Ferro Corporation (NYSE:FOE) Q1 2018 Earnings Conference Call May 2, 2018 10:00 AM ET
Kevin Cornelius Grant - Head of Investor Relations
Peter Thomas - Chairman, President and Chief Executive Officer
Ben Schlater - Vice President and Chief Financial Officer
Rosemarie Morbelli - Gabelli & Co
Mike Sison - KeyBanc
David Begleiter - Deutsche Bank
Kevin Hocevar - Northcoast Research
Dmitri Silversteyn - Longbow Research
Mike Harrison - Seaport Global Securities
Good morning. Thank you for joining the Ferro Corporation 2018 First Quarter Earnings Conference Call. An archived replay of this teleconference will be available through the Investor Information section at ferro.com later today and will be available for approximately 7 days.
I would now like to turn the call over to Mr. Kevin Cornelius Grant, Head of Investor Relations for Ferro Corporation.
Kevin Cornelius Grant
Thank you, Jenifer and good morning everyone. Welcome to Ferro's first quarter 2018 earnings conference call. This morning, we'll be reviewing Ferro's financial results for the first quarter ended March 31, 2018.
I'm pleased to be joined today by Peter Thomas, our Chairman, President and CEO; and Ben Schlater, Vice President and Chief Financial Officer. The earnings release and the conference call presentation deck are available on the Investor section of our website.
I'd like to remind everyone that some of the comments we are making today are forward-looking statements and are based on our view of the world and our businesses as we see them today. However, those assumptions can change as the world changes. Please refer to the forward-looking statement disclosure in our earnings release and presentation deck on Slide 2.
Today's call will contain various operating results on both the reported and adjusted basis. Those identified as adjusted exclude certain onetime items and charges. Description of these non-GAAP financial measures and reconciliations are included in the earnings release and the presentation deck.
It is now my pleasure to pass the call over to Peter.
Thanks, Kevin. Good morning, everyone and thank you for joining the call. Our global team produce another quarter of very good financial performance delivering robust growth and maintaining the momentum of the last several quarters the demand for our products and services has been very strong particularly at the higher end of our markets.
We are leveraging our marketing technology leadership positions, our innovation pipeline and the linkages between our three operating segments to successfully feed into this demand and move up the value chain. We feel good about how the business is performing we are confident in our strategy and we are excited about the many opportunities we see for additional value creation.
The first quarter of 2018 was our seventh consecutive quarter of organic growth, driven in large measured by sales from our new product pipeline. Our new products and pricing strategies along with the value proposition we offer our customers enabled us to generate greater profitability despite headwinds from continued raw material price inflation. We are confident that organic growth combined with strategic acquisitions and optimization initiatives across our global footprint will sustain our industry leading performance
Before we talk about segment performance, I'll review some of the consolidated results from the first quarter. Please note that the non-GAAP numbers I refer to are on adjusted basis using constant currency. All first quarter comparisons are versus the first quarter of 2017.
The financial highlights and results can be reviewed in Slides 3, 4 and 5 in the presentation accompanying today's press release, which you can find on ferro.com in the investor section
Starting with the first quarter performance on Slide 4, we grew net sales 18.1% to $405.5 million with total volume increasing 11.1% and organic sales growth of 4.6%. Adjusted gross profit increased 9.9% to $119.7 million. We grew adjusted EBITDA by 14.5% to $64 million or 15.8% of net sales.
GAAP earnings per diluted share improved 3.8% to $0.27 compared to $0.26 in the first quarter last year and adjusted EPS increased 16.1% to $0.36. All in all it was another quarter of strong performance building on strong performance in the last several quarters.
The fourteen strategic acquisitions we've made over the past two and a half years are contributing to our results in multiple ways. They are extending our addressable markets, providing cross selling opportunities, enhancing our technical capabilities, generating cost synergies and bringing strong talent into the organization. We've been able to quickly integrate the acquisitions and we are seeing the benefits.
In the current phase of our strategy, the dynamic innovation and optimization phase, we are optimizing the value proposition we offer our customers as we move up the value chain in the markets we serve, providing higher value products and services. Rest assured, we are at the same time maintaining a companywide commitment to optimizing our cost structure in every part of our business, commercial, operational and functional, we are working to improve our effectiveness and efficiency.
The refinancing of our credit facility, which we announced last week is another example of optimization, as we took action optimize our capital structure by locking in rates, increasing our credit line and giving us more financial flexibility to fuel our growth strategy.
Now I would like to spend a little time reporting on the performance of our three segments.
Turning to Slide 5 in the presentation, you can see a summary on first quarter 2018 performance from our three segments. Starting with Performance Coatings a leading supplier of decorative coatings for ceramic tile, which we sell through our tile coatings business and glass based coatings for metal substrates which we sell through our portion enamel business. Performance Coatings represents about 45.5 of Ferro's total sales.
Performance Coatings generated strong growth and net sales in the first quarter of 2018 with organic sales growth in the mid-single digits. We are focused on building this business through cross selling channels that leverage our acquisitions in the high end of the market. This approach gives us the ability to optimize our customer base, concentrating on segments of the market in which we can offer superior products and services that generate higher margins.
For the first quarter net sales increased 35.5% to $184.6 million with volume up 15.1%. Organic sales growth was up 6.1%. Adjusted gross profit was $43.7 million and gross profit margin was 23.7%.
As I mentioned during our 2017 fourth quarter earnings call, our Performance Coatings business has been the most impacted by raw materials price inflation, especially related to lithium and cobalt. We have taken proactive steps to manage through today's raw material environment, expect that's also good for long term growth of the business. Increasing raw material cost has been a catalyst for us to optimize the value of our customer base. We're evaluating customer terms and conditions.
Global demand for our color coatings is very strong, allowing us to be selective in the orders we've take and optimize the customer base by targeting the high end of the market that values our innovative portfolio and support services.
This has allowed us to capture better pricing and margins. We actually put this initiative in place last year when we anticipated raw material price inflation. The impact is starting to become evident in the first quarter results, where Performance Coatings drove $7 million in additional revenue through price increases, the highest since we set our value creation strategy more than five years ago.
Over the past two quarters as a result of the value proposition we offer our customers, the Performance Coatings business has been able to deliver more than $11 million in additional revenue through price increases. This higher pricing which we have implemented in connection with our customer optimization initiatives has pushed some volume into the second quarter as we set new terms and conditions with certain customers.
These disciplined customer optimization practices will have even greater impact when raw material prices level high. Looking forward we are excited for the Performance Coating segments growth opportunities, especially in emerging markets. We believe emerging markets are poised for strong gains in 2018 as these markets are early in the global recovery cycle compared to more developed markets. We expect that Ferro will benefit as the low cost provider with a high end market in these regions
Turning to Performance Colors and Glasss, we can see on Slide 5 that this segment continued to grow above the market rate in the first quarter. As a reminder, our Performance Colors and Glass business serves technology driven markets were our coatings add significant functional value to our customer's products, the primary driver of our Performances' product innovation which we do in close coordination with our customers. Our leadership in the digitalization of glass coatings also is contributing to growth in this business.
Performance Colors Reported as colors and Glass revenues ends about 29.7% of total Ferro sales. For the first quarter, net sales net sales in Performance Colors and Glass were up 8.5% to $120.5 million with total volume up 6.5%. Organic sales grew 2.9%. Adjusted gross profit was $43.3 million and gross margin was 36%.
Our innovation initiatives and technical capabilities are driving consistent high growth in the automotive market, especially in Europe and Asia Pacific region where we turned in high single digit growth in volume and revenue well above the market growth in the quarter. The last two quarters have produced the highest organic growth that the performance colors and glass business has achieved since the start of the Value Creation strategy more than five years ago
Complementing the strong performance in automotive, we are seeing strong demand for our electronic package materials in the sensor market, with revenue growth in the mid and high single digits again in the first quarter. More broadly as a leading provider of glass coating technologies, we are well positioned to apply our inter related competencies to certain mega trends that we see emerging in the marketplace, for example LED, 5G and smart cars.
We are working closely with existing and perspective customers in areas such as digital printing and the decoration market, sensors with customized functionality, 3D printing and many others. We are really excited about the opportunities we see ahead.
Now moving to our Color Solutions segment, which produces functional color pigments and surface finishing materials, Ferro is a leading global manufacturer and supplier of inorganic pigments and we continue to experience strong demand. The businesses that we acquired in recent years such as Nubiola, a global manufacturer of inorganic pigments and Cappelle , a global manufacturer of inorganic and organic pigments have increased our adjustable market and they are making significant contributions to the business.
These acquisitions have both been part of Ferro for over a year, making year-on-year flow through the first quarter in Color Solutions all organic. Net sales for the first quarter of 2018 increased 4.4% to $100.4 million. Adjusted gross profit was $32.7 million with gross margin coming in at 32.6%.
Our volume in color solutions was down relative to the first quarter of 2017, but note that in 2017 we had a very large and unusual sales basic from sulfate, putting aside the effect of that unusual sale in the first quarter of 2017, color solutions volume grew by mid-single digits for the first quarter of 2018.
Innovation is a strong driver of new and expanding demand for the color solutions business. With our new technology and innovation office expertise, we look to continue to capture growth in new opportunities such as working granules. We also are looking at ways to expand our lineup of environmentally friendly pigments. As in all our businesses, we continue to be mindful of optimization opportunities to manage our cost to ensure that our operations are efficient..
Finally, we continue to evaluate opportunities for building out our surface technology business into a more substantial platform. We have seen continued growth and strong forward demand from our customers and this space.
So a good first quarter, with the first quarter under our belt and an organic pipeline full of opportunities and strong demand for our products we are reaffirming our full year 2018 guidance. Looking further on the horizon we are making good headway toward our vision 2020 goals of gross margins of 33% to 34%, EBITDA at 20% and free cash flow conversion at 50% to 60%.
And now I'll turn the call over to Ben for his comments.
Thank you, Peter and good morning everyone. As Peter noted we are very pleased with the first quarter results. Revenue and organic growth combined with our pricing and optimization activities including SG&A leverage resulted in solid earnings this quarter despite the continued headwinds our industry faces from raw material price inflation.
With great efforts from our team through price increases, reformulation initiatives and operations optimization, we have been able to mitigate the majority of these headwinds and as we have noted in prior conference calls when raw material inflation stabilizes, we expect to cover any headwinds on a one to two quarter lag.
In my comment this morning, I'll review onetime adjustments for the first quarter of 2018 and provide an overview of SG&A expenses and other and income expense lines.
For the first quarter of 2018, there were a few nonrecurring adjustments primarily related to our active acquisition pipeline. First, we had adjustment of approximately 1 million to cost of sales primarily related to acquisitions.
Turning to SG&A, we had onetime adjustments of 4.1 million of legal, professional and other expenses related to certain corporate development activities as well as fees associated with certain optimization projects.
Under restructuring and impairment there was an adjustment approximately 4.1 million in the first quarter related to actions to achieve our ongoing optimization initiatives and acquisitions energies. And lastly in other income and expense, we had an adjustment of about 800,000 related to acquisition purchase price adjustments
Now Turning to Slide 7 and our first quarter earnings deck. The first quarter adjusted SG&A expense was 69 million or 17% of net sales compared with 60.5 million or 17.6% of net sales in the prior year quarter as stated on a constant currency basis. Newly acquired businesses accounted for the majority of the increase. We continue to see good operating leverage as we grow the top line while achieving our targeted optimization in SG&A.
That brings me to the breakdown of cash flow. Adjusted free cash flow from continuing operations was the use of 41.1million, which compares to a use of 2.2 million for the prior year.
As a reminder we define adjusted free cash flow from continuing operations as adjusted EBITDA, less any charges for taxes, interest payments, investments in networking capital, capital spending and other cash operating items.
The most meaningful components of adjusted free cash flow from continuing operations are as follows. Starting with adjusted EBITDA 64 million we subtract, 7.3 million of interest, 4.6 million of cash taxes, 67 million from our investment in working capital, 14.5 million of capital spending, 16.2 million of incentive compensation payments,600,000 of pension payments and then we add 5 million of non-cash charges added back to EBITDA.
Before moving to guidance I wanted to just spend a few minutes on cash flow on Table 9 of the press release. Most of the variance versus the prior year was driven by planned working capital increases and higher CapEx.
The increased usage in working capital was driven primarily by growth in our business year-over-year in addition to our typical seasonal working capital build based on yearend levels and timing. In addition, we made some strategic pre-buys in the inventory in anticipation of our planned optimization and integration activity as well as raw material price trends.
We anticipate both of these will reverse in the second half of the year consistent with our historical trends. Cap Ex was also higher due to timing of spend. Our full your guidance here remained at 40 million to 45 million.
In summary, I would just reiterate at the adjusted cash flow from continuing operations was very consistent with our expectations for Q1 and does not change our outlook for the year. We still feel very good about our full year guidance of 40% to 45% cash conversion.
Now, please turn to Slide 8 to review the 2018 guidance summary. As Peter mentioned we are reaffirming the 2018 outlook that we published in our year end 2017 press release.
These metrics remain as follows, adjusted EBITDA in the range of 270 million to 275 million, adjusted EPS in the range of $1.55 to $1.60 and adjusted cash flow from operations conversion between 40% and 45%.
To be consistent with our previous practice, 2018 guidance reflects foreign exchange spot rates as of 12/31/2017, which reflects a euro to US exchange rate of $1.20. We have provided FX sensitivity in the guidance section of our earnings release.
As a reminder Ferro generates approximately 35% to 40% of its revenues in Euros and approximately 25% to 30% in US dollars. We estimate that 1% overall change in foreign currency exchange rates weighted for the countries where we do business will impact operating profit from 1.3 million to 1.5 million.
Further if you isolate for sensitivity, a 1% change in the euro would impact operating profit by approximately $800,000 to $1million. As we have noted in earlier conference calls the effects of our transformation into the new Ferro started gaining momentum in the second half of 2016. Now with the seventh quarter of increasing organic growth, our projections on performance from the upgraded portfolio and integrated acquisitions are becoming more visible. We are still getting a hand on the cycle changes.
As Peter said, we have a robust pipeline that we expect to continue to contribute to our vitality index. We are experiencing solid demand for our products. We are confident in our raw material mitigation strategy and our ability to continue optimization throughout our business. And lastly we announced on April 26th that we successfully closed on a new $820 million senior secured term loan facility and increased our senior secured revolving credit facility to $500 million.
We were extremely pleased with the success of this effort and the interest attracted from the financial markets. I'll just review a few of the highlights from the financing briefly. First we feel good about extending the debt life and lowering our interest rate. Second, it increased our liquidity by about $250 million. Third, it's just roughly two-thirds of the capital structure at attractive rates. And lastly it maximized our interest deductibility.
So in summary 2018 is shaping up to be another busy year for Ferro. We are excited about the opportunities for organic growth and are actively evaluating acquisition options. Our culture is focused on innovation and optimization and using our market and technical leadership to support our customers in the technology-based coatings and color solution space. And we remain focused on our vision 2020 plan.
And now I will turn the call back over to Kevin for our Q&A session.
[Operator Instructions] Our first question comes from the line of Rosemarie Morbelli with Gabelli & Co. Please proceed with your question.
Thank you. Good morning everyone.
Congratulations on the strong first quarter. But, Peter, we know you are conservative in your projections. So in addition to your conservatism, were there any areas which performed above your internal expectations? And linked to that, as the first quarter was stronger than at least for street and I anticipated you are maintaining the guidance. So are you expecting some weakness going forward in the next two, three quarters?
Hello, Rosemarie, and thank you for the compliment, so let me address your first question [indiscernible] we see really, really nice improvement, what we are really excited about and why we feel good for the balance of the year, because there are some things that are going on that should make everybody feel very comfortable. Let me highlight a few of those.
First, let's talk about our automotive sector around the world where you know based on the days particularly out of LMC's reports where global automotive is probably somewhere between 2.5% to 3% [indiscernible] where we are really excited about is our volume was up close to 9% and our revenue was up 8% globally.
Why is that the case? For two reasons. Number one, over the last two to three years, we have really, really jumped the chasm with our customers on being the incumbent R&D support group for them and we've really jumped the chasm again twice on offering second and third generations right up front. So we are really, really picking up market share around the world.
The second important piece of that as an extension is that our key customers are becoming more global as they also reproached solidifying their positions in the growth regions with application center and we are right alongside them. As they expand, we are moving right there with the right funding and building an application space. So we are really picking up share.
The third thing is we just happen to be in the right mix of products whether it's a high end BMWs, Mercedes, Porsches, Ferraris, Lamborghini, whatever the case is and even down the Mexico where you see that automotive production is [indiscernible] to Mexico as well as exports, but guess what? We are - the good news is where companies like Ford are moving away from sedans, we have the strongest position in trucks and SUVs.
So we are at the right place right time with the right technology around the world targeting the right end customer products that have the greatest demand. The second thing is our electronics business is on fire and basically our volume's up about 15%. And again with our oxygen centers and our nitrogen oxide centers and all those different applications we are - that particular functionality is real critical and you've done all the reading.
You know what the center demand is over the next three to five years and we are one of the few that were in that space with the leadership positions. Next a really highlight for us is surface technologies and why we've made the comment over the years that that is a nice feeling. It's developing as we are moving along. Our R&D work is very good.
We have a lot of off-cycle opportunities there adding to the excitement moving forward. For the first quarter, our volume is up about 18% and our revenue is up about 25% and we feel very comfortable for the balance of the year particularly where we are in the key with a handful of customers that will be coming out with leading technology.
More on this side that may be a little surprising but since we've initiated the concept that Ferro is going to digitally color the world, you could see we are building our competencies around the applications on every type of substrate, every type of ink, now we're in the equipment business. You can see the demand for our inks whether the inks are in [indiscernible] our volume in our inks is up 33% and our revenue is up 21% and even more impressively would be our growth with Porcelain Enamel which you know is typically a 1% to 2% growth type of a business.
Although margins are high and strong cash flow, we had a wonderful quarter. Our volume was up 6% and our revenue was up 12%. Why? Well, I guess we owe to Trump, because he put terrace on appliances and all the North American appliance producers are benefitting of course as the market leaders so do we.
So those are the - hopefully that answered your question. We have a lot of bright spots we see, the traction moving forward and that's why we remain supporting our guidance and we feel really good about the balance of the year.
Are you expecting that you are not tracing your guidance? So is it a question of you are probably going to get closer to the high end or get closer to the low end and what we get you to be at the low end, what could go wrong?
Yeah, I don't think there is anything that could go wrong. I think what you are to take away from this is that we started pretty strong with our guidance. I mean at the end of the day we provided our guidance. We were talking about the EBITDA growth of 14%, EPS growth of 20%. We talk about revenue growth of 14%.
Organic - I mean when you put all that together as we are defining Ferro, we started out the year where we want to be a transparent and we want to be predictable incredible and that is what we felt that we could deliver and not at the lower range. We want to stay on mission and we see no reason why we can't deliver what we are saying.
Okay. Thank you. I'll get back in queue.
Our next question comes from the line of Mike Sison with KeyBanc. Please proceed with your question.
Hey, guys. Nice start to the year.
In terms of solutions volumes, should that return to growth in 2Q and for the rest of the year?
Yeah, first of all thanks for that question because we know what that looks like optically. So that's kind of put us in the situation where we are going to be a little more transparent with the volume what it means to Ferro and whatever and have a better understanding of that business where maybe in the past we were holding back for certain competitive regions. But let's look at it this way. Same thing is for Performance Colors and Glass.
When you look at Color Solutions, number one, it only represents about 9% of Ferro's total volume. And what that suggests is when you look at that business, I would not be too concerned about volume. If you have swings, what you have to measure if you are concerned about the volume, then look at the margin and revenue, because this is really a mix in revenue and margin type of a business much like PCG. Let's look at it this way.
We had an extra order of byproduct in the first quarter of last year. Putting that aside, our volume in that business would have been mid-single digits if you want to look at and measure and although we were up 4.4% in revenue adjusting for that particular situation, our organic growth would have been 7.5%. So number one, nothing wrong with the business adjusting to the big byproduct sale in the first quarter last year which we highlighted which was very, very large. Going forward, the business is very strong. The cross-selling activities are gaining momentum.
Our plants are running very strongly. We are increasing capacity around the world to meet the demand looking forward. Our order book is up two and three quarters. We have good visibility with the high end products and our demand remains strong. We are adding capacity and we are going to meet that demand and this business continues to be a highlight of the company.
Right. And, yeah, gross margin was up - gross profit was up too in the quarter. Shifting gears a little bit, maybe give us some color on M&A scenario that's really been a hallmark for you guys in the last couple of years and you have tended to find acquisitions in the second half. Any chance some of the momentum can start earlier this year?
Yeah, so good question. So here is what we are now ready to share with you. Remember that each year usually it starts sometime at the beginning of the second quarter and moves through the balance of the year. Again we have many opportunities and let me just highlight a few more to address at another comfort level which I think your question might be.
Our targets are now up to 340. We give you an idea. We were looking as I mentioned at any given time there are five to six - managing five to six through different stages and in the first quarter we saw something very interesting that we were trying to sequence the acquisitions in a way that we can optimize the value contribution to the business for the rest of the year.
So we worked really hard repositioning those assets in a way that I would say you should feel comfortable that we now have them in the queue and now we are going to orderly and methodically start executing the plan in a way that we will continue to deliver against our commitments $100 million to $200 million of investment capital, $120 million to $130 million of revenue and $30 million to $35 million of synergy adjusted EBITDA. We are on track and we will stay tuned.
Great, thank you.
Our next question comes from the line of David Begleiter with Deutsche Bank. Please proceed with your question.
Thank you. Good morning. You mentioned on performance coatings some sales got pushed into Q2. Ex that, would have volumes been up in the quarter and what's your expectation for the rest of the year in that segment from a volume basis?
Yeah, perfect, mid-single digits.
Very good and also in that segment, in terms of gross margins and pricing, where do you stand? How much more pricing do you need to get and when can you expect - when should we expect gross margins to come positively on a year-over-year basis in performance coatings?
David, before we go there, let me make sure we explained that volume thing - it's just a good question. There are two pieces there and I think it's important for you to understand rather this side, because we feel good about it. I mean the volume is very strong. You will not believe what we are looking at going forward here. But two things you have to consider.
Our volume growth in that business has been up 15.1%. Understand that we've had five acquisitions in that business and two of them still want to integrate it because they are not with us for a year and in order to optimize our capacity to meet the strong demand, some of what you would define as organic volume and we would define are moving through those facilities that are not organic yet and it's rolling hard for us to really get a handle on that because the orders are coming in every day.
But our teams are very efficient. We know what the cost is in each facility. We know what each cost is for the macro group. We know the cost structure of every SKU and what happens is when those orders come in, those orders are flying all over the place and it's really hard for us to really get a handle on what's organic than other and you look at mix and volume that we are looking at and we can get into that later.
So just understand that when these become organic, that would be a lot easier. But what you should look at is that 15% putting aside what I've just mentioned is a good single digit kind of a volume growth or let's basically call it 3% to 4% or whatever. The second thing that's important for you to understand is notice that we use something that we haven't used before is the customer value proposition optimization.
I guess you got that and that's why you asked about this volume movement. So what we really like, I'm going to say something, even though raw material headwinds are negative, hey, look, at the end of the day we view it as a - maybe we are more optimistic about that looking forward because we are doing a lot of things. So when the raw materials start to accrue when they combine [ph], we have really step-changed the business in our meetings for certain raw materials that will put us in a better, better position than you can imagine.
What do I mean by that? Two things, one, if you take a look at the major raw materials that we are dealing with particularly lithium and cobalt and a range of others without being specific our teams have done a phenomenal job with repositioning our requirements for raw materials and that we are using no less than nine different byproducts we are using to extract raw materials from those that are really moving up in order to lower our cost structure and reposition our business in the future.
So going forward our demand may be for lithium and cobalt might not be as dramatic as it was in the past. So we've repositioned that cost structure. The second thing is we like catalysts to up our optimization programs. So if you remember in '14 and '15 we've spent a lot of time picking and choosing the customers that we want to deal with in the future, right, and those typically were customers that would have certain demand requirements and/or would require a lot of technology in R&D moving forward thus the reposition of everything that we have done.
So the good news is now that we have done that here is the deal. We said this space with Ferro you can use three words from now on to explain anything, everything is dynamic and everything is innovative and everything is optimized. So here is what we are doing with those same customers we feel this is a good time to step back and ask the questions, 'does the customer really appreciate what we do and does our team understand what their value proposition is, so that we can marry our serviceability with the true value proposition of those customers which means some customers like quality and they like supply chain.
They don't care as much about price, but maybe we have to understand that. So what we've done as a strong man as we targeted maybe tile first and we said, look, this is our chance. So look at every facet of the value proposition to make sure that we are comfortable with quality needs of the customer, R&D needs of the customer, specific pricing, supply chain requirements, alignment of business roles, making sure they take the right volume that we need them to take to help us out and return and so on and so on and what we have done starting in the fourth quarter is we embraced that program.
And what you are seeing over the first and second quarter coming up and the fourth quarter is movement with volume with those customers and maybe pre-bought a little bit while we were negotiating in the fourth quarter. In the second quarter they had the volume. In the fourth quarter maybe some of them push a lot into the second where we have a moving target of what I can tell you is when you look at our order book in the second quarter we are pleased to note that the majority of what we have asked for with a reason that may be enhancing our position we are getting. So we feel very good for the balance of the year and so should you..
Thank you very much. That's very helpful.
Our next question comes from the line of Kevin Hocevar with Northcoast Research. Please proceed with your question.
Hey, good morning everybody. Nice start to the year.
Hey, Ben, last quarter you gave an EBITDA bridge in your comments on the call and I believe you mentioned that kind of the net raw material inflation headwind after adjusting for pricing in all your optimization initiatives would be about $4 million to $5 million headwind to EBITDA this year. So just wondering with everything, all the moving pieces, the inflation you are seeing, the pricing you are getting, the optimization you are doing, is that still a good number or do you think things any differently based on what you see in the last couple of months and see going forward?
We should still be, Kevin, pretty close to that. We'll continue to see raw material increases as we get in here to the second quarter. But if you look at where we are from a price perspective, how we are rolling our price versus how raw materials are rolling in, we are ahead of schedule in terms of being able to cover that. I mean we said in the past that we'll cover that one to two quarter lag. So I think you can see that number go up a bit. But if you look at how fast the price is rolling out, we feel like we are ahead of the curve in terms of being able to recover it, so said differently when we are recovering it faster than we thought we otherwise would.
Got you. Okay. And then not to keep question - throwing question at you on the performance coatings, the push out in volumes and the color solutions volume, but what would - you do organic growth 4.6% even despite those items that held back that growth in this quarter. So if you kind of normalize those, what would that organic growth have been excluding those factors this quarter? And I know the long-term expectation is 3% to 4% organic growth. It seems like you are tracking ahead of that. So once we get past these issues, I don't want to call it issues, but things that impacted the first quarter organic growth, how should we think of that organic growth the balance of the year?
Yeah. So in the first quarter, Kevin, if we put aside sort of the things that Peter is talking about that organic growth remained really strong and we are going to be mid to high single digits north of 6%. So we continue to see really, really good demand in the markets across the portfolio.
Got you. And should we think of that that's a full year thought that 4% to 6%?
That's just in the first quarter.
Got you. Okay. Thank you very much.
Our next question comes from the line of Dmitri Silversteyn with Longbow Research. Please proceed with your question.
Thank you for taking my questions. Congratulations on getting the year off to a good start.
I just want to make sure that I sort of put this horse to bed as far as the one-time sale you got in the first quarter of 2017 that didn't repeat this year in color solutions. None of its built off into the second quarter, right, so in the second quarter your volume comp should be more apples-to-apples without this one-time large order. Is that correct?
So, Dmitri, we have a little bit in the second quarter last year, so I think we'll see a little bit of it continue, but the magnitude was lower. This was the basic chromium sulfate coming out of the color solutions business and if you recall this was very low margin product, right. It takes off a ton of the volume with very low margin. So it's really sort of - it's very easy to isolate.
Okay, okay. Fair enough. In terms of you talked about being a little bit ahead of the curve in your expectations in recovering pricing or recovering the impact of raw material cost increases. If you look at your price raw material spread, obviously you can't predict where raw materials are going to go next year or next couple of quarters. But assuming that they stay at these levels, can we get to a gross margin purity or better in the second half of the year and is it more of a third quarter or fourth quarter event?
So I think it all depends on sort of the trajectory and the speed around the raw material increases. But I think the short answer is yes. I mean we reflected our best guess in our guidance. So we stand by that, in terms of the cadence around rolling out price with respect to raw materials and if you look over the last couple of quarters that has held very, very true. If you look at the raw materials headwinds net in 2017 versus the price that we pulled in the first quarter, we are well ahead where we need to be.
So what that would tell us is that once we see stabilization from a raw materials perspective, we feel really good about seeing the margin come back there in sort of one to two quarters timeframe. So that was what happened in the first quarter from that standpoint. I think it was really encouraging.
Okay. Are there any customer groupings, geographies, businesses, end markets where pricing is harder to get or easier to get where you are still maybe struggling to get pricing off the ground or were you having really strong success in getting pricing?
Dmitri, I don't think so. I mean if you look at - let's just go business by business. I mean if you look at color solutions, I mean, we are almost fully recovered in the first quarter. Same for performance color and glass. With respect to Tile and PE, which is where we are seeing most of the cobalt increases, I mean, tile pulled - that business pulled $7 million of price in the first quarter which is more than they have pulled in recent history. So we are seeing a lot of really good traction and this sort of builds on the comment that Peter talked about around the customer value proposition and really looking hard at that.
Yeah. Another point to make is that I think we want to highlight even it wasn't asked, if you remember what we measure in terms of the quality of the business and why we feel so good as we continue to look at flow through and if you remember last year of our $70 million of organic growth and 40%, we mentioned you don't forget that as the raw materials and size because these raw material increases are hiding a lot of good things and we in so many different ways are trying to bring to your attention we feel good about this. You should adjust this, don't forget this and that or whatever the case is. But even in the first quarter that organic growth of flow through was even greater than it was all of last year.
So when you see on an additive basis and why we feel good and you are hearing it and why we are maintaining our guidance and how we operate as it relates to this, we don't want to disappoint, we want to hit, but understand there has been a significant structural change and I'll tell you what. Like I said before maybe it was a good thing that we have these raw material increases because, look, at the end of the day it's usually when people ask the press of it so there's kind of a disaster that arises in the occasion and we have and as Ben mentioned, hey, look, it's higher.
We have $11 million of price. But understand what we have said we use that as a catalyst to address a lot of other things that will make the quality of our business better going forward because we pick the right customer base. We appreciate our value to them and we respect them and that's worth a little bit more money at the margin level and that's why we said we are feeling really good about the 33 to 34 based on the 2020.
Don't lose sight of the structural change over the last two years. That's why we are painstaking and we are making certain points. So as you are doing the model and you have a perspective on those items.
Okay. That's helpful, Peter. And I actually wanted to follow up with my question along those lines. This customer optimization and mix optimization initiative and I sort of understand I think what you mean by that statement, obviously it can lead to lower volume growth as you are more focused on mix and getting pricing. How should we think about that and is there a particular - I would assume that in performance coatings there is a bigger issue there or maybe a little bit less on color solutions?
No. When we stop you there and make sure that we are clear. There is a difference between rationalization and optimization. Rationalization was the program that we withdrew in '14 and '15 to pick and choose what we wanted. Optimization means we love everybody that we have and we are just making sure that we are getting the right value for what we offer and it doesn't change the volume and that's why I mentioned we haven't lost the volume.
You are going to see this spread maybe more in the fourth quarter and second quarter rather than the first quarter because that's when one was defined as the impact point. So no volume, this is all about making sure that customers respect what we do like we respect them and we want to make sure because we are all busy that we are aligning and putting the right time and service that wants a certain price point.
Not just price thought, it's quality, it's serviceability, it's supply chain, it's making sure that maybe we would go to a customer and say, hey, look, you got to buy a 1000 metric tons at a pop instead of 500. It's all those little points around terms and condition, nothing to do with rationalizing anything. It's optimizing the position. No volume loss.
Okay, Peter, thank you for that clarification. That was very helpful. Thank you.
Our next question comes from the line of Mike Harrison with Seaport Global Securities. Please proceed with your question.
Hi, good morning.
Peter, I wanted to go back to the question around gross margin in the performance coatings business. Obviously that's where you see the most raw material pressure that's also where you're getting the most pricing. And we're seeing gross margin down about three hundred basis points year on year was just wondering if you can give us some thoughts on the gross margin cadence from here during 2018, when might we expect to see you get back to the 26%, 27% range which is what you saw for the full year in 2016?
Yeah obviously we don't want to be that specific for some reasons but like you know the songs that you get better all the time. I think you have to just trust what we're saying and how we're managing that and you'll see what we define I guess we can say without going too far the bigger not only were see it improvement and that makes us all what we ought to face today so I think might just stay too we have a lot of things that are adding value not only just on the price side that there's some other things that are going on as a result of his value proposition situation that will enhance our value moving forward, so just stay tuned, getting better all the time.
All right and then just looking at the overall raw material picture it looks like some of the materials you call about the past like Cobalt, lithium, zinc are maybe starting to stabilize or move lower over the past several weeks can you talk about what are some of the materials that are still give you a headache you want and what you're seeing in terms of the potential for stabilization or moderation as we get into Q2 with the rest of the year?
Hi, Mike. Yeah, sure, I think you're right we are starting to see some stabilization I think that where we would expect to continue to see increases and where we work the hardest around price and managing it from a supply perspective are come cobalt and lithium. So I don't think that that will change going for be good news that the market is well aware of that and have been receptive on the price side. And then I would just continue to reiterate what Peter said at the top of the call around the work that the team has done from a supply perspective on both buying and reformulation, so that so that has been I would say very successful in the first quarter and we would look for that to continue.
Hey, Mike this is an again we're [indiscernible] for your consideration. Don't forget what we mentioned of bought what we've done with those byproducts theories and what that means going forward and things of quote liberate our ability to do that with a handful of raw materials might suggest that we don't need maybe as much as we can give - our requirement, our take maybe a third less from a lot of those raw materials which have an inherent improvement - provides inherent improvement to our gross margin. So that's why the point about byproducts and things, we're trying to let you know that we haven't –we're not standing still on all facets of using the raw material catalyst as a mechanism to really, really drive better optimization of our franchise.
Alright and then last question for me is on the color and glass business, I was just wondering if you can talk a little bit about the new product pipeline that you have there, maybe trying to get a sense of how your visibility looks in that business, I know mentioned in color solutions you feel like you have visibility going out two or three quarters, do you have similar visibility at this point in color and glass.
We sure do and I'm - I'd like to talk to you about this for an hour, but let me give you an idea of what we have done over the past year and what has been bleeding into our performance and should continue through the bounce of the year which would suggest what I said earlier not only are we the market leader, but we are jumping the cats in twice versus the rest of our competition. That's why you see the steady improvement, but let's just look at PCG, the growth initiatives the new product pipeline for that business we have an automotive, we have new anti-stick black enamels that are really differentiated the marketplace that's performing unbelievably well in our declaration business. We have led free black enamels, we have variants of what our four hundred pearls, we have resistance led free types of coatings and electronics, heater elements, heater resistors and brand new precious metal piece that would go into those resistors and those elements, so we have an integrated solution.
And in our industrial sector we have, you'll hear more about this a little bit later, but a new dynamic in roofed house that Ferro has pioneered and we have a lot of new technology that will be coming out. We have brand new conductive wings, we have new roof and windows glasses, I mean we have - don't forget our addressable markets since 2012 has expanded from 3.2 billion over ten billion and with that type of an expansion of addressable market are adjacent movements are unbelievable which is why we have a greater pipeline on our base organic pipeline which is why we have a stronger inorganic pipeline and that's the reason why we launched our Chief Technology Officer expertise model on our Investor Day because with that dynamic innovation we have twelve new programs that are valued now over $200 million over a three to five year period with a gross margin that's greater than 40.
We have four new LED applications which range everywhere from new pace, the ceilings, the color glasses and new metal type coatings as well as our 5G applications and a lot of that is a PCG and we're talking about high frequency applications, new fixed film tapes, audio communications with Smart Cars, surface conductors I mean you name it it's all over the place and like I mentioned the first quarter, we have more secrecy agreements in 2017 than we had probably the prior six or seven years. So all of our organic and inorganic programs are out there and we're hitting that. We might not be rowing boat about all these hits and I just mention a lot of them to you just now just a map of what I consider and go through every business and highlight another fifty but for competitive reasons we may not be helping ourselves by not communicating lot of these, but we feel it's more important to gain the traction, get the order and jump a customer and then we talk about it. So what we're trying to do a little better with this, but we want to make sure we put enough distance between ourselves and our customers before we start giving that information out a little more freely if that makes sense to you.
Understood, thanks very much.
Operator, we have time for one more question.
Thank you our follow up question comes from the line of Rosemarie Morbelli with Gabelli & Co. Please proceed with your question.
Thank you for taking the question I have tried to be disciplined and stick to two questions before. I was wondering Peter, if you could give us an update on your manufacturing consolidations and then a little more details on the capacity additions, which areas geographies you're adding?
Well, let's see, those two questions can be interpreted several different ways by us, so be more specific on your question. Are you talking about are the synergies around our acquisitions, on what we've been consolidating within those businesses, is that what you're referring to the manufacturing consolidation ?
Yes, in addition to it. I mean, you had talked about 30 million to 35 million of synergies from that particular activity, so where do we stand down towards gaining those particular savings and those numbers feel good.
Yeah, just to make sure there's clarity around - we've never said over the manufacturing consolidation that 30 million, but what we said it was an optimization bridging capacity around the world with a range of new equipment, upgrading processes, upgrading cycle times, adjusting for raw material purchasing advantages and LI. Is it really coupled here and that's why I asked the question. So as it relates to that program we are on track and on schedule, stay tuned, things are happening pretty quickly here. We can get more into that very shortly, but understand nothing has changed. We feel very good about that project maybe even a little bit more than we have and would suggest to you that you might already be thinking and there's no reason why. I think we said that by first quarter 2019 we got the full run rate, so we feel really good about where that is and I think you'll start seeing some of that shortly.
Now as it relates to - if you're asking about the acquisitions and as you know there are a lot of manufacturing synergies around the acquisitions I've made, I mean we've made - that we made that we should discuss that. We're ahead of our schedule and that we're delivering greater synergies than what our business case was. So they're on track, moving at a good pace and maybe a little more value than we thought would be contributing. Did that help you?
Yes, it does. I mean all of those acquisitions you inherited a lot of manufacturing facilities, so I assume you don't need them all?
Right, and that's what we've said. To give you perspective, I think we gave a measure on what you should expect on how much we'll invest like 150 to 200 with the adjusted - synergy adjusted EBITDA and I think we gave some synergy. Of course we always say what surface - what the amount we purchased and then we synergy adjust and a lot of that includes manufacturing consolidation type activity. The more we can say is, we're ahead of schedule and they're delivering greater results. And probably by the maybe fourth quarter, we could be more specific about certain actions that we take, but we just want to make sure for a lot of competitive reasons we stay a bit furtive on the 30 million and we just know that they're coming to full issuance, probably had a schedule and delivering more.
Okay, that is great and the capacity addition Peter, any particular geography and which specific markets are you targeting with those?
For competitive reasons we don't to - we can't discuss that, but yeah, just know that the demand is really, really high in a couple of our businesses and we are building the capacity to address that demand in a way that we're pretty comfortable and lot of the cases our competition may not be able to respond as quickly as we are. So we feel good about being on the forefront of that demand.
Okay, great. Thank you.
We like to thank everyone for joining us today. We appreciate your interest in Ferro and we look forward discussing our results with you again next quarter.
Ladies and gentlemen this does conclude the conference call for today. We thank you for your participation and ask that you kindly disconnect your lines. Have a good day everyone.