these savings, along with the positive impact from the solar paste asset sale will be the primary driver for increased earnings. The savings, however, will be partially offset by inflation and the normalization of incentive compensation accruals. Taking all this into consideration, we expect adjusted earnings in 2013 to be in the range of $0.35 to $0.40. Cash flow is expected to be in the range of $5 million to $10 million. Our estimates exclude special charges, including restructuring impairments and the annual pension mark-to-market adjustment. In addition, no acquisitions or acquisition-related costs have been built into this plan. Additional assumptions that are part of our outlook include: Capital spending for the year will be approximately $50 million; interest expense is expected to remain relatively flat to the $28 million recorded in 2012; ongoing pension expense, excluding mark-to-market adjustments is not expected to be material as our significant pension plans are frozen and expected return on the pension assets will approximate service and interest costs. Worldwide pension and contributions are forecast at approximately $20 million in 2013; depreciation and amortization expense will be approximately $50 million.

In addition, we are reaffirming our 2015 sales and earnings targets of top line sales growth of greater than 4% in 2015. Gross profit as a percentage of sales of over 21%, SG&A expense as a percentage of sales of less than 12%, EBITDA margin exceeding 11%, maintenance CapEx during that time of $25 million, EPS of $0.90 to $1, and return on invested capital greater than 15%. The quarter's results are a clear indication that our value-creation strategy is gaining momentum and generating results. We are committed to continuing to drive costs out of the organization and to improve operating efficiencies. We will also continue to focus on unlocking value and taking appropriate actions with underperforming or underutilized assets.

An example is a program that has already been cited. We are exiting our excess real estate assets wherever possible to reduce ongoing operating costs and improving cash flow. Another example is our fully reserved tax assets. As many of you know, when we impaired our solar assets in the third quarter of 2012, we were required by GAAP to fully reserve a majority of our tax assets associated with NOLs, foreign tax credits and various other credits. We are currently working to unlock this value. While some of these assets may not be used prior to their expiration, based on our projections, our model will utilize over $100 million of these assets and we are working to increase that number. We do not want our stakeholders to lose sight of this incremental value to the model.

As Peter indicated, we look forward to providing additional details on actions to create value as the opportunities develop.

That concludes our prepared remarks. I'll turn the call back to John Bingle.

John T. Bingle

Thank you, Jeff. Operator, we're now ready to begin the question-and-answer session. [Operator Instructions] And we'll then take the first question.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Mike Harrison with First Analysis.

Michael J. Harrison - First Analysis Securities Corporation, Research Division

Can you talk in a little bit more detail about the rationale behind shifting to segment gross profit instead of operating profit as the performance metric?

Jeffrey L. Rutherford

Yes, Mike, I can do that. This is Jeff Rutherford. It really stems from how we're going to manage SG&A and how we're driving costs out of the SG&A line. Historically, SG&A was direct and allocated into the segments and the segment teams were expected to manage those costs. And those costs were coming from multiple locations and being managed by commercial leadership teams. And we made a change late last year to change that structure. Now we manage that bifunctional growth out of this office, and so it's my responsibility, Peter's responsibility and the people who work with us to drive those costs out globally. That's the only way we can drive the costs out the way we are versus doing it through segment teams. So they no longer manage SG&A. What the segment teams manage are sales and gross profit. So when we do a review of operating results like we just did for the first quarter, the segment teams, those 5 segment teams, they come in and their responsibility is to sales and gross profit. Then we have a second meeting, which is SG&A-oriented, which is the functional leadership, which would be operation. So as Peter talked in his discussion, we've divided operations between materials and chemicals, the Materials group owns SG&A, the chemical group owns SG&A. That's disclosed -- those numbers are disclosed in both our release and in MD&A of the Q and then there's a corporate piece of SG&A. And we are responsible for that management. So the way it lines up -- and you could see it, it's not in the segment footnote, but it's in MD&A, and it's in the earnings release. You can see how that lines up and rolls up for SG&A by the Materials group and the SG&A for the Chemicals group and for corporate, and that's how it's being managed now. Now, could you individually take that and allocate it back to the Materials group or to the Chemicals group? Yes, and so could we, but that's not how we're going to manage it, that's not how we're modeling it and so by segment reporting requirements, we are disclosing it the way we are managing our segments and our costs.

Michael J. Harrison - First Analysis Securities Corporation, Research Division

Okay. And let me ask you this. As I think about the cost savings initiatives you guys have in place, it sounds like most of those costs then are going to be coming out of SG&A and we should assume that gross profit drivers are sort of more going to be driven by volume, things like that, versus big changes in the cost structure. Is that fair?

Peter T. Thomas

Yes. What you would want to look at, Mike, is, as it relates to the $70 million of savings that we've put out there, roughly 20% to 25% of that savings will be at the COGS level and the balance at the SG&A level.

Jeffrey L. Rutherford

So, Mike, when you look at that from a targeting perspective for '15, right? What SG&A is running right now, it's running at approximately $60 million a quarter. We need to drive those costs down to $50 million a quarter to get our goal. And that's our goal. So you can measure our progress in the SG&A section by driving costs from $60 million a quarter to $50 million a quarter, okay? And then in gross profit, the way you measure it is how far we can drive gross profit percentage above 21%. So those are our standards and those are our goals and that's what we've modeled out and we have the plan to get to those goals by the end of '15 and end of '15, and that's how you can measure our success in driving those. We'll report it on a quarterly basis, but we're telling you upfront what we're modeling and how we're going to drive the costs out of the model.

Peter T. Thomas

Yes, so, and again, Mike, just to close your question about how is that going to come about. As it relates to volume, it's a good point because what we're showing here moving forward, as Jeff mentioned, gross profits that are greater than 21%. That will be on volume, as it relates to our expansion into new geographies, our new -- the product development initiatives, plus the fact that we have improved operating leverage on that $70 million of cost that allows us to be more competitive in areas where we haven't been in the past, and that, too, will also increase sales.

Michael J. Harrison - First Analysis Securities Corporation, Research Division

All right. And then maybe just one more and then I'll let other people have a chance. But looking across your businesses, I think you've probably sold the most obvious couple of pieces that are either problematic or don't fit what you're trying to do going forward. Can you give us a sense though as you're sort of looking strategically at these product lines, how many other divestitures might we expect to see over the next several quarters? And maybe just some idea of order of magnitude. Are they big, small, medium?

Peter T. Thomas

Yes. Part of our -- well, of course, you just hit one of our key value drivers, which is the financial piece around return on invested capital. And as we've mentioned, every one of our product lines, assets, businesses, if you will, are under current review, and they will be analyzed and assessed for their ability to deliver shareholder growth. So you're right. The first 2 seem to be pretty obvious. One of the things that we're doing internally is making sure that we have clarity around a true look at those businesses and assets as the cost reductions move through them. So to answer your question, we do have a cut of other businesses that are in question. And as we go through the course of the year and we measure the cost reductions impacting those businesses, we'll have more clarity around the other things that could be jettisoned from the portfolio, but there are others under review.

Operator

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

Michael J. Sison - KeyBanc Capital Markets Inc., Research Division

Over the years, I don't disagree. It does seem that Ferro has done a good job of identifying costs, taking those costs out. I sort of wonder if you can give us a little bit more sort of substance in why you think you can grow the business. And so it seems to be the area that -- and maybe give us by segment to sort of collaborate that 4% growth you expect to do over -- by 2015.

Peter T. Thomas

Yes. One of the best parts of this -- the best part of this value-creation strategy for me is the fact that we have one strategy going forward. There are not -- there are no -- there are not multiple strategies within the company. So our ability to target and identify growth opportunities and prioritize them in a way that those opportunities could come to fruition quicker is better managed in this particular environment, in this strategy. We do have a wonderful core set of businesses. They serve some very commodity markets, as you know. But quite frankly, with us focusing on one strategy, we can make many of our product lines less -- in the case of color and glass, less euro-centric. And we could put more emphasis on moving that technology as we mentioned, like glass to China to take advantage of the growth rates of that market. Or moving glass here into North America because the North American automotive market is great. And our ability to fund, as Jeff mentioned, $25 million of growth opportunities, being able to further globalize our digital inks business, and now, the launch of our digital glazes has occurred. Now we have the money and the focus on one strategy to make that happen sooner than later. Another key point is that with the management of SG&A that Jeff has mentioned, quite frankly, our commercial teams have more time to be in front of the customer, planning R&D programs and making execution decisions much quicker in terms of product expansion. So as a result of that, we've been able to build a 2013 to 2016 opportunity pipeline which would include product and market development, as well as geographical expansion. And after a thorough scrubbing of that platform, we now have a pipeline that represents somewhere between 25% to 30% of our current annual sales of growth opportunities. So the point is, the opportunities are identified. They have been scrubbed. And we're going to work hard on execution. It has to be done to your point.

Michael J. Sison - KeyBanc Capital Markets Inc., Research Division

Okay. And then when I take a look at your guidance for '13, you're off to a good start, but that's never been the issue. It's sort of the end of the year that has caused some havoc in terms of expectations. So when you think about bridging the gap per quarter as the year progresses, does earnings get stronger throughout the year based on the cost savings? Is that sort of the way we need to sort of think about it?

Jeffrey L. Rutherford

Mike, what's going to happen on SG&A, SG&A's going to continue to decline through the year from a $60 million run rate it will decline throughout the year. It's going to be choppy at times, but it will continue to decline. Gross profit, we'll continue to maintain. The issue becomes sales volume and especially as we get into the fourth quarter as European plants begin to shut down and go on their holidays and so forth. That's why we've maintained it at that $0.35 to $0.40 range in anticipation that there could be a bit of a dip in our fourth quarter sales volume, which has been our historical experience. So we would continue to have improvement in the second quarter, third quarter, with the possibility of some softness in revenue in the fourth quarter.

Peter T. Thomas

Hey, Mike, we also would want to add one important point because we didn't hit on it yet. One of the most important pieces of our financial driver, a portion of our strategy is around customer and product rationalization. We are in a process of analyzing a lot of what we might define as being unattractive business, and quite frankly, about $5 million to $6 million of our sales in the first quarter were a result of that target. So as we go forward, it's going to be a bit of a challenge for you all, as well as us to understand the fact that there will be puts and takes on possibly good revenue growth, but we may be taking away from revenue because of poor business financials.

Michael J. Sison - KeyBanc Capital Markets Inc., Research Division

Okay. And then just last question. Peter, can you sort of give me a feel for how you -- well, let me just -- do you and the board have a value of what Ferro worth based on your value-creation plan and give us a little bit of maybe qualitative understanding of how you're sort of getting there. And obviously, just curious relative to Schulman's bid, why did -- help us understand why you think the value is much greater.

Jeffrey L. Rutherford

Peter, let me start and you could fill in. Mike, we've given you our targets for '15. That's our model. So you can obviously model from that based on the information we've provided relative to cost takeouts and where we think we're going to be in '15. And everybody runs the same model. We can all get -- depending on discount rate to a number, we can all do that. One thing I would encourage you to do is to remember that $100 million of tax assets, put that in your valuation model, and you're going to get to a number. Everybody gets to the same number. We've talked to all of our shareholders. They all get to the same numbers. And the range varies by discounting. And you obviously have those same models. We have the same models, and that's the discussion relative to valuation. We're not going to quote you a number, but we're all going to get to the same place.

Operator

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

Rosemarie J. Morbelli - Gabelli & Company, Inc.

I was wondering -- so as a few people have already touched on, the focus is really on SG&A at this particular point, but how much -- and you talked about the gross margin, but is there any possibility of eliminating some of your manufacturing plants? For example, you talked about Southern Europe. But my understanding was that, that particular facility in Spain is actually operating at 100% capacity utilization. So can you help me understand a little more how you are going to proceed on that gross profit line?

Peter T. Thomas

Yes. The gross profit -- well, let me answer your question around manufacturing facilities...

[Technical Difficulty]

Peter T. Thomas

Oh, good, okay. So you know how many plants Ferro has worldwide and because we make multiple products across many of those manufacturing locations, it would be consistent to think that further consolidation of those manufacturing facilities would take place. Now, those types of activities are not near-term, meaning this year or probably the beginning of next year, but certainly they're there. We understand them. I'll give you an example. We make -- we have 6 manufacturing locations making pigments. Okay. So that has to be addressed somewhere. Now, back to the growth element, again, I wanted to lay out there to make sure that everyone understands. Even though this is a value-creation strategy, and one thinks it's all about cost reductions, we do have that growth pipeline that I mentioned that's made up of both market and product growth opportunities, as well as geographical expansions with our current asset base, particularly in end markets that are doing quite well, particularly automotive and most of the glass applications. So there is an emphasis on growth even in this mile, and that's why we laid it out there and laid out the volume for you to see how we can get to that growth range that Jeff has mentioned, at 4% to 5%, and those higher-valued activities will move our gross profit to greater than 21%. So there is a strong focus on growth here.

Jeffrey L. Rutherford

And, Peter, I would add that we track our return on invested capital and our valuation by location. So we have an ROIC and a value-creation model that goes to the site level and so there are facilities that we are operating today that aren't providing adequate return and they know who they are, and that's part of the gross profit and SG&A plan would be those facilities and the products that they support have to have adequate return. So there is -- we just don't measure return on invested capital by the total company or by materials or chemicals. We run it and we evaluate it by site, by site location and then relate that back to the products that are being serviced. So there are -- this is a continuous process. I mean, it's not a project. It's a process. And that's going to continue, and that's why we're going to continue to evaluate not only our product lines, but also our product -- our manufacturing location.

Rosemarie J. Morbelli - Gabelli & Company, Inc.

Okay. And looking at product lines, in the Polymer Additives, which is being affected by some changes in regulations, I am assuming you are talking about the phthalates being out?

Peter T. Thomas

Yes.

Rosemarie J. Morbelli - Gabelli & Company, Inc.

And that is no news. So it sounds to me as though nothing was done at that particular level, I mean, in this business level, to work towards finding other alternatives. Am I looking at this the wrong way and therefore would be Polymer Additives kind of in trouble?

Peter T. Thomas

No. You are looking at it the wrong way. We do have a solution, an alternate technology to the benzyl phthalate program. It's something that's been in-house, and I think we've mentioned it in the past. It's a certain type of technology that's more environmentally friendly. We've had the model internally for over 7 years. And we have a plant design. We have a customer base who wants the product and technology, and that is now under this value-creation model, something that we can now take a look at because under this strategy, moving to that type of substitution will create additional value for us. And that's under evaluation and consideration right now and maybe we'll be talking about that in a little bit.

Rosemarie J. Morbelli - Gabelli & Company, Inc.

So it sounds good. So while you have been sitting on it, if you pardon the expression, for 7 years, why isn't it out in the market right now? And why are you losing business to competitive products?

Peter T. Thomas

Yes, so quite candidly, there's only so much capital that can go around and under a different type of strategy, capital is prioritized in a way that would be most prudent for growth. And under this model, capital is being prioritized around advancing return on invested capital. And as such, with the new model, it now is on the table for review.

Rosemarie J. Morbelli - Gabelli & Company, Inc.

Oh, great. That is helpful. And lastly, if I may. Some believe that you can save a lot more than $70 million and the numbers of $100 million to $150 million have been thrown out, and that is not taking into consideration whatever synergies there would be with Schulman. This is Ferro by itself. How do you feel about that? Do you think that as you get further into your valuation, you can actually get at the same stage as the $100 million or is that expecting too much?

Peter T. Thomas

Well, I think you've heard my comments. Our target is now $85 million.

Jeffrey L. Rutherford

What we've committed to -- the programs we have in place total $85 million. There are things in the queue that are coming, right, that we're not prepared to talk about. But there is additional opportunity.

Peter T. Thomas

Yes, to answer your question. The more and more we get into, the more and more we see opportunity. But we have to be very careful and surgical because quite candidly, everything that we have done around cost savings so far has not been a disruption to our customer. And that's the most important thing because the customer is the only person I know that sends us checks every month.

Operator

Our next question comes from the line of John McNulty with Crédit Suisse.

Abhiram Rajendran - Crédit Suisse AG, Research Division

This is Abhi Rajendran calling in for John. First, Peter, congratulations on the formal CEO role because as you've already made some significant changes. A quick question with regard to the new gross profit reporting structure. I guess, what if anything has changed as to how your divisional leaders are compensated based on the new metric to track segment performance over the next couple of years?

Peter T. Thomas

No. Actually, our business leaders have always been incented on a wide variety of metrics, but in this new model, more of the bonus, if you will, or target, is centered on gross profit improvement. It always has been, but there's more of an emphasis on it now.

Abhiram Rajendran - Crédit Suisse AG, Research Division

Okay, great. And then just a quick follow-up on the Electronics business. I guess how are the fundamentals in that business based on what you're seeing with regard to industry inventory levels, utilization rates at your customers and also I guess where do you see trends going kind of over the course of the year?

Peter T. Thomas

Yes, it's interesting. And of course, we don't have the solar business left. So a lot of that forecasting, if you will, has been eliminated, and our ability to be more predictable is going to be a lot easier. The remaining product lines -- to give you a perspective, the remaining 4 product lines in EMS have been split and folded into the 2 other divisions. One would be Color and Glass and the other would be our new Powders, Pigments and Oxides. But in consideration of maybe thinking someone would ask that question, we did take a look at it that if they were together what might that look like. And what I could tell you is, it's pretty diverse. Right now, the Surface Technologies business is not performing that well. However, our metals powders business is up a bit because there's been some demand in passive components and also the adhesives for silicon chip adhesion as it relates to our MLM business, which is the ceramic capacitor business. We see some uptick in military applications and medical applications, but down in others. So all in all, it looks pretty much like our first quarter for the rest of the businesses coming from a year-over-year look.

Operator

Our next question comes from the line of Kevin Hocevar with Northcoast Research.

Kevin Hocevar - Northcoast Research

Question on the -- the increase, the $20 million increase in cost savings here to $70 million. It looked like that Capgemini to the global shared services was a big part of that. And I know in the initial $50 million savings that global shared services was part of that as well. So just wondering, how much incremental savings do you expect to realize because of this Capgemini part of the savings? And then what's the other puts and takes to get to the $20 million beyond Capgemini?

Jeffrey L. Rutherford

Yes. We haven't disclosed all that detail. I would say, what it is, is -- and we're going to be a little sensitive because of the cultural aspects of some of this global shared services. A major portion of that was the finalization of the $20 million was the finalization of the agreements with Capgemini. And what we've done, and as Peter talked, as we go forward on a project and it's approved and moves forward, it moves into our model. That's why we talk today for the first time that there's $85 million of projects now, right? So there's $85 million of cost reduction projects that are being managed within Ferro. When we're talking about, $30 million and $70 million, we're talking about the timing of that $85 million. And one of the reasons we moved from $50 million to $70 million is the acceleration of the timing of some of the Capgemini-related cost reductions. So the $70 million isn't the total that we're working on. The $70 million is what we believe we can realize between now and the end -- or beginning of this year and the end of '14. And to answer another question, is there anything beyond the $85 million? Certainly. But we're not ready to commit to anything above $85 million because we don't commit to it until it's a project and it starts moving forward. So maybe we confused people with the way we've been talking about it and saying that it's going to be $50 million and people were thinking we only have $50 million of cost reductions. It was $50 million that were going to be realized through '14. So what we've done is based upon the projects that are in place of the $85 million, $70 million of that is going to come through between '13 and '14. Peter, do you want to add so more?

Peter T. Thomas

No. I'm glad we clarified that because I think a lot of skepticism may have been built or a lot of folks may have been discounting us, right, Jeff? Do you think on the $50 million or the $70 million. We'll, in essence the way we look at it...

Jeffrey L. Rutherford

Yes, and it's our own fault. I mean, we're going to give it to you like it is. There's $85 million in projects out there, $70 million are going to come through before the end of next year and are going to be reflected in our earnings. And then there's more to come. And stay posted and when we have -- when we're ready and we're committed to the projects, we'll provide that information.

Kevin Hocevar - Northcoast Research

Okay. And just a real quick follow up. So the 4% sales -- 4% to 5% sales growth, annual sales growth through 2015, with all -- it sounds like there could be rationalization of certain product lines if they're not meeting certain profitability expectations. Could you give a sense for how much of that might be volume? Would volume be fairly flattish then because of some of the rationalization and more price mix? Or how should we think of kind of the components of that growth?

Peter T. Thomas

Yes. I think you should look at it this way. There is a component of increased volume because of the improved operating leverage that we'll realize from the cost reductions, that's number one. Number two, you should look at it as being our ability to expand some of the higher value products that we have in our pipeline that will enrich our mix going forward. Let me give you an example. Like our digital inks, for example, those products run at a gross profit that are 35% to 40%. Our digital inks that are coming out that will follow that product line are priced a bit higher, and they're quite a bit above the aggregate portfolio of that tile of business, so that as those sales come in, the mix improvement will be realized. Again, I want to emphasize the point about the operating leverage. There are pieces of business that may not have been attractive to us because of the metric, but once the leverage comes through, they may be more exciting again in a way that will lift our gross profit.

Operator

Our next question comes from the line of Dmitry Silversteyn with Longbow Research.

Dmitry Silversteyn - Longbow Research LLC

A couple of questions. And I'm a little bit pressed for time, so I'll ask them quickly. When you look at the Polymer Additives, and to follow up on Rosemarie's questions, the headwinds that you're facing with the loss of business, it sounds like you're probably at least a year away from getting a competitive product in the market. So should we expect this business to continue to provide some headwinds for the balance of 2013 and into 2014? Or has this been a one-time thing and we're done anniversarying it?

Peter T. Thomas

No. Thanks for bringing it up because we do want to make sure that we clarify it. The answer is, yes. The deselection will continue through the balance of this year, and we've made that adjustment in our models already. So we have taken that into account.

Dmitry Silversteyn - Longbow Research LLC

Okay, okay. Your working capital metrics have gotten a little bit softer over the past couple of years. We're looking at days sales outstanding and inventory turns all not being as good as they were a year ago at this time. Should we read into this anything or is this just a question of you sort of cutting businesses and shutting revenues faster than you're adjusting your inventories and, say, accounts receivables?

Jeffrey L. Rutherford

Yes. We're not going to make excuses for it. We look at it as an opportunity. Some of the issues we get into on receivables is mix issues and geographic mix issues relative to business climates and so fort as we move in and have higher concentration of business in the Middle East and Asia, but that's not an excuse. There's opportunity in inventory. We talk about it every day, and we continue to look at how we can better collect and reduce those day sales. So there are reasons that's happening, but there's no excuse as to why it's happening.

Dmitry Silversteyn - Longbow Research LLC

Would you say that going forward, working capital would be more like a source of cash?

Jeffrey L. Rutherford

We -- yes, we haven't modeled it yet as a source of cash. What we have done in our models is that it would be flat year-over-year with some level of growth, so they're better leveraged. We didn't see that in the first quarter, but that our goal in our model in return of invested capital of 15% by '15 is for working capital to remain flat to 12/31/12.

Dmitry Silversteyn - Longbow Research LLC

Got it. Got it. Okay. And then final question. On the range of earnings that you've given, both for 2013 and for your 2015 targets, that $0.05 range and $0.10 range, respectively. The performance of the bottom versus the top of the range, is that a function of kind of economic growth and your ability to drive volume? Or is it going to be more a function of your getting $70 million, $85 million, $30 million, $35 million in cost savings for appropriate periods. In other words, is it the pace of cost savings that are going to get you to the top or bottom of that range? Or is it going to be the volume performance of the businesses?

Jeffrey L. Rutherford

It's going to be volume on those ranges, especially near term.

Dmitry Silversteyn - Longbow Research LLC

Okay. Okay. And then just a general question, I'm assuming the answer is yes. But I just want to ask, are you going to be providing or you have provided, maybe I just haven't seen them, the restated results for the new divisional structures going back a couple of years?

Jeffrey L. Rutherford

We are. And, John, you want to say anything about that? No, you don't have to, John. We knew this was coming, and John is working on that. We're going to -- do you want to commit to a time right now, John?

John T. Bingle

It will be the next couple of days.

Jeffrey L. Rutherford

The next couple of days, John says. So I would encourage everybody to call in and make sure that...

John T. Bingle

The calls will make that a little longer.

Jeffrey L. Rutherford

Dmitry, we knew that was coming. We're working on it, and it's in process. This change has been a change for our accounting group, too. So we're going back. We're going to pull all the quarterly changes out, and we're going to file an 8-K hopefully. Well, today is Thursday, so by the end of day Monday, are we committing to that?

John T. Bingle

Yes.

Jeffrey L. Rutherford

All right. So by Monday we'll get that out.

Peter T. Thomas

And in the event that someone does want to call John, I can assure you, his time slot is 3:00 in the morning to 4:00.

Operator

Our last question comes from the line of Christopher Butler with Sidoti & Company.

Christopher W. Butler - Sidoti & Company, LLC

I win the last time slot. Looking at your -- the targets that you have for sales, gross profit and SG&A, could you talk to the fact that these targets could potentially be in conflict with each other and part of this was brought up as you trim sales to improve gross profit, it gets a little bit more difficult to hit your sales target, as you cut SG&A, new products may be slower to come through the pipeline, et cetera?

Jeffrey L. Rutherford

Yes, that's always the dynamic tension. We had that discussion. We had it right before the call started.

Peter T. Thomas

And every day.

Jeffrey L. Rutherford

Between Peter and I. And obviously, that's always one of the risks of focusing on return on invested capital that you lose sight of growth, right? So there's that -- and that's a good tension to have within an organization. Right now, I'd have to say that return on invested capital and cost reduction are taking precedence and there may be some tension, and as Peter talked about, that we're looking at firing our own customers that aren't meeting our profitability objectives. So in the near term, I think that's true. And then as we move out into the model, we don't believe that's going to be the case.

Christopher W. Butler - Sidoti & Company, LLC

And looking at the cash flow side of things, the real estate assets, are there more of those to come? Is that -- any significance over time as you look at your holdings and could you talk to where acquisitions might fit into all of this at this point?

Jeffrey L. Rutherford

Yes. We don't have -- I'll answer the second question first. We don't have any acquisitions built into our model. And then as far as real estate is concerned, there are no more right now. Where that could become an issue is -- and what we answered on other questions relative to locations, if there would be a change in locations, we may have to adjust real estate, but our folks have done a really good job of working through that real estate and cleaning that out. So there's not a lot left relative to real estate assets. If there's I could tell, I'll tell you.

Christopher W. Butler - Sidoti & Company, LLC

Are there acquisitions that... Sorry...

Jeffrey L. Rutherford

I'm sorry, go ahead. I'm sorry.

Christopher W. Butler - Sidoti & Company, LLC

Are there acquisitions that might fit into the long long-term strategy I guess was kind of what I was asking.

Jeffrey L. Rutherford

Well, I mean, there always could be, right? But as I said, right now, where we're at is that in our model, there is nothing modeled in for acquisitions at this point. Our focus is on cost reduction and creating value with the assets that we own right now. That doesn't mean that won't change, but that's our focus right now.

John T. Bingle

All right. I would like to thank everyone for joining us on the call today. With that, we'd like to end the call, operator. Appreciate it. Have a great day.

Operator

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.

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