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Edited Transcript of FOE earnings conference call or presentation 9-Nov-18 3:00pm GMT

Q3 2018 Ferro Corp Earnings Call

Cleveland Nov 12, 2018 (Thomson StreetEvents) -- Edited Transcript of Ferro Corp earnings conference call or presentation Friday, November 9, 2018 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Benjamin J. Schlater

Ferro Corporation - VP & CFO

* Kevin Cornelius Grant

Ferro Corporation - Head of IR

* Peter T. Thomas

Ferro Corporation - Chairman, President & CEO

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Conference Call Participants

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* John Patrick McNulty

BMO Capital Markets Equity Research - Analyst

* Kevin William Hocevar

Northcoast Research Partners, LLC - VP & Equity Research Analyst

* Michael Joseph Harrison

Seaport Global Securities LLC, Research Division - MD & Senior Chemicals Analyst

* Michael Joseph Sison

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

* Rosemarie Jeanne Pitras-Morbelli

G. Research, LLC - Research Analyst

* Yifei Huang

Deutsche Bank AG, Research Division - Research Associate

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Presentation

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Operator [1]

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Good morning. Thank you for joining the Ferro Corporation 2018 Third 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 this conference over to Mr. Kevin Cornelius Grant, Head of Investor Relations for Ferro Corporation. Please go ahead, sir.

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

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Thank you, and good morning, everyone. Welcome to Ferro's Third Quarter 2018 Earnings Conference Call. This morning, we'll be reviewing Ferro's financial results for the third quarter ended September 30, 2018. I'm pleased today to be joined by Peter Thomas, our Chairman, President and CEO; and Ben Schlater, Vice President and Chief Financial Officer. The earnings release and conference call presentation deck are available in the Investors section of our website.

I'd like to remind everyone that some of the comments we are making today are forward-looking statements and are based on our view of conditions and circumstances as we see them today. However, those views may change as conditions and circumstances change. Please refer to the forward-looking statement disclosure in the earnings release in the earnings presentation.

Also, today's call will contain various operating results on both a reported and adjusted basis. Descriptions of these non-GAAP financial measures and reconciliations are included in the earnings release and presentation deck. We encourage you to review that information in conjunction with today's discussion.

It's now my pleasure to pass the call over to Peter.

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

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Thank you, Kevin, and good morning, everyone. Ferro is on course to deliver, in 2018, its best performance in many years. And third quarter was another step in that direction, adding to strong performance in the first and second quarters. We're accomplishing what we set out to do at the beginning the year even with the challenges of higher raw material costs relative to the prior year and the occasional cause of macroeconomic uncertainty. In 2018, we continued to outpace our peer group in revenue growth, and we are well on our way to delivering 20% growth in EPS and greater than 15% growth in EBITDA. As these numbers suggest, we are successfully executing the dynamic innovation and optimization phase of our value-creation strategy and delivering another excellent year-over-year improvement in performance.

Revenue growth was strong in the third quarter company-wide. Net sales increased 12.9%. And on a constant-currency basis, organic sales increased 7.3% compared with the same period last year. We hold healthy positions in the markets we serve, and we have a strong customer value proposition based on innovation, quality and technical expertise.

Organic growth was, again, a major contributor to our increased revenues. For more than 2 years, we have delivered quarter-after-quarter of organic growth due to our value proposition, our strengthened portfolio of businesses and our strategy to target the higher end of the markets we serve. Our vitality index, which measures revenue from new product sales, reflects the strength of our product innovation pipeline. We previously said that we intended to drive our vitality index in excess of 20% by 2020. I am pleased to report that our vitality index now stands at approximately 21%.

I'm also very pleased with the cash generation capacity of our businesses. Ferro drove cash flow in the third quarter by taking alignment between sales and plant utilization and satisfying a portion of customer demand with existing inventory, which contributed to the reduction in working capital. These actions also drove net cash provided by operating activities of $73.4 million and adjusted free cash flow conversion of 124%, which is propelling the company towards its full year cash generation targets. We anticipated the customer destocking that typically occurs in the fourth quarter, and we are now in a better position to deploy cash as we deem most appropriate, including through stock buybacks.

We see the same macroeconomic uncertainty that our peer companies see whether related to foreign exchange rates, trade tariffs, rising interest rates, the late stage of the economic cycle, geopolitical tensions or equity market volatility. Although we are not currently experiencing a reduction in demand for our products, and we believe in our position serving the higher end of our markets insulates us to some degree from market softness. We do recognize that circumstances can change, having improved our cash position, we are better positioned for market weakness if it develops.

As noted in the earnings release, Ferro experienced a dip in gross margin in the third quarter due largely to a combination of our cash conversion initiatives and higher raw material prices relative to the prior year quarter, which has been discussed previously or anticipated. We expect gross margins to bounce back in the fourth quarter.

Our raw material prices are decreasing, and we believe that Ferro pricing in the fourth quarter will more than offset the higher raw material prices relative to the prior year for the first time since early 2017.

Based on these factors, we are affirming our 2018 guidance at the lower end of the range for adjusted EPS and adjusted EBITDA and at the upper end of the range for free cash flow conversion.

Now I'll say a few words about each of our three business segments. Turning to Slide 7 in the presentation, you can see the third quarter 2018 summary of our business segments. So let's begin with Performance Coatings. Performance Coatings turned in another quarter of strong sales and profit growth. Net sales on a constant currency basis were up 26.2% and volumes were up 12.7%. Organic sales growth was 7%. Adjusted gross profit was $36.3 million. Gross profit margin declined to 20.6%, reflecting margin compression from raw materials that we prebought at the beginning of the year and continue to work through. As previously said, the Performance Coatings segment has been the most significantly impacted by the elevated raw material prices over the past year. But the Performance Coatings team has done a great job of increasing prices, reformulating products and optimizing plant spend in response.

In Italy and Spain, Performance Coatings continued to see solid stable growth as demand remained strong for our high-value materials. In Indonesia, we continue to capture market share in part because of antidumping tariffs imposed on Chinese strip manufacturers. And in China, we continue to see increased demand as other manufacturers close due to environmental health and safety concerns at their facilities. Performance Coatings also generated improved volume and sales during the quarter with some of our most important accounts, that is our large appliance customers.

Now let's look at our Performance Colors and Glass segment. Performance Colors and Glass produced another quarter of solid sales growth, well ahead of the market rate. Net sales reported on a constant-currency basis grew 13.5%, with volumes up 20.9%. Organic sales increased 11%, adjusted gross profit was $40.1 million and gross margin was 32.5%. We continue to see solid growth in the automotive part of the PCG business. We produced mid-teens sales growth in Asia Pacific, and we produced mid-single-digit growth in Europe even as the automotive market as a whole in Europe grew less than 2%. In contrast, demand from our automotive customers in North America and Latin America was flat. Demand also continues to remain strong for Ferro's electronic packaging materials, with sales up 24% over the last year. The number of sensors per product in industrial applications continues to increase, which has been a key driver of growth for the high-performance materials we sell that are used in sensors. Demand for our glass decoration products grew nicely as well in the mid-single digits as we saw off cycle sales during the quarter from the major beverage bottling company that uses our products to decorate glass bottles.

Now looking more broadly to the future, Ferro is the technology in glass coatings, which positions us well to apply our expertise to the emerging megatrends that we have talked about, including LED, 5G, smart cars, 3D printing and more. We are at the forefront of innovative functional glass coatings and are positioned in multiple markets to take advantage of the opportunities created by these megatrends.

Now turning to the Color Solutions segment summary. Net sales growth in the third quarter was all organic. Reported on a constant-currency basis, net sales increased 4.6%. Adjusted gross profit was $31 million. Gross margin was 32.3%. Sales for our Color Solutions business advanced due in large part to continued strong growth in our Surface Technologies business. We are seeing strong demand in this business for memory chip makers who use our products for polishing. Demand also was strong for our Ultramarine blue pigments. We are expanding our manufacturing facility in Columbia as announced last quarter to satisfy continued demand for Ultramarine blue pigments. Color Solutions also benefited from increased demand for our transparent iron oxide reds. As in our other businesses, Color Solutions is concentrating on serving higher-end markets, improving mix and pricing our products according to the value proposition reflected in our high-quality products and technical support.

On Slide 8, you will see year-to-date performance metrics for our three reporting segments.

So to sum up, Ferro had a very productive quarter with all three business segments contributing and the company making excellent progress and executing our strategy of dynamic innovation and optimization.

I'm now going to turn the call over to Ben for his comments on the quarter and Ferro's financial position.

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

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Thank you, Peter, and good morning, everyone. I'd like to spend a few minutes to review the consolidated financial results from the third quarter of 2018.

Please note that the non-GAAP numbers I refer to are on an adjusted basis using constant currency. All third quarter comparisons are versus the third quarter of 2017. The financial highlights and results can be reviewed on Slide 3, 4, 5 and 6 in the presentation accompanying today's press release, which you can find on ferro.com in the Investors section.

Starting with the third quarter performance on Slide 4. We grew net sales 16.3% to $395.2 million, with organic sales growth of 7.3%. Adjusted gross profit increased 3.5% to $106.6 million. Adjusted SG&A expense was $56.2 million or 14.2% of net sales. We grew adjusted EBITDA by 8.4% to $63.7 million or 16.1% of net sales, and adjusted EPS increased 12.1% to $0.37.

Now turning to Slide 5, I'll quickly go through our year-to-date performance. We grew net sales 16.9% to $1.2 billion. Adjusted gross profit increased 8.7% to $353.5 million. Adjusted gross profit margin was 29%. We grew adjusted EBITDA by 13.7% to $202.9 million or 16.7% of net sales. Adjusted EPS increased 15.8% to $1.17.

With that, I'll review onetime adjustments for the third quarter and provide an overview of SG&A expenses and other income and expense lines. For the third quarter of 2018, there were a few non-GAAP adjustments primarily related to our corporate development acquisition activity and optimization initiatives. First, in cost of sales, we had adjustments of approximately $1.1 million due primarily to acquisition costs related to optimization activities. In SG&A, we'd onetime adjustments of $8.2 million consisting of legal, professional and other expenses related to certain corporate development activities as well as fees associated with certain optimization initiatives. Under restructuring and impairment, there was an adjustment of approximately $2.6 million in the third quarter related to actions to advance our optimization initiatives and acquisition synergies. In other income and expense, we had an adjustment of about $1.3 million primarily related to impacts of currency in Argentina. And we had an adjustment of $2.4 million for special items being tax affected at the respective statutory rate where the item originated.

Now turning to Slide 6, I'll go through SG&A. The third quarter adjusted SG&A expense was $56.2 million or 14.2% of net sales compared with $57.6 million or 16.9% of net sales in the prior year quarter, as stated on a constant-currency basis. We continue to see good operating leverage as we grow the top line, while maintaining tight reins on SG&A.

That brings me to cash flow. As Peter mentioned earlier, we are very pleased with efforts our team has made to improve the efficiency of the balance sheet for 2019. For the third quarter, adjusted free cash flow from continuing operations with an inflow of $79.1 million, which compares to an inflow of $20.8 million for the prior year quarter. We define adjusted free cash flow from continuing operations as GAAP operating cash flow less CapEx, then we add back cash used for our most significant optimization projects, acquisition-related items and restructuring.

Beginning with operating cash flow, the most meaningful components are as follows. Starting with GAAP net income of $16.1 million, we add $14.2 million of depreciation and amortization, $33.5 million from working capital, $10.6 million of change in other balance sheet items and then we subtract $1 million of other noncash P&L items to arrive at cash used for operating activities of $73.4 million on a GAAP basis. Then we subtract $20.6 million of capital expenditures to arrive at $52.8 million of free cash flow for the quarter on an unadjusted basis. Our practice has been to adjust this number for cash flow related to our strategic activities. These include: one, cash related to our most significant optimization projects; two, M&A-related cash flow; and three, cash from restructuring programs. The quantification of those three adjustments for the third quarter are as follows: $18.1 million for the optimization projects; $5.6 million related to M&A; and $2.6 million related to restructuring. This brings adjusted free cash flow for the quarter to $79.1 million. Dividing this by our adjusted EBITDA in the third quarter gives us an adjusted free cash flow conversion of 124%. As a reminder, our guidance for the year on this basis is 40% to 45%, and we are targeting the high end of that range, as Peter mentioned.

In the past, you've heard us discuss one of our more significant optimization projects, which involves a series of related optimization initiatives. To remind you, this is the project that we expect will deliver approximately $30 million of incremental EBITDA by 2020. We're pleased at this point to be able to share a more complete picture of the economics. I'd like to begin with total cash spend related to the project. We anticipate that to be around $73 million, of which $48 million has already been spent. Of the remaining $25 million, we anticipate approximately $15 million to be spent in the fourth quarter and the remaining $10 million to be spent in the first half of 2019. From these investments, we expect the following financial benefits: approximately $8 million of EBITDA benefit in 2019 incremental to 2018; approximately $30 million of EBITDA benefit in 2020 also incremental to 2018. So $30 million of benefit in total, $8 million of which is expected in 2019 and $22 million of which is expected in 2020. Further, none of this benefit is revenue related and nearly all of it is expected to be at the cost of sales line in the P&L. In addition, we are expecting incremental benefits to cash conversion from this program. That represents the summary we wanted to share on the economics. Peter will further discuss this project with you in his remarks on optimization.

Next, I wanted to share our activity relating to repurchases of Ferro common stock. In the first 9 months of 2018, Ferro repurchased $17 million of its shares, $11 million of which was in the third quarter. Further, in the fourth quarter, we've purchased an additional approximately $11 million, bringing the total for the year to $28 million. The company's Board of Directors recently approved an additional $50 million of share repurchase, which brings -- which means we now have a total of approximately $70 million of unused capacity with which to repurchase company stock. We intend to continue repurchasing shares as circumstances and prudence warrants.

Both the optimization project and the share repurchase activity just discussed, we consider strategic investments from a cash perspective. Given that, we wanted to share our thoughts on the impact to leverage for the year. We ended the quarter with net leverage of 3.2x. At the end of the year, we expect to be around 2.9x, which includes our expectations for unadjusted free cash flow in the fourth quarter and all spending on the optimization projects and share repurchases.

In summary, we expect continued focus on the balance sheet and cash flow to optimize our economic returns and put us in a position to take advantage of opportunity that may arise to strategically invest and further grow our business.

This concludes my prepared remarks on the third quarter of 2018. I'll now pass the call back to Peter to provide an update on our dynamic innovation and optimization phase and our long-term outlook. Peter?

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Peter T. Thomas, Ferro Corporation - Chairman, President & CEO [5]

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Thank you, Ben. On our Investor Day almost exactly 1 year ago, we explained the dynamic innovation and optimization phase of our value-creation strategy. Over the past year, we've shared a great deal with you about innovation initiatives and how they have contributed to an energized company culture where new products, new formulations, new technologies and new applications are constant themes in our work. We haven't talked as much specifically about optimization, but I can assure you that our teams are deeply engaged in optimization initiatives as well.

We have a broad range of global optimization initiatives underway, some of which we have completed. For example, over the last 2 years, we've closed 6 manufacturing facilities and 6 sales offices, and we are in the process of closing another 6 production facilities by the end of 2019. We continually assess our facilities and capabilities to increase productivity and efficiency, and we will continue to see seek out additional opportunities for optimization, whether involving site consolidation or other actions to drive value.

This morning, I want to share more about actions we are taking to optimize manufacturing, our balance sheet and functional SG&A. Let's begin with manufacturing. Our focus is to ensure we have global manufacturing capabilities that allow us to be highly efficient in delivering products to our customers and that position us well to serve our evolving markets. And very importantly, we also want to be close to our customers so that we can provide the technical support they rely upon for their success. These are key things for us. Our manufacturing optimization initiatives include developing technical and manufacturing centers of excellence with new equipment, state-of-the-art production processes and new technologies. Depending on the size and scope of the manufacturing center of excellence, we may make changes to R&D, supply chain logistics and customer service to support the facility.

In the past, you have heard us discuss a major project in our optimization efforts. To remind you, this is the project we expect to deliver approximately $30 million of incremental EBITDA by 2020. I want to share with you today more about that project as it is nearing completion. We expect the completed program to begin contributing to our financial performance in 2019 and, as reported in the news release, to contribute approximately $8 million to $10 million in adjusted EBITDA in 2019. We anticipate the adjusted EBITDA run rate benefit by the end of 2020 to be $30 million.

The second area of optimization that I want to address today relates to the balance sheet. As you know, we've transformed our business to target the higher end of the tile market, which has increased growth and lifted the margins in our Performance Coatings business. However, the high end tile market generally requires longer accounts receivable centers. To address this, we are evaluating an accounts receivable facility specifically for our tile business through which we can sell the receivables and thereby accelerate our receipt of payment. We would expect this facility to be accretive to our cash position and EPS and to improve our economic return. We plan to use any funds received from the facility to pay down debt. We are working on this facility and expect it to be in place in the fourth quarter of 2018.

And finally, let's talk about functional optimization. Our value-creation strategy has been transformative in many ways. We have taken cost out of the business by focusing all our efforts on becoming a leading technology-driven, functional coatings and color solutions business. We continue to encourage a culture of efficiency and productivity throughout our organization. We've been able to capture synergies from acquisitions made in recent years in both back office and other functions. We've optimized our talent in connection with these acquisitions, elevating the best people from our base business and the acquired businesses to drive the company forward. In addition, every department in the business is focused on driving 2% more efficiency. We are pleased with the contributions these optimization initiatives have made to Ferro's performance and our teams have embraced the importance of continuously driving efficiency. We see more optimization opportunities ahead.

Now I want to comment once again on the Vision 2020 goals that we laid out at the Investor Day last year. As a reminder, those goals include $1.7 (sic) [$1.7 billion] in annual revenue, organic growth of at least 3% to 4% and 2% annual optimization efficiency within the business. We also expect our optimization efforts to produce gross margins of 33% to 34%, EBITDA at 20%-plus and free cash flow conversion of 50% to 60%. We are well on our way to achieving these outcomes. For example, we expect that stabilization of raw materials pricing to contribute 100 to 150 basis points to gross margin. We expect that optimization efforts will improve gross margin by another 150-or-so basis points, and we expect that organic growth initiatives will contribute another 50-or-so basis points.

So let's bridge from where we are today to 2020 by looking at 2019. In 2019, we expect to see top line growth of at least 3% to 4%. We expect much of that growth to fall through to gross profit with gross profit margins improving 45 to 50 basis points. We also expect to see a benefit from raw material prices in 2019, adding about 70 to 80 basis points to gross profit margin. And finally, we would expect to see about 50 to 60 basis points improvement from the optimization program we have described. This translates roughly to a 31% gross profit margin in 2019.

We intend to deploy cash in a prudent way that drive shareholder value. We would expect to continue to repurchase shares in 2019 on an opportunistic basis and within our leveraged targets. With this preliminary look at 2019, perhaps you can see why we are so confident that we are on track to achieve or exceed our 2020 goals.

Thank you, and I'll return the call to Kevin for the Q&A.

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Kevin Cornelius Grant, Ferro Corporation - Head of IR [6]

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Thanks, Peter. With that, operator, let's open up the call for first question.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We have a question from the line of Rosemarie Morbelli with Gabelli & Company.

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

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Peter, you announced recently the acquisition of some technologies, and you emphasize technologies more than operations. I was wondering where we stand? What they're going to bring? And if you could give us a little more details on what is happening there?

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

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Sure, I'd love to do that. Thank you for your compliment, we feel the same as you related to what's going on here. But during the last call, we mentioned that we had a range of, let's call them, technology acquisitions to fill the gaps in our portfolio. So here's where we stand today because we were able to add another one since the last call. But in total, we have acquired 7 types of technology platforms, if you were companies. And let me give you an example of what the revenue and EBITDA and synergy-adjusted EBITDA might be from that handful or 7 types of deals. We were looking at revenues somewhere between, let's call it, $70 million and $80 million. We're looking at EBITDA anywhere between $10 million and $13 million and synergy-adjusted EBITDA anywhere between $20 million and $25 million. That would put us at an acquisition multiple of about 8 and synergy adjusted at 4.1. So again, within the framework, but here is what's important, when you look at that collection, let's share with you as much as I can with a lot of real deep detail, but let me give you a high level. What we've acquired are advanced water-based glass coatings, probably 3 or 4 technology platforms that we did not have and are new in the industry. We also complemented our high end tile business with adjacent higher-end tile additives that enhance the performance of our current high-value product offerings. We also acquired a high-end dielectrics business that complements our key customers' requirement for the way we service the customer actually that particular deal was driven by our customers asking us to do that. We also bought some very interesting automotive types of coatings, I won't be more specific around the substrate, but again, it's just another type of technology platform that we've added that will continue to differentiate us. We also bought a complementary range of colloidal silica chemistry around CMP slurries again, complementing our product offering to our key customers who wanted us to do and add that type of technology. And we also added the last high-end tile glaze producer in a way that we now have over 30% of the high-end market for tile coating solutions and our relative market share has now up to almost 3. So we've pretty much filled in this year, most of the technology gaps that we felt we had so that we can really leverage all those synergies in 2019 and 2020. So there's just a brief summary. Let me add another piece of information because I think that it's important. You always hear us talk about adding technology and that's why we're delivering the type of vitality index and that's why we continue to jump the chasm twice versus our competition in many of the markets we serve. In 2012, Ferro actually possessed 21 market-leading technology platforms and about 60% of our revenue in 2012 was from leadership positions. Where we stand now through the balance of this year, Ferro now has 51 market-leading technology platforms and over 92% of our revenue is coming from market leadership positions. So that's the reason why we spent a lot of time around organic activities, the pipeline, the vitality index and why we speak so often around filling those technology platforms because our breadth and depth of technology offerings is really, really desired by our high-end customer base. So that's where we are for the deal so far this year. And by the way, I'll add, we're at the table with a couple more. We hope to maybe get one more deal done. We have letters of intent in place, and we'd love to close one more deal with a very interesting complementary technology platform.

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Rosemarie Jeanne Pitras-Morbelli, G. Research, LLC - Research Analyst [4]

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Okay. That is really helpful. So does that mean that by the end of this year, you will have spent somewhere between $100 million and $150 million in M&A in line with what you are projecting?

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Peter T. Thomas, Ferro Corporation - Chairman, President & CEO [5]

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Yes, and -- the answer is yes. Then -- but I also want to add a couple of other things that it's very important. We always talk about invested capital around deals and remember, we would view like that major capital, that cost if you will of that major program and even our stock buybacks, as strategic investment. So if you add all those together, we're approaching about $200 million of invested capital and what we would define as strategic investments, including investing in ourselves, which, as you know, we believe, is very strategic because intrinsically, our stock is really undervalued, and we believe in ourselves.

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Rosemarie Jeanne Pitras-Morbelli, G. Research, LLC - Research Analyst [6]

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And if you could -- if I could ask another couple of questions, the SG&A ratio is at its lowest, at 14.2% of sales. Is that sustainable? Or were there some kind of temporary steps taken during the third quarter?

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Peter T. Thomas, Ferro Corporation - Chairman, President & CEO [7]

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Thank you for bringing that up. What you see there, Rosemarie, part of that reduction had to deal with incentive comp reduction. Basically, that's what that is.

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Benjamin J. Schlater, Ferro Corporation - VP & CFO [8]

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Rosemarie, I would just add to that. In addition to that, we are seeing base company SG&A, the leverage there improve particularly as we've added the deal. So effectively what's happening is you're seeing base company SG&A stay flat as the top line grows and that's adding -- that's adding a fair amount of leverage as well.

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

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Okay. And then lastly, if I may, could you talk about the environment in China? You touched on it, but could you gives you -- give us a little more details vis-à-vis the competitive environment as well as the tariff in trades?

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

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Yes. Actually, I will tell you, China, for us, regardless of what you're in, it's kind of what we said -- what I mentioned in the prepared remarks, we do see what everyone else is seeing, but we've positioned ourselves in higher-end markets where we're buffering ourselves a bit, where we have some coverage of protection, if you will. But also, we've positioned, as you know, over the past 18 months, our technology and served markets where we were starting with very little. So the lowest -- small numbers is actually holding us. But one thing you should be aware of. As it relates to what we're dealing with in China and Asia in general, basically for the third quarter year-over-year, if we look at automotive, for example, our automotive business is up over 11% in China. Our industrial applications with sensor activity and the like were up over 30%. When you look at other types of electronic applications that I mentioned in my prepared remarks, were up over 30% in that area as well. When you look at our Color Solutions business, surface tech is up well into double digits. Our pavements business is up mid-double digits, in the teens. Even with our tile business, because of the environmental impact where a lot of companies are being shut down to the credit of the government, even our tile business is up over 20%. And that would be on all -- in all product lines like frits, colors, our FAS product line, and porcelain enamel is up in high-single digits. So the environment there for us, whether it's because of the environmental shutdown or the tariffs are not hurting us because we produce locally. And again, the demand for our higher-end products is really significant. So we're actually enjoying one of our better years in China and Asia this year.

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Operator [11]

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And we have a question from the line of Mike Sison with KeyBanc.

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Michael Joseph Sison, KeyBanc Capital Markets Inc., Research Division - MD & Equity Research Analyst [12]

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I actually wanted to make sure I understood the walk for '19. I think you said $8 million in cost savings with a $20 million in acquisitions and then raw materials would be a benefit and then, I guess, finally, would be the organic sales growth, right? Is that how we should look at it?

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Benjamin J. Schlater, Ferro Corporation - VP & CFO [13]

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Mike, it's Ben. Yes, I think so. I mean, if we jump off our guidance for 2018, and we add to that sort of 3.5% growth, we think that, that will turn into EBITDA, Mike, of somewhere in the range of $16 million. And then you take the optimization savings of $8 million and add it to that and then you've got deals of about another $8 million. And then finally, we think that -- Peter referenced 70 to 80 basis points of margin enhancement because of raws flipping around, that's about another $12 million. So when you rack all that up, again, $12 million from raws, $16 million from growth, $8 million from optimization, $8 million from deals, you get to about $315 million for next year or so. And so as we sit here today, I mean, look -- as we look at the business, demand is strong, raw materials are going down. So as we sit here, we feel pretty good about sort of that range for next year from an EBITDA perspective.

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Michael Joseph Sison, KeyBanc Capital Markets Inc., Research Division - MD & Equity Research Analyst [14]

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Great. And then in terms of 2020 period, you talked about being able to get there with -- just as is without more acquisitions. And I guess, if you think about getting to $1.7 billion or so in sales, just kind of the walk that I'm seeing plus 20% EBITDA margins, the growth from '19 to '20 is even stronger. Is that the way to think about that? Maybe...

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Peter T. Thomas, Ferro Corporation - Chairman, President & CEO [15]

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Yes. No, you're right. I mean, if you look at this year, where we expect to end, Mike, which I think is, $1.632 billion in revenue. And with the type of growth you are seeing, there is a good possibility that we could hit that $1.7 billion next year, instead of 2020.

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Operator [16]

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(Operator Instructions) We have a question from David Begleiter with Deutsche Bank.

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Yifei Huang, Deutsche Bank AG, Research Division - Research Associate [17]

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It's David Huang here for David. I guess, in terms of the four acquisitions you did in the quarter, how do you expect them to contribute to your growth? And can you also discuss the synergies and margin profiles of the acquired businesses?

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Benjamin J. Schlater, Ferro Corporation - VP & CFO [18]

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It's Ben. I think we -- as we just talked, for next year, in '19, we expect those deals at the EBITDA line to contribute about $8 million. And those deals when taken collectively, next year, we also expect to be margin accretive from a gross margin perspective. And then maybe, Peter, you want to talk?

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Peter T. Thomas, Ferro Corporation - Chairman, President & CEO [19]

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Yes. Relative to the specific gross margins, rather than discuss the specifics, let me give you a different way of looking at it because I don't want to provide a lot of detail, but if you're looking at the water-based coatings, which would be positioned in our Performance Colors and Glass business, let's say, that the profile of those new product lines would have a -- anywhere between 800 and 1,000 basis points higher than the current portfolio of that business with the high-end dielectrics and the other slurry business that would be probably in line with our other electronic type of applications, which would be anywhere between 55% and 80% depending on what the mix is. And as it relates to the high end -- remaining high-end tile contribution with additives as well as the high-end glazes and the like, they would have gross margin that are probably 1,500 to 2,000 basis points higher than the current aggregate for the tile business. Does that help you?

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Yifei Huang, Deutsche Bank AG, Research Division - Research Associate [20]

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Yes. And secondly, I guess, on the $30 million optimization savings, can you roughly break that down by segments?

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

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No, we're not in a position to do that at this point, but early January, we'll tell you everything in detail. Right now that project is nearing completion. Things are moving, things are starting up, things are being made, new systems and processes are being bettered. Everything is a go. We're ready to -- we're just ready to push the button, but we'll be very specific here very shortly. And hopefully, when you hear what we have to say, although we've been talking about it for 2 years, and I think we made some reference on the last call that we thought that maybe there were even more exciting opportunities and variants of that, that you'll be as excited as we are and it will address your comfort level as to why we feel so confident about that project and what it means to us next year or 2.

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Operator [22]

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Our next question is from John McNulty with BMO Capital Markets.

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John Patrick McNulty, BMO Capital Markets Equity Research - Analyst [23]

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So I guess, the question on the fixed cost absorption and the dialing down of production to kind of push out inventories. I guess, when you think about what the actual impact was on the margin, what was that? And is that something that we should be thinking about kind of going forward as to how you kind of manage your second half numbers? Or is that kind of more just a onetime, look, this is what we need to do this quarter to kind of get ready for the optimization plan?

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

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There you go, I'm glad -- there you said something very important, "to get ready for the optimization plan." So let's go through that. And John, I think, you know us pretty well. I mean, you have an idea of how you link that. Let's make sure we're clear about something. One of the most important things that we're establishing here is we really want to be irresponsible for the actions that we take, and we're taking prudent actions. We've all been around long enough to know there's so much noise in the marketplace, John, whether it's real, whether it's contrived, whether it's self-fulfilling, it doesn't matter. The bottom line is sometimes where there's smoke, there's fire. And the last thing that we want to do is play catch-up with something that could be more significant going forward. So we took the third quarter as an opportunity to advance maybe some of the things that we would typically do in the fourth quarter. We thought that was the responsible thing to do and that it was prudent because there were some things that we were hearing from the macro perspective. You know how we feel, we believe we're sheltered so much, but it doesn't mean we're immune to it. And if, in fact, things occur, like some people think, the last thing we want to do at Ferro is running around in the fourth quarter and the first quarter and telling you on the call that we're doing mitigation plans, and we're doing this. That isn't the case. We're catching this potential knife by the handle. So we took the actions to address in the line and rightsize our inventory mix for our customers that we've selected to grow with and if you remember, the first 2 quarters, you heard me talk about extracting value for the value proposition and part of that value proposition was 6 months of studying what is the right mix that we feel we should have that would reward us for the value we bring to the customers. So we took 6 months of data, we processed that information, and we came up with a mix that we felt was absolutely essential for us to move in the third, fourth and first quarters so that we can flush the system with materials that we might not have an interest in. So the combination of being in the state of preparedness for any potential downturn, the alignment of the right mix for customers that we might have done in the fourth quarter, but we took an earlier action. If you put all those together, it was the absolute right thing to do. And that really meant about $0.03 to us, John, to be very candid with you. But that was our decision. There's nothing fundamentally wrong with the business. We have significant demand. We have great organic growth. We're going to experience more organic growth in the fourth quarter. We don't want to be reactive at the last minute. We want to jump the curve and get ahead of it because at the end of the day, if you're swimming in the stream with a bunch of animals you sure want to be upfront and upstream instead of downstream, right, so that's the deal. We want to get this thing straight going into the year. We've done the right thing and second thing is, raw materials were $0.02. One of that we were aware of. We've made it clear. So I've already identified $0.04 a year we were aware of and/or we did it was self-inflicted. The other thing that there was a precipitous drop with cobalt, where it jumped -- it dropped like 20% and then 30% and everything is based on LME so, we got caught in a little bit of a jam there and it cost us $0.01, plus the $0.03 in the cobalt and the materials, I mean, that's transitory. I mean, you heard us talk about the comeback into the fourth quarter and the first quarter. So when you look at your math, we see the headlines that we missed this and we missed that, look, we're guiding through the year. We're very nimble, and we're going to do the right things for the business because we have a clear line of vision to what this is going to be next year. We essentially gave you a very good look if you're doing the math, and I'm not sure how many people are doing that, but I think, it looks like 2019 is shaping up to be a very, very respectable year for us, again, which would be 7 in a row. So I'm not sure if that answered your question, but obviously, you see we're passionate about -- we are doing things that we feel are prudent and right for the business, and we want to stay ahead of the curve.

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John Patrick McNulty, BMO Capital Markets Equity Research - Analyst [25]

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No, that's perfect. Very clear and very helpful. One last question, I think -- Ben, I think you'd mentioned earlier that the optimization program in addition to the $30 million of cost saves, there might be some working capital and cash flow benefits as well. Are you at a point where you can give us some clarity on that? Or is it a little bit early on it?

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Benjamin J. Schlater, Ferro Corporation - VP & CFO [26]

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It's a little early, John, but here's what I think we can help. This is something that will really help get to our adjusted free cash flow conversion target. So as we sit here today, in that 45% range, as we bridge to 2020 and somewhere between 50% and 60%, this is going to have a significant impact of getting us to here -- from here to there. I think what you'll find is that in 2019, you will find our free cash flow conversion accretive to where we end up in '18 because of it.

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Operator [27]

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We have a question from Kevin Hocevar with Northcoast Research.

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Kevin William Hocevar, Northcoast Research Partners, LLC - VP & Equity Research Analyst [28]

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I was wondering if you've gone on a nice spree here in terms of acquisitions. So wondering if you could just kind of touch on the pipeline of that? I know you typically have a pretty full pipeline of acquisitions and various degrees of exploration, but so wondering if you can kind of comment on how that pipeline looks and how we can expect -- obviously, you've done a lot lately, but what can we expect over the next couple of months or so?

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

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Okay, good. As I mentioned earlier, we do have LOIs with two, and we're hoping to close one, another one by the end of the year, which will give us another -- actually both these deals have very intriguing market-leading technology profiles. So we feel there's a possibility we can at least get one of them done. Our pipeline over and above that, as we still maintain that we're in heavy conversations, again, with another 5, we still maintain our $100 million to $150 million invested capital, but remember what I just mentioned, that would also include our own stock buybacks on an opportunistic way. We view that as a deal and think about that, there's no integration either, by the way. But again, intrinsically, we believe we're undervalued. So we're being very opportunistic. And again, part of the reason why we wanted to -- now we're going to share something else with you. If, in fact, what some people believe is going to be a little bit of a head-storm in the first and second quarters of next year, we wanted to really tighten our cash position up in a way that maybe some of the things we're looking at, can be had at a more preferred value or there could be other things out there if the market does take a turn, that we would be in a very nice position to capture something at a more reasonable price. And that's another reason why we took the actions in the third quarter just to make sure that we're cash ready with some of the types of investments we're taking.

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Kevin William Hocevar, Northcoast Research Partners, LLC - VP & Equity Research Analyst [30]

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Got you, okay. And on the raw material side, just another quick one there on -- expecting that to be a $12 million flip in EBITDA next year and a nice little bump to gross margins. Can you give just a little color there? Is that a net raws versus pricing number? Or is that simply raws and is that assumption that raws kind of stay where they're at today? And which are the ones, I know you mentioned cobalt has come down. I think as we talk about -- why don't you just give us some color on -- just a little more color around that raw material piece?

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Benjamin J. Schlater, Ferro Corporation - VP & CFO [31]

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Kevin, sure. No problem. Yes, that $12 million is a net number, right? So that would squeeze -- that would be the benefit we see come back through with the gross margin line. It does assume that raw materials stay where they are today. With respect to your question on cobalt, we are aware of sort of there is a view in the market that cobalt may go back up. We are not seeing that. The areas where that's been identified in the market is sort of outside of our supply chain and a different grade of cobalt. And the other thing I would mention is, we have largely reformulated a pretty significant amount of cobalt out of the supply chain. The Performance Coatings team has done a very, very good job of that in 2018. So from a raws perspective, we feel pretty good about going into the fourth quarter and into 2019.

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Peter T. Thomas, Ferro Corporation - Chairman, President & CEO [32]

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Kevin, just to add something real time. Our Chief Procurement Officer is in China at the Cobalt Conference. She has been keeping us pretty much up to date here. And basically just to summarize, this is something that she just said, "there's not much of concern here at the cobalt conference." So it seems like whatever is out there, doesn't seem like it's -- maybe it's hyped up a little bit, but it doesn't seem to be too much of an issue coming out of that conference.

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Kevin Cornelius Grant, Ferro Corporation - Head of IR [33]

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Operator, we've time for one more question.

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Operator [34]

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And we've a question from Mike Harrison with Seaport Global Securities.

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Michael Joseph Harrison, Seaport Global Securities LLC, Research Division - MD & Senior Chemicals Analyst [35]

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Wondering if you can talk a little bit about your business in Turkey. Just wondering if you're seeing any impacts from some of the political and economic situation on your production, that's based there and maybe on the markets that you serve in and around that country?

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Peter T. Thomas, Ferro Corporation - Chairman, President & CEO [36]

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Yes, just like the second quarter, where we discussed this, our Turkish business is up double digits, and we're just not -- we're positioned in things that are more high end and lower volume and good margins, and we're very pleased with our beachfront that we built in Turkey, and we have an expectation with all that's going on, that we're going to do more.

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Michael Joseph Harrison, Seaport Global Securities LLC, Research Division - MD & Senior Chemicals Analyst [37]

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All right. And then also wondering about kind of the pricing and mixed fronts. The efforts that you've been making in response to raw material inflation that we've been seeing over the past several quarters. It seems like you guys have made some changes in your approach and been pretty successful particularly in Performance Coatings. Just wondering kind of how sustainable or sticky you think that some of these pricing and mix improvements could be such that as you expect to see raws maybe move in the other direction, how confident you can be that you hang onto this pricing rather than then give it back to the customer?

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

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Yes, good. I'm glad you brought that up, and thanks for recognizing that. Ben, not that I'm asking the question for him. But why don't you share the magnitude of the price increases that we've accomplished because I think that's an important point.

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Benjamin J. Schlater, Ferro Corporation - VP & CFO [39]

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Yes, sure.

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Peter T. Thomas, Ferro Corporation - Chairman, President & CEO [40]

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First, and then we can answer the rest of it.

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Benjamin J. Schlater, Ferro Corporation - VP & CFO [41]

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Yes. So year-to-date, the business across all segments has pulled $33 million of price year-over-year. And of that $33 million, 2/3 or about $21 million sits in Performance Coatings. So I can tell you that's something that's not been done before in Performance Coatings in that amount of time. So that's very, very significant. And I think sort of a testament to Julio Garcia and his team and what they've been able to do from a price perspective.

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

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And here's kind of what the strategy would suggest. The reason why that is, is because of the repositioning of that business in the higher end, number one, and the fact that they were able to get the magnitude of that $21 million also would suggest how sticky it might be. If that helps you?

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Michael Joseph Harrison, Seaport Global Securities LLC, Research Division - MD & Senior Chemicals Analyst [43]

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All right. And then the last question I had is just on the -- in your 10-Q, the Color Solutions business, it references $3.8 million in higher manufacturing costs. So I just wanted to understand, is that related to some of the fixed costs absorption and some of the self-inflicted things you did this quarter? Or is something else going on there?

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Benjamin J. Schlater, Ferro Corporation - VP & CFO [44]

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No, that's it, Mike, it's Ben. It was largely in Color Solutions, that's one of our highest margin businesses and the absorption impact would be felt more there. So the planned actions that we took there sat largely in Color Solutions.

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Kevin Cornelius Grant, Ferro Corporation - Head of IR [45]

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

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Operator [46]

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That does conclude the call for today. We thank you for your participation, as you please disconnect your line.