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Ferro (NYSE:FOE)

Q2 2013 Earnings Call

August 01, 2013 10:00 am ET

Executives

John T. Bingle - Director of Investor Relations and Treasurer

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

Jeffrey L. Rutherford - Chief Financial Officer and Vice President

Analysts

David L. Begleiter - Deutsche Bank AG, Research Division

Rosemarie J. Morbelli - Gabelli & Company, Inc.

Dmitry Silversteyn - Longbow Research LLC

Operator

Ladies and gentlemen, thank you for standing by. Welcome to Ferro 2013 Second Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded, Thursday, August 1, 2013. I would now like to turn the conference over to John Bingle, Treasurer and Director of Investor Relations. Please go ahead.

John T. Bingle

Thank you. Good morning, and welcome to Ferro Corporation's 2013 Second Quarter Earnings Conference Call. Joining me on today's call is Peter Thomas, President and Chief Executive Officer; and Jeff Rutherford, Vice President and Chief Financial Officer. Peter will start the call with comments about the progress we're making in executing our value creation strategy, and he'll also provide an overview of business conditions. Jeff will follow with financial details for the quarter and will review our 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 we'll discuss this morning, in the Investor Information portion of our website, www.ferro.com.

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

Forward-looking statements reflect management's expectations as of today, August 1, 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 to or download a replay of the call through the Investor Information section of the website. Any redistribution, transmission or rebroadcast of this call in any form without the express written consent of Ferro is prohibited.

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

Peter T. Thomas

Thanks, John. Good morning, everyone, and thanks for joining us today. I'm pleased to report that we continue to make excellent progress executing our value creation strategy. We are achieving targets that we set, and this is generating improved adjusted earnings as seen in our second quarter results. As we previously have explained, our strategy has 3 value drivers. The first is to generate better returns on invested capital. We are driving a commitment to improved returns on invested capital across our businesses. The sale of our Pharmaceuticals business and the Solar Pastes assets reflect this commitment. We also have sold idle real estate assets during the first half of 2013, generating $3 million in cash proceeds and approximately $1 million in annual cash savings. We continue to evaluate our business lines for a potential divestiture or investment to drive stronger returns.

In addition, we have been moving away from lower-value customer relationships where appropriate, which will drive gross margin improvement. We're willing to accept an impact on the top line in return for a stronger bottom line that reflects the high quality of Ferro's products, technical expertise and value-added services.

The second component of our value creation strategy is to streamline our core operations and reduce operating costs. We are making very good progress on this also. We have reduced staffing by approximately 10% or 520 positions, inclusive of divested operations since we announced our goal of a 10% reduction in force last October.

In June, we concluded negotiations with works councils in Europe regarding our plans for further streamlining operations in our European operations. And we now are moving forward on personnel reductions there, which will further reduce SG&A expenses in the second half of the year.

We also are making progress with Capgemini to outsource certain IT, finance and accounting activities. We are almost fully transitioned to Capgemini support for IT help-desk services and application support and expect to be fully transitioned within the next few months. We're also on track to transition certain of our finance and accounting functions in the fourth quarter of 2013.

Through June, our efforts have yielded SG&A savings of nearly $13 million, a year-over-year decline of about 9%. Overall, our cost-reduction projects are on target to achieve $30 million in savings in 2013 and $40 million in 2014. We expect total program savings to exceed $85 million, and we are evaluating potential additional cost savings opportunities.

By way of a brief review, there are 3 general categories of savings in our plan. The largest is corporate and back-office functions, which represents about 45% of expected total savings.

Second is operational realignment, which accounts for about 30% of the savings. These savings result from moving to more regional or global structures for manufacturing, supply chain and logistics, procurement and EH&S, as well as from an array of manufacturing Lean initiatives.

The third category is business realignment, which represents approximately 25% of the total projected savings and includes business restructuring actions. Within this category are projects that impact market-facing functions, such as sales and marketing, R&D, and technical support. Again, I'm confident that we will achieve $30 million in savings this year, which is built into our reaffirmed guidance for adjusted earnings of $0.35 to $0.40 per share. I'm also confident that we can achieve our 2014 and 2015 savings targets.

We are taking a methodical, orderly approach to our savings initiatives, with assigned leads and accountable teams for each project. We're well on our way to having in place a significantly leaner cost structure, as well as improved controls and processes for running the company.

Having described the first 2 drivers of our value creation strategy, namely improved on invested capital and streamlining operations, I now move to the third key value driver in our strategy, which is pursuit of high-return investment. With about $50 million [ph] budgeted for capital expenditures, half is reserved for maintenance capital and the remaining $25 million is earmarked for growth investing. 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 growth initiatives are aimed at migrating our portfolio into a higher value of applications and expanding into the developing markets. Our investments in digital inks and glazes for the tile market, as well as our expansion into Northern Africa, Eastern Europe and Asia, are examples of such investments.

In addition, we recently have installed production capacity for forehearth colored pearls in Saint-Dizier, France. The forehearth pearls investment will allow us to develop a broader range of glass colors to meet glass customer-specific applications. This new product line will be a boost to our glow [ph] forehearth business. Our production until now has been U.S.-based, so we're excited by the potential to be more competitive with state-of-the-art, advanced technology in Europe.

Later this month, we will begin work at our Antwerp, Belgium site for construction of new facilities for dibenzoates production. As we have explained, dibenzoates are non-phthalate, fast-fusing plasticizers. This is an important enhancement to our core technology capabilities and advances Ferro's participation in attractive markets calling for eco-friendly material solutions. The project also includes installation of technologies to produce benzoic acid, which will give us the efficiencies and competitive advantage of being fully backward-integrated into this key raw material in Antwerp. The plant will have the capacity for about 28,000 metric tons a year of dibenzoates at our nearby world-class laboratory facilities for providing customers across the continent access to our services, to help them optimize Ferro additives in their production process.

Now we see strong potential sales for dibenzoates in European and U.S. markets, and we're excited to be moving ahead with this project. We expect production to begin in the second half of 2014.

I'd like to comment now briefly on business trends and our outlook for the year. Our second quarter value-added sales, adjusted for dispositions, were approximately -- were down approximately 1% versus the second quarter of 2012. Sales held up despite the economic landscape in Europe and continued deselection of our phthalate plasticizer products. Our teams have worked hard to replace sales in European countries where we have traditionally maintained strong sales and that are struggling in the grips of this recession. We have done a great job building export sales into emerging markets and regions. For example, sales into Eastern Europe countries such as Hungary, Lithuania, Russia and Poland, offset weak sales in Northern and Southern Europe, and our sales in the Middle East and North Africa particularly in Egypt, Morocco and Saudi Arabia grew by more than 12% in the second quarter.

The benefits of our value creation strategy came through in our profit performance in the quarter. Adjusted gross margin expanded to 21.9% from 20.4%, and EBITDA margin increased to 9.3% from 7.9% in the second quarter of 2012.

Across our operations, we are executing our cost savings initiatives and making Ferro more competitive in driving higher profitability. With the progress we've made with works council negotiations in Europe, we expect to further reduce European operating costs and lower our SG&A expenses in the second half of the year.

Now from a sales perspective, it's important to note that the second quarter is traditionally the high mark for our business, with the highest level of sales and profitability. Our businesses follow a normal seasonal pattern, characterized by lower customer demand and reduced plant utilization due to holiday shutdowns in the second half of the year. Because of this trend, we expect sales and gross margins in the third and fourth quarters of the year to be lower than the levels achieved in the second quarter. In addition, lower raw material costs in the second quarter led us to reduce pricing to certain customers due to formula-based product pricing or to meet competitive offers. The reduced average selling prices adversely impacted net sales, but we did benefit from the lower input costs, as pricing strategies helped us maintain a portion of the benefit of lower commodity prices. We expect pricing will adjust for certain products to a lower input cost, causing additional pressure on sales growth and gross margins.

While results in the second quarter were positive, we remain somewhat cautious about economic conditions in Europe and Asia Pac. Given these uncertainties and the pace of customer deselection of phthalates in our Polymer Additives segment, we now estimate full year sales to be approximately flat versus 2012 value-added sales, adjusted for dispositions. We are pleased with the progress to date on our cost savings program. I am proud of the Ferro employees around the world and the work being done to position Ferro for long-term success and deliver value to our customers and the company shareholders.

Now I'll turn it over to Jeff for a more detailed look at the financials for the quarter and the year end.

Jeffrey L. Rutherford

Thank you, Peter, and good morning, everyone. As John Bingle mentioned at the start of the call, you will find reconciliations of non-GAAP results discussed during this conference call in our press release and also in the supplemental financial data that is posted in the Investor Information portion of our website.

My comments, in general, will focus on adjusted information to provide comparability of information from period-to-period.

Today, I'd like to cover 3 primary topics and then we'll get to your questions. First, I'll provide a quick recap of the quarter. I will then give an overview of the performance of each of our reportable segments. And finally, I will conclude with a discussion of our outlook for the remainder of the year.

So first, our results. For the second quarter of 2013, we reported a loss of $0.02 per share. This compares to income of $0.02 per share last year. But on an adjusted basis, diluted earnings per share from continuing operations were $0.14 in the current quarter versus $0.10 last year.

Significant adjustments include the following. The company incurred $13.5 million in restructuring costs for the quarter, as part of our cost-saving initiatives.

Secondly, we incurred nearly $2 million of nonrecurring expenses in cost of goods sold, primarily related to inventory items and including a loss of associated with the flood at our Colditz, Germany manufacturing facility.

Third, SG&A expenses included approximately $3 million of special items associated with the proxy contest and other nonrecurring corporate expenses.

And finally, number four: income taxes have been adjusted to a normalized 36% tax rate.

As I continue in my remarks of the quarterly results, I'll refer to adjusted numbers excluding the items mentioned above. Note, we will also focus on value-added sales and explain growth in describing profitability measures, such as gross profit and EBITDA margins. As a reminder, value-added sales exclude precious metal sales, as the precious metal sales, in general, are pass-through sales to our customers. We have also excluded from our sales growth calculations the impact of operations divested last year or earlier this year. Including the sale of our Solar Paste assets, a borates mine in Argentina and our Pharmaceutical business, which has been accounted for as a discontinued operation.

Value-added sales were $408 million in the second quarter of 2013 versus $424 million last year. Adjusted for the Solar Paste divestiture, $9 million, and mining operation, $2 million, value-added sales declined approximately 1% on a year-over-year basis. On a sequential basis, value-added sales increased 5% from the first quarter of 2013.

Adjusted gross profit was $89 million in the second quarter of 2013 compared with $87 million last year. Adjusted gross profit as a percentage of value-added sales increased to 21.9% versus 20.4% last year. Gross margin improved due to our cost-reduction efforts, improved volume and a richer business mix in Performance Coatings and improved manufacturing results in Performance Colors and Glass.

The second quarter adjusted gross profit was adversely impacted by lower volumes in Polymer Additives, coupled with 2 plant shutdowns at our Colditz, Germany facility due to the flooding, and a planned maintenance shutdown at our Belgian Polymer Additives plant. We estimate that the 2 shutdowns cost the company approximately $2 million in profitability, primarily in reduced absorption, and to a lesser extent in higher operating costs.

Adjusted SG&A expenses were $61 million in the second quarter, a 7% reduction versus $65 million in the same period last year. Actions taken to the reduced cost, linked to the company's cost savings initiatives and the Solar Pastes assets divestiture, were the major drivers of the SG&A decline. These actions accounted for an estimated $10 million reduction in cost.

These savings, however, were partially offset by several items, including higher incentive compensation expense of $3 million, an increase of $1 million in bad debt expense associated with 2 bankruptcies in Latin America, an increase of $1 million in pension expense when compared to a 2012 curtailment gain of a defined-benefit plan in Europe, and another $1 million in other items.

For the quarter, we achieved $38 million of adjusted EBITDA, resulting in an EBITDA margin of 9.3%. This compares to second quarter 2012 adjusted EBITDA of $33 million with a 7.9% margin. For the quarter, cash flow from operating activity was the source of $8 million. Working capital in the period was a use of $10 million, and capital expenditures accounted for use of $8 million. Other cash payments include the restructuring of $9 million, taxes of approximately $1 million, interest of $1 million and pension of $5 million. Other expenditures totaled $5 million.

At the end of the quarter, net debt was $308 million, unchanged from the first quarter, and a decrease of $9 million from December of last year. This result is favorable, relative to the first half of 2012 when net debt increased by approximately $30 million.

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 $15 million on our U.S. asset securitization program. Our precious metal consignment obligation was $51 million at the quarter end compared to approximately $178 million in the second quarter of last year.

The net lease obligation has declined substantially over last 12 months due to the Solar Paste asset divestiture and our program to aggressively manage our precious metal manufacturing requirements. We currently have no demands for cash collateral related to the precious metal consignment program, and there have been no recent changes in our precious metal leasing program participation. Now I'd like to provide a brief overview of each of our reporting segments, second quarter results versus the same period last year. Again, this analysis is based on value-added sales and excludes the impact of divested operations.

In Pigments, Powders and Oxides, value-added sales increased by $2 million, driven by increased demand for our metal powders and surface finishing products, coupled with the tolling revenue of approximately $1 million related to a supply agreement entered with the buyer of our Solar Paste assets. Sales and metal powders benefited from pre-buying by certain customers ahead of a planned plant shutdown for our annual inventory audit. Gross profit declined in the quarter, primarily due to weaker sales mix and inventory obsolescence charge of approximately $2 million, and the unexpected plant shutdown at our Colditz, Germany manufacturing plant in early June. Plant was closed for nearly a week due to the flood, and that region of Germany adversely impacted absorption and operating cost. The plant was returned to full capacity within 2 weeks.

In Performance Colors and Glass, value-added sales were flat. Sales of our glass products increased by approximately $5 million, offset by reduction in our dinnerware, industrial and Electronics product lines. Gross profit margin improved by over 300 basis points, primarily due to favorable raw material and other production-related costs and higher selling prices.

In the Performance Coatings segment, the value-added sales were also essentially flat. Volume gains and a richer mix of business in the tile coatings were offset by lower volumes in Porcelain Enamel business and lower average pricing, principally in tile. Within tile, sales of digital inks continue to grow -- to show strong growth, increasing by approximately 45%. Sales of lower margin frits and glazes also increased by approximately 4%. These gains were partially offset by lower sales of tile color products.

Gross profit improved by approximately $4 million, primarily due to the impact of higher sales volumes in the tile business, cost-saving initiatives, and reduced commodity costs relative to average selling prices.

In Polymer Additives, sales declined 8%, primarily due to reduced volumes. Average selling prices were also down. As in prior quarters, segment sales have been adversely impacted by customer deselection of phthalate products. This trend is impacting both of our major markets, North America and Europe, with the greatest impact in the quarter coming in North America. Gross profit declined by $1 million partially due to the lower sales volumes, but also due to a plant and its related shutdown at our Belgium manufacturing facility.

Sales in Specialty Plastics segment were nearly flat in the quarter, primarily related to a reduction in average selling prices. Reduced pricing is primarily associated with lower commodity costs and the impact on formula-based pricing for some of our customers and the need to meet competitive offers.

The impact of lower average selling prices outweighed a 2% increase in volume. Gross profit margin increased, primarily related to the increased volumes and lower commodity cost relative to the average selling prices, as the company was able to keep a portion of the benefit of lower raw material costs.

Finally, I'd like to provide some color on our outlook for the remainder of the year. It should be noted that our results have historically followed a pattern of lower sales and profitability in the second half of the year.

Construction markets are generally weaker in the latter part of the year, and our businesses that are impacted by seasonal plant shutdowns, particularly for our European summer holidays, when customer demand is reduced and our own manufacturing facilities are idled. Because of this historical pattern, we expect value-added sales in the third and fourth quarters will be lower than those in the second quarter. Gross profit margins likely will also decline due to the adverse impact of reduced demand and planned plant shutdowns. We expect adjusted gross margins in the third and fourth quarters to be in line with those of the first quarter.

While we expect a traditional business pattern to repeat, based on the divestiture of the Solar Paste assets and the successes we've had in reducing our cost base, we do not expect our results to demonstrate the same level of volatility experienced over the last several years.

For the second half a year, we remain cautiously optimistic. While we are committed to our cost savings targets, and continue to expect a low level of sales growth in the business segments for the remainder of the year, we recognize risk from tempered economic growth in Asia-Pacific region and continued weakness in Europe. Because of the lack of visibility, particularly in Asia, and to a lesser extent, in Europe, we are not prepared to increase guidance from the current levels. Value-added sales should be approximately 4% to 5% higher in the second half of 2013 versus the same period last year, adjusting for divested operations. On an annual basis, this would suggest value-added sales growth would be approximately flat for the year.

Further, we expect adjusted SG&A costs, excluding special items, to continue to decline off the second quarter level, based on our cost savings initiatives, partially offset by continued higher costs associated with variable compensation.

Given these items, the company confirms its current adjusted annual earnings guidance of $0.35 to $0.40 per diluted share.

That concludes my remarks. I'll now turn it over to John for the question-and-answer session.

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] And our first question comes from the line of David Begleiter from Deutsche Bank.

David L. Begleiter - Deutsche Bank AG, Research Division

Maybe you can just comment on the second half earnings progression of the roughly $0.15 of earnings you're expecting, what's the breakdown between Q3 and Q4?

Jeffrey L. Rutherford

What's going to happen is, it's going to be -- 3 will be stronger than 4. And it will be comparable to our first quarter, and then we'll see a decline in the fourth quarter.

David L. Begleiter - Deutsche Bank AG, Research Division

Very good. And just -- can you comment on the European demand trends, are you seeing a bottoming of -- any signs of improvement in the European markets?

Peter T. Thomas

Yes. This is Peter, David. Yes, the way -- we view Europe in a few different ways. We look at Europe as a traditional Europe, which will include our major thrust being in Southern Europe with our tallow and Porcelain Enamel business, as well as some of Color and Glass. And then everything we've been doing over the past few years now have mitigate that contraction that's taking place outside, or we view it as export Europe, which would go into Eastern Europe, Turkey, the Middle East, North Africa and the such [ph]. And as we mentioned, our sales have been strong there. They've grown 12%, as we mentioned. And 2 years ago, as an example, sales in that area, versus where they are, where they're in today, have grown by 3x. So yes, we continue to see, and we're positioned properly, for export sales out of Europe. We are starting to see some, let's call it, stabilization in Northern Europe. Spain, strangely enough, seems to be a little more stable. But Italy is still a problem, and we also do realize that France is still not out of what we would call a stabilized pattern. But yes, Northern America and particularly around Germany, we see a stabilization there.

David L. Begleiter - Deutsche Bank AG, Research Division

And just lastly, in the second half for raws [ph] versus price be a benefit or a headwind?

Peter T. Thomas

We see it as being neutral, overall.

Operator

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

Rosemarie J. Morbelli - Gabelli & Company, Inc.

Could you talk a little bit about these trends behind the Color and Glass? I know you mentioned that dinnerware and electronics were down, but is these trends because of some pickup in construction in Europe? Or is it something else, I suppose we are talking about flat glass?

Peter T. Thomas

Yes, let's -- thanks for the question. It's a good question. When you think of our glass business, think of if it is auto glass, flat glass and what we would define as being container glass. And it varies by region. So let's start with auto glass. Auto glass is a good story for us, for the most part, globally. Even though there's contraction in the European market with both commercial vehicles and passenger vehicles, our auto glass business is actually up. The reason being is that we just happen to be at the right model at the right time. And there's some strength in still the models that we're participating in Europe to the export market, particularly in Asia. Auto glass is also up in North America. Okay, so the third of the portfolio of auto glass is actually doing quite well. Then we have flat glass. And of course, flat glass, there are a variety right of applications, and the majority of the flat glass goes into construction. And in Europe, construction again is at -- projected as we view it as being somewhat of a contraction. And so it's still pretty soft for us in Europe with flat glass. We do see some strength in North America, as we've mentioned, as we start to develop the North American business more. And we also see a bit of pickup in flat glass in Asia since we've been expanding our capabilities there. We also have a bit of a pickup in Latin America for our glass business. So it's kind of a mixed bag. Construction's down, automotive's up, and our container glass, for the most part, is somewhat flat.

Rosemarie J. Morbelli - Gabelli & Company, Inc.

Okay, that's very helpful, Peter. Could you also give us a better feel for the business realignment that you're doing? I mean you said that marketing and sales were also being cut. So is that -- how are you doing it so it does not affect the business that you want to maintain going forward?

Peter T. Thomas

Right. Because of the sensitivity around customers, everything that we've -- we're doing in the front end of this restructuring starts as far as away from the customer as possible, so that's number one. So we're very judicious around how we're doing this, so it doesn't have an impact. And quite frankly so far, it has had it -- it has not had a negative impact. In fact, because of the restructuring and the narrowing of all the work that was being done, where we weren't benefiting from, as we've discussed before, we can't be everything to everybody, so what was happening is we took a lot of work on, and we weren't delivering very much to a lot of people. So having made those changes of restructuring around the customers and the products that we want to grow with in the future, we've realigned those organizations, particularly in Color and Glass and pigments, mostly, around being more to the marketplace. And picking and choosing those areas that are in our control and would be a power alley [ph] of ours. And that's how we've done that. So we've essentially combined the Color and Glass businesses together, is really what you're seeing. Where we had 2 global entities, now we have 1 global entity. And we actually are more effective. And again, you could see by the margins, our customer and product rationalization programs are working. And also, as you've heard, we have developed the new forehearth pearls and we have some other R&D programs that will be coming to fruition here over the next 6 months to 12 months. So all in all, it was a good move, very productive and efficient.

Rosemarie J. Morbelli - Gabelli & Company, Inc.

Okay, great. And if I may, could you talk about the potential impact of the unrest in Egypt since you are moving quite a bit of your capacity there? And then talk about the non-phthalate in the U.S., since it sounded, and I may be wrong, as though you are building capacity in Europe, and then you're going to export it into the U.S. or you do also -- are you also adding capacity in the U.S. market?

Peter T. Thomas

Okay, first, let's talk about Egypt. Egypt is an interesting story. And I think we've made comments about understanding the geography and logistics around Egypt, within Egypt on where we are. First of all, all the noise that everyone hears is in Cairo, and it seems to be pretty much isolated there. Our plant is southwest of Cairo by about 70 kilometers and, quite frankly, it takes like a few hours to get there, if you will. So a lot of what we're seeing, we're not experiencing those problems near our plant, which is located where one of the major production areas for tallow production takes place within Africa. So we're not having difficulty around plants, shutdowns or any type of problems. In fact, that facility is running pretty much full out and has, relative to the Tile businesses, a pretty attractive gross profit. And quite frankly, if we had more capacity that, too, would be sold-out. And we're also in a position where we're starting to seed Saudi Arabia and other areas in Turkey from the low-cost position that we have in Egypt and that's going to further strengthen our position moving forward and probably will provide signs of what the future will become as we start to grow with additional production. As it relates to phthalates, you're right, the first move is to deal with Europe, because of the reach issue and the perception, it takes place there. So the intent is to produce there and supply the European market, and we will start supplementing our current plasticizer business in North America with the new dibenzoates. You've also heard us mention that we have a couple other analogues for -- of plasticizers that are more environmentally friendly, although more specific, especially applications. But albeit still extensions to our product line that will help mitigate some of the shortfall. And the good news about the dibenzoate technology, if you really -- I don't want to get too technical here, but the plant that we have in North America is exactly the same as the plant that we're converting. And we also have the benefit of currently having a large stream of toluene and oxygen, which are major precursors for benzoic acid. So our ability, if and when the time comes, to mimic that plant here in the U.S., it will not be difficult.

Operator

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

Dmitry Silversteyn - Longbow Research LLC

Actually, would like to follow-up on Rosemary's questions about the plasticizer market. It -- so you're losing the phthalate business as your customers are moving to non-phthalate alternatives where you really don't have a product to offer yet. So you're building this Antwerp facility to be able to basically reenter the market sometime in 2015, if I understand the timing of the construction correctly. Is your absence from the market for 2 years basically makes you a new entrant, and then you have to fight for market share? Or do you hope that your customers still remember who you are when you're back to them with the non-phthalate plasticizers?

Peter T. Thomas

Good question. So here's the answer. We've actually been producing dibenzoates since 2002 and '03. We now understand the technology, and we actually have the toll [ph] produced for us and we have been seeding the market over the years with a version. Because we have a lot of customers that were actually asking us to do this. So we're not really new to the market. We understand it, our customers know that we understand it. And quite frankly, many of the customers that have moved away to dibenzoates were our customers. So to give you a perspective, we're not -- we will not be newcomers per se. We do have a still sizable tranche of tonnage in Europe, as it relates to customers that can be converted, they're still hanging with us. And they committed to us moving forward. There's another tranche of volume that we used to own over the past 3 years that have moved to dibenzoates. And we certainly have not lost our contact with all of those customers. And one of the things that we mentioned in the script is that we have best-in-class application laboratories with a lot of equipment and a lot of tech service and tweaking that's certainly unmatched versus the competitors that are in that space in Europe. So our production will start up at the second half of 2014. And our expectation is the customers we have for phthalates right now will stay with us. And we do have a targeted percentage of those customers that moved away over the last few years, who, through our discussions, feel very good about us doing that and probably would like to come back to us or see us in that space. And then there's another tranche of the business -- and this is why I'm glad you've asked the question, there's another sizable tranche of potential volume that are in what we define as being higher valued applications, which are in areas like cosmetics, personal care, pharmaceuticals, food packaging, engine oils and other types of lubricants across the board. Which really, in a way, starts to make our Polymer Additives business more of what we are going to start defining as being a performance additives business over time. Because the market expansion, the addressable market expansion allows us for 2x what it was before. So we're very, very excited about this, we understand the space, we understand the customers. And through our repositioning activities with Polymer Additives over the last 3 years, we've become very acquainted with some of those other markets that I've mentioned and we've been having discussions with those customers.

Dmitry Silversteyn - Longbow Research LLC

Okay, that's a very good answer. I wanted to follow-up on the variable comp expenses that you're [indiscernible] up in 20 [indiscernible]. Can you remind us what you're variable comp drivers are? And what is it that's doing so much better this year versus last year that you're going to have incremental off-set [ph] restructuring benefits?

Jeffrey L. Rutherford

This is Jeff Rutherford. The longer-term metric for our compensation is return on invested capital and cash flow. The annual is operating profit and cash flow. And so what is happening is, based upon our internal metrics. We are favorable to our internal metrics and we are just -- adjusting our bonus compensation accordingly.

John T. Bingle

Just to add to that, one of the things that we have talked about in the past is just the 2012 year had a very low level of compensation, variable compensation. And so not only is this year higher, we had reduced compensation last year, particularly in the...

Jeffrey L. Rutherford

Well, we had 0. We adjusted to 0.

John T. Bingle

We adjusted down, so you'll see a bump up.

Dmitry Silversteyn - Longbow Research LLC

Fair enough. And what's the run rate of your annual cost savings if you had to put it at sort of a annual run-rate basis at the end of the second quarter versus the $30 million you have targeted by the end of the year?

Jeffrey L. Rutherford

Well, we are confirming that we are sticking with our $30 million. So it's going to be something in that range right now, in the range of approximately $30 million to $40 million. It's hard to target. One of the things that happens in our cost-reduction is it's not linear. It plateaus. And because now it's based on project and on completion of particular projects, so we're going to see -- it's going to be lumpy as it goes through. And that's why when you ask a question like run rate, I mean, where are you at on a run rate, and where are you at with the project. So we haven't provided that. We'll continue to advise as we get into the third quarter. But right now, I'd say it's probably in that $30 million range.

Operator

[Operator Instructions] We do have a follow-up question from the line of Rosemarie Morbelli from Gabelli & Company.

Rosemarie J. Morbelli - Gabelli & Company, Inc.

Peter, did I understand properly you are exporting products from Egypt into Saudi Arabia and Turkey? Or are you -- and where, if that is correct, where are you exporting products from Southern Europe?

Peter T. Thomas

Yes, so the way you might want to look at this. It varies by product and the specialty nature of the product. So anything that's highly specialized, like digital inks, digital glazes and/or digital ink glaze substrates, most of that would be exported out of Spain. Because that's where the technical hub is and we are watchful of the technology. And anything that's more commodity-based, where we have a better cost position. Because as we've mentioned before, the cost structure in Egypt versus Spain is probably less than half for your base commodity products. So we're kind of using the concept of commodities out of Egypt and specialties out of Europe right now.

Rosemarie J. Morbelli - Gabelli & Company, Inc.

So are you still selling some commodities out of Spain? Or has all of this capacity moved into Egypt? And if you are still selling out of Spain, are you planning on ability some lower-cost capacity somewhere else? And shutting down Egypt -- shutting down Spain?

Peter T. Thomas

Yes, so we're still selling some of the commodities out of Spain to mostly Eastern Europe, if you will. And in terms of looking forward, yes, there's a -- under consideration, looking at ways of expanding our capacity, like we always do, in lower-cost parts of the world, to lower our overall cost footprint.

Rosemarie J. Morbelli - Gabelli & Company, Inc.

Okay. And Jeff, if you look at that $85 million-plus in savings by the end of 2015, I am guessing. Do you have any savings from reshuffling your manufacturing footprint? Or is that not yet into the numbers?

Jeffrey L. Rutherford

There is nothing in that reduction related to any footprint adjustments.

Rosemarie J. Morbelli - Gabelli & Company, Inc.

Okay. And if you were a guessing person, how much do you think you could save from doing that, from that next project?

Jeffrey L. Rutherford

Fortunately, for all of us, I'm not a guessing person.

Rosemarie J. Morbelli - Gabelli & Company, Inc.

Okay, so an educated guess?

Jeffrey L. Rutherford

Yes, we just don't have anything that we could share with anyone at this point in time.

Peter T. Thomas

Rosemary, let me mention one thing as I think we've discussed this in a prior analyst call. Until we get this first flush of cost out of the system, only then will we be in a better position to understand what our overall footprint will be. We need a little more time of getting some more of the cost out. Because every day that goes by here, sometimes things look different than they did 3 months ago because of the effectiveness of some of the things we're doing. So we need some gestation time of having these cost-outs settle into our overall cost structure before me make those decisions. So we don't want to make a mistake.

Rosemarie J. Morbelli - Gabelli & Company, Inc.

Sure. That make sense. And are you already -- well, do you feel that you're focusing on growth at the level that you want to be focusing? Or you really need to go through those savings before you can actually push the growth factor?

Peter T. Thomas

Yes, we're obviously -- one we need to run a parallel path. We're in the beginning, it's more cost-outs, but you don't take your eye of the growth. As I mentioned, we sanitized all the growth projects that we were working on last year. We narrowed them to the bucket of a few that we're investing in right now, and you're starting to hear about it and you'll hear more as we go on so we are running that parallel path. We can multitask the growth and the cost-outs, but we had to get to a certain point. We're doing it in an orderly and methodical way because, again, we still talk about -- even though this is cost-outs, you've heard us talk about as we move forward, it's a GDP plus. And we've discussed how the bleed in from that organic pipeline will come in, in the sequential years. And of course, you know as well as I do, we, as prudent businesspeople, we are mindful of inorganic type of growth vehicles as well. And we are analyzing things like that.

Rosemarie J. Morbelli - Gabelli & Company, Inc.

Okay. And lastly, corporate expense were quite high at $18.8 million. I'm assuming that the comps are in there. What should we be looking at on a normalized quarterly basis?

Jeffrey L. Rutherford

What's in that number is, that's the GAAP number. Of SG&A. And so, things like the cost from the proxy are in that number, and the compensation and the bad debts and so forth. So on a normalized basis, we would say probably $6 million off of that $18 million.

Peter T. Thomas

Rosemarie, before you get off, I want to answer a question that you haven't asked this time, but you have in the past. Because I think it's important, since we talked about Polymer Additives. As you know, our Polymer Additives business is 3 different businesses. We have a polymer modifier piece where our benzyl phthalates reside. We have a lubricants piece, and we have a stabilizers piece. And just so you know, year-over-year, if we exclude the polymer modifiers piece where benzyl phthalates reside. Our Polymer Additives business is up about 8% in volume and about 4.5% in revenue. So I wanted to make sure that there's clarity around that. If you adjust for benzyl phthalates, the Polymer Additives business is actually performing quite well because of automotive and the construction here in North America.

John T. Bingle

Okay, operator. This puts us up to the top of hour. So we're going to call -- close the call at this point. I appreciate everyone's participation. For copies of our press release, replays of this call or to access our SEC filings, please visit our website at www.ferro.com, and click on Investor Information. In addition to that, if there are any questions, please feel free to call me and we can have a follow-up discussion. I appreciate your support. Thank you for your time this morning, and have a good day.

Operator

Ladies and gentlemen, that does conclude the conference call for today. Thank you for your participation, and ask that you disconnect your lines.

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