Q3 2019 Earnings Call
Good morning. Thank you for joining the Ferro Corporation 2019 third quarter earnings Conference call. An archived replay of this teleconference will be available through the Investor information section at <unk> Dot Com later today and will be available for approximately seven days.
Turn call over to Mr., Kevin Cornelius Grant Director Investor Relations and corporate communications.
Thank you and good morning, everyone welcome to Ferros third quarter 2019 earnings Conference call.
This more he will be reviewing ferros financial results for the third quarter ended September Thirtyth 2018.
I'm pleased to be joined today by Peter Thomas Our Chairman, President and CEO , and Ben Schlater Group, Vice President and Chief Financial Officer.
The earnings release in conference call presentation deck are available in 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 conditions in circumstances as we see them today.
However, those views made changes conditions and circumstances change.
Please refer to the forward looking statement disclosure in the earnings release in earnings presentation.
Also today's call will contain varies operating results on both reported and adjusted basis.
Descriptions of these non-GAAP financial measures 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.
Thanks, Kevin and good morning, everyone.
Macroeconomic uncertainty during the third quarter continue to challenge our business outside North America.
I'm pleased to say, however, and even though these conditions pressure our top line, we managed to increase gross profit margins in the quarter relative to the prior year quarter.
This is our first year over year quarterly increase in gross profit margins since the first quarter up 27 team.
The higher gross profit margins were generated as a result of lower raw material cost and our optimization initiatives.
These circumstances macroeconomic pressure on the topline, but expansion in gross margins, whereas we anticipated.
As you recall, we said over the past three quarters that we were seeing market softening and customer inventory channels setting as our customers became more conservative with their inventory management.
This was especially the case in certain markets in which we participate such as construction and youre in automobile production pretty much around the world.
To address this we redoubled our efforts as we said we would an optimization.
In our prior calls we have commented on the lack of visibility in the second half of 29 team. Many of our customers have had limited visibility into what turned out to be softness in demand for their products and the period it would take to work through their inventories.
The challenge we encountered when our customers did not have visibility was made more difficult because of the sheer breadth of our customer base some products.
We have 6700 customers around the world and 21000 S.K. years.
Even focusing on just our customers who represent 80% of our sales still involve some 700 customers.
Well this breadth of customers and products means we avoid the risks associated with heavy dependence on few customers are products.
It also means that gaining clarity with respect to demand and uncertain markets can be elusive.
We expect current macroeconomic conditions to persist in the near term and we continue to see conservative inventory management among our customers.
From our perspective, most economic indicators are not pointing to improvement for the remainder of 2019 generally 2020.
Exposure to Europe , and its ongoing economic weakness reason or sales and profitability.
Demand in certain end markets remained soft, particularly in the construction industry in Europe were weak demand for high end tile coatings has been a drag on our performance coatings segment.
The automotive industry also continues it swung globally, which impacts demand for our performance colors and glass and color solutions products.
We are intent on managing what we can't control, we cannot control global economic conditions, nor can we control foreign exchange rates, which have shaved about a penny per share from our earnings in a third quarter.
Our focus remains on innovation and optimization, we're capitalizing on technical expertise in functional coatings and color Solutia supposition faro to be the partner of choice for our customers as they develop next generation platforms.
The optimization front, we are advancing on multiple initiatives to manage costs, an increase operational efficiency.
We are seeing the benefits from optimization initiatives already underway and we have a significant additional actions in the pipeline.
As I've said on previous calls our intention is to create a better version of Faro and thereby drive greater value for our shareholders toward these objectives, we continually pursue opportunities to improve our operations upgrade our portfolio and enhance our value proposition with customers.
So at this point I'll ask tend to run through the financial results for the quarter and then I'll discuss segment performance.
Thank you Peter and good morning, everyone as Peter noted softer industrial and construction markets, particularly in Europe are impacting our topline. In addition, we estimate foreign exchange rates will impact EPS in the second half of the year by approximately two cents as reflected in our updated guidance.
Moving to our consolidated financial results for the third quarter of 2019. Please note that the non-GAAP numbers I referred to on an adjusted basis and growth rates mentioned are on a constant currency basis compared to the third quarter 2018.
The financial highlights and results can be reviewed on slide three four and five in the presentation accompanying today's call, which you can find on Faro dot com in the Investor section.
Turning to slide four in the third quarter net sales declined 5.8% to $365.7 million.
Adjusted gross profit declined 2.7% to $101.9 million.
Adjusted as gene expense was $57.4 million were 15.7% of net sales.
Adjusted EBITDA declined to $58.2 million or 15.9% of net sales.
Adjusted EPS declined to 35 cents.
The performance in the quarter compared to the prior year was lower as expected. However, we saw margin expansion across most of the businesses compared to the third quarter of last year.
Our gross profit margin improved 90 basis points to 27.9% compared to 2018.
These results reflect the following non-GAAP adjustments for the third quarter, primarily related to our corporate development acquisition and optimization activities.
I'll now provide more detail on these adjustments.
First in cost of sales, we have adjustments of approximately 1.6 million, primarily due to costs related to optimization initiatives.
NSG M&A, we have one time adjustments of 10.4 million in the quarter, primarily consisting of cost for legal professional and other expenses related to certain corporate development and certain optimization initiatives, including the North American manufacturing optimization, we announced in January of this year.
Turning to restructuring and impairment there was an adjustment of approximately 6.2 million of which 3.1 million reflects an impairment charge related to our performance coatings business and the remainder is related to actions to achieve our ongoing optimization initiatives and acquisition synergies.
Finally in other income and expense for the quarter, we had an adjustment of about $1.4 million primarily related to the impact of currency related items in Argentina.
Now moving gas unit in the third quarter adjusted that she now expense was $57.4 million or 15.7% of net sales compared with $55 million or 14.2% of net sales in the prior year quarter on a constant currency basis.
This now brings me to adjusted free cash flow.
Adjusted free cash flow for the quarter was an inflow of $46.7 million.
Ill spend a few more minutes walking through the details.
We define adjusted free cash flow from continuing operations as GAAP net cash provided by operating activities less capex.
Then we add back cash used for our recently announced manufacturing optimization acquisition related items and restructuring activity.
The most meaningful components for the quarter are as follows.
Starting with GAAP net income up $13.2 million, we added $14.7 million of depreciation and amortization.
$6.3 million for working capital.
Plus $4.2 million of changes in other balance sheet items.
And was 14.1 million of other noncash PNM items to arrive at cash provided from operating activities of $11.7 million on a GAAP basis.
Then, we subtract 3.2 million of capital expenditures and cash received on other receivables.
19.6 million to arrive at 28.2 million of free cash flow in the third quarter.
Our practice has been to adjust this number for cash flow related to our strategic activities. These include one cash related to our manufacturing optimization announced in the first quarter of this year.
To M&A related cash flow and three cash flow restructuring programs.
The quantification of those three adjustments for the quarter are as follows.
4.9 million for the optimization projects 9.5 million related to M&A and 4.2 million related to restructuring.
When we add these items back to our GAAP numbers. This brings adjusted free cash flow for the quarter to $46.7 million.
The details of this calculation and the related reconciliation to GAAP operating cash flow can be found on table 12 of the press release.
Regarding our balance sheet and cash flows third quarter adjusted free cash flow was strong and we reconfirmed our full year adjusted free cash flow conversion targets, a 45% to 50%.
Further we finished the quarter at 3.5.
Times net leverage.
As we think about the full year, we expect net leverage to be just about three times at year end. This change from our view last quarter was primarily driven by lower EBITDA, partially offset with more favorable working capital.
And with that I'll now turn the call back over to Peter to walk through each of the business units and discuss our updated guidance fear.
Thanks Ben.
Now I'll take you through third quarter performance in each of our three reporting segments. So let's begin with our performance coatings segment.
Performance coatings volumes were up 3.2%, while net sales on a constant currency basis were down 6.1% to $162.4 million from the prior year period.
Gross margins improved in the third quarter relative to the prior year on a constant currency basis by 150 basis points from 20.6% to 22.1%.
Adjusted gross profit increased slightly from $35.6 million to $35.9 million.
Sentiment remains cautious among our performance coatings customers, especially in European construction markets for high Intel products.
Customers are maintaining a conservative approach to inventory due to weak demand and slow market growth.
In a more positive note the high end tile coatings to stocking that started about a year ago may be leveling off as most of our customers have right size or inventories to reflect current market conditions.
I should also note that in the third quarter some of our key customers extended their European summer holidays into the month of September which is longer than normal.
With regard to performance coatings for the remainder of 2018, we expect our customers to continue focusing on working capital and keeping their inventory levels low because their customers lack visibility.
Now, let's take a look at our performance colors and glass segment.
In the third quarter performance colors, and glass volumes declined 12%, primarily driven by one off sales in our decoration business last year and continued weakness in global auto production net sales on a constant currency basis were down 6.8%.
Despite the lower sales gross margins improved by 40 basis points in the third quarter over the prior year period on a constant currency basis, moving from 32.5% to 32.9%.
Adjusted gross profit decreased to $37.1 billion from $39.3 million.
The portion of our performance colors and glass business that serves the automotive industry continued to experience weak demand.
In the Americas, we experienced a low double digit decline in Europe in mid single digit decline and in Asia, we were relatively flat compared to the prior year quarter.
Overall, our automotive business sales were down approximately 6% and third quarter as our customers work down their inventory levels.
Looking ahead automotive demand remains weak with many of our customers, we expect automotive market weakness to continue through the remainder of 2019.
Our glass decoration business was down high single digits in the quarter compared to the prior year, mainly because last year, we had a substantial off cycle order from a large bottling company that we're not repeated this year. In addition, as we have seen within other markets some cuts.
Most of our glass decoration business are working through inventories.
Our electronic materials business declined mid single digits in the quarter, primarily due to weaker demand in automotive applications as customers work down their inventories and waited to see the impact of the automotive workers' strike at GM.
Now turning to our color solution segment.
In the third quarter color solutions net sales on a constant currency basis were up 3.9% while volumes were down 8%. Despite lower volume sales gross margins were relatively flat at 32% compared to last year, 32.3%.
Adjusted gross profit decreased to $29 billion from $30.6 million in the prior year quarter.
For the second consecutive quarter color solutions delivered sequential quarter margin improvement with a 40 basis point increase to 32% in the third quarter from 31.6% and the second quarter, which was up from 30.5% in the first quarter.
The primary driver decline in sales in the quarter was related to surface technology.
As we noted during the second quarter 2019 earnings call, we anticipated weaker demand in the second half of 2019 due to the strong willed ramp up that we experienced in the second half of 2018 that was driven by demand related to the adoption of Fiveg technology.
Also we experienced instances of lower demand for certain pigments relative to the prior year, because some customers build up inventories last year when trade friction between the us in China began to emerge.
And finally, we also saw softer demand for pigments used an automobile applications as auto production demand continued to be weak across the world.
All in all the third quarter was a mixed bag sales were down but gross margin was up our customers continued to be cautious amid uncertain macroeconomic circumstances.
And at the same time, they are encouraging signs in some of our markets. They give us a sense that demand is firming up and that there are opportunities for growth on the horizon.
Turning to slide eight we have revised our guidance for 2019, adjusted EPS and adjusted EBIT da to reflect the impact of exchange rates.
We now anticipate the adjusted EPS of $1.15 cents to $1.20 cents, and adjusted EBITDA of $222 million to $227 million.
We anticipate being toward the lower end of these ranges.
With respect to our guidance on adjusted free cash flow conversion, we are reaffirming our guidance of 45% to 50% as our business continues to generate cash inline with our expectations.
Even in the current environment of soft demand global economic uncertainty and political and trade issues. We do see opportunity. We continue to innovate for our customers we are benefiting from lower raw material costs.
And we are seeing the fruits of our optimization initiatives.
All of the should advance us on the path of driving additional shareholder value.
We are continually exploring opportunities and executing on initiatives to become a better version of our self.
There are multiple ways to enhance our business to become a better faro and to drive value for our shareholders.
And we remain committed to these key objectives.
So that concludes our prepared remarks.
Kevin we're now ready to take questions.
Okay.
He would like to register for question. Please press the one followed by the foreign your telephone you will hear three Tom prompt to acknowledge your request. If your question has been answered any we'd like to withdraw your registration. Please press. The one followed by this rate.
Please sir our first question.
And our first question comes from the line of Rosemarie Morbelli MACI Research. Please go ahead.
Thank you good morning, everyone.
Good morning.
[laughter] you had mentioned Oh.
Opportunities there are pockets of opportunities even in this environment and I was wondering if you could elaborate affiliated on that and gives us much more details as to what you actually will be failing to what you're seeing.
Sure Love to do that.
Everything of course is based on where we sit in our strategy in terms of innovation and optimization, so right off the bat.
As you know since 17, we have been really solidifying our vitality index with new products and innovation application opportunities as well as really really loading up a pipeline with a plethora of optimization opportunities. So as it relates the pockets of growth number.
One which is aligned with our innovation, which is in line with the 20 acquisitions, we've done over the past five years, adding technology platforms.
We're basically at a point after one year of as you know very limited M&A activity. This year. The teams R&D teams have been spending more time cross fertilize thing at the technology level with the roughly 52 technology platforms that we have and of course after one year.
And of this activity constant R&D exchange, we continue to lift the innovation of pipeline in a way that next year, what should be a pretty good year.
We're launching a range of new opportunities from that cross fertilize matrix of R&D activities with higher gross margins than I can give you a really high end example of the types of products without being specific but understand that they will be commercialized we have a range.
Page of new storage data application technology with surface Tech.
We have a range of new organic gains for container applications that are new to the world.
We have a whole range of new products for sensor applications.
For a whole different types of at a range of applications not only automotive, but also and we would call whether its appliance land or additional applications, because we've been able to move them into new market segments.
The performance class and colors team has been working really hard over the past couple of years to come up with a new range of glaze glass based ceiling, which are really really really critical as more glass becomes the surface of choice with.
Autonomous automobile applications.
And those last sealants, aesthetically and from a performance and conductive bases are going to be really really critical for the advancement of either.
We have a.
With a lot of I'll keep this at a high level, but with a lot of new military activity going on we've come up with a whole range of new low temperature coal fired ceramics or control applications, particularly in military applications. We've also come up with a a whole new range of conducting conductive.
Polymer Fritz.
In our glass applications, whether it's in the base DCG business or advanced to the new types of applications through Ditech, which would be all all types of glass surfaces.
And.
What's really exciting too about the pigments space is that we do have a whole new range of IR, reflecting pigments, which will be novel to the space. So after.
A whole year of really really focusing on R&D our expectation.
On a 20 that our innovation pipeline will.
Maintained its 20% vitality index with an upgraded portfolio.
Products and we feel this year really really good about that application. So as it relates to pocket, that's kind of a rough discussion on the new products, but what's really important to since our strategy is around if you if you remember.
Our end goal is to creating more attractive portfolio that dilutes our concentration on just a few segments and also a dilution of our European exposure, we have been focusing on opportunities that are more outside of maybe what we would define as base Europe .
And if you look at opportunities geographically, we do see stronger based growth that will come out of Mexico, particularly in appliance and flat glass applications. We also note where we are physician.
The benefit from greater truck exports from Mexico, we see that potentially next year and of course, the Mexican demand for.
Things like sensors capacitors anti stick in the Ambles on a whole range of other types of surface technology and PCG application. So we're looking for a stronger Mexico.
Next year.
As it relates to Mena.
What you will see looking through all the data that overall, there is a better than average GDP in that region and as you know were very strong and those regions. It starts off we started off with a lower concentration of volume and sales however over the years.
As you know, we've really increased our concentration of revenue in those areas that typically have higher margins, but the advance GDP will also help us.
Because we are at the end of the day of small numbers. We also see end up construction for flat glass is starting to pick up.
And we also.
Continue to see the expansion of.
The population migrating from Egypt to new Egypt, which would put a.
A stronger demand for all of our all of our construction products.
Through that area, not just not just kind of products.
And Asia, you hear all the negative things, but as we target our opportunity.
We see actually.
Better demand in India with a lot of our our types of construction and glass types of products and also we feel very optimistic about.
Vietnam next year, we see a greater demand for all of our a lot of our products from a crossover platform.
And even in China, where it seems like it's really in downtown everybody's talking about that.
We do see certain pockets.
Rounding out our pigment business.
Picking up as well as.
Let's call it are flat glass expansion and even though everyone knows that automotive is down in China. The good news for US is we're really not down we're actually flatter what you'll see probably by the end of year is a little bit of an uptick.
So that gives you a perspective of why we feel good about.
Feel much better sitting here today.
He did in the first quarter second quarter. This year as we look forward with what appears to be from our perspective, a stabilization of our environment across our customers then well I just highlighted just a range of new things that don't forget this fourth phase also deals with not only the innovation I mentioned.
And that dilution away from Europe in terms of concentration, but the range of optimization activities that we see for for next year that we've discussed in the past. So your takeaway from this I know was.
I'll answer, but the take away is something like this as our base business is concerned as we sit today as we see it with our range of visibility, we would feel like Faro base business aside from when I, just mentioned would be relatively equal to or maybe slightly better but the.
Add on with innovation in the optimization will spur a more exciting opportunity for us when what might be considered a monday. Our so we we feel pretty good about that the team is geared up to execute on all those things and certainly we're eager to share with you when our budgets done with that on me.
Thank you Peter.
This is very helpful can you please.
Dollar amount in terms of.
Central from all of those.
Tend to discuss JV.
And whether it is not necessarily in 2020, but maybe two years out there that you have the shield for what they could contribute to the top and bottom line.
Yes, we have an idea we're still working through our budgets.
And so at this point because we do have a range of moving parts considering the types of activities, we have going on and how we want to allocate our resources, we're going to hold off until we provide our guidance for 2020, but.
Feel comfortable that there's we see more positive and negative and just as soon as we zero in on certain forward activities will be in a better position.
To to provide that for you but.
I would feel more comfortable now that you did in the past.
And finally outside.
You know your internal works whether it is.
Okay. These innovations cost cutting it.
Could you show, we does what youre. So additional opportunities that you are working on which I'm not specifically related to operations Christie.
Yes, we as you know we have pipelines for everything because at the end of the and less things are defined at you have double in the detail there not we're working on so thats the reason over the past seven years.
We've been successfully executing against our strategy in fact, if you go back when we started what I can tell you because we just.
Gather the data even from Two Q2 014 through this year.
Real measurement is heavily been successful if our strategy and of course, the phases define our actions. They clearly represent the type of work.
We're going to do as you know and if you go back to 14 through the end of this year, whether its revenue whether its gross profit.
Our EBIT da.
Margin or even EBIT da we have a CAGR of double digit growth for the most parts. So tough that's a pretty good indication that how we pick and choose what we do when we do it the timing of it.
We will be successful with because we're very thoughtful were small cap company. We don't have room for error. So we want to make sure that were being very judicious on what we say what we define because one of the most important aspects of all this as I've mentioned that lightened up on it a bit as the culture. This organization.
And what's in our.
DNA and and how we attack work and how we're successful so.
We do have other type of add on activities I think you might be referring to M&A does M&A activities are still clearly define our pipeline is robust.
We have a range of things that could keep us kicking the can down the middle like we had been over the past four years. We did mention this year that because of the slowdown in an environment. This may be a good time for us to really step back look at our strategic portfolio that we defined with the last year than say.
Ourselves why don't we just focus on this maybe this year, let the R&D teams catch up let the organization stabilize hit the synergies get the innovation not and corporate will focus on trying to outline that model to move the organization towards that.
And state that I mentioned last year, which is a better version of ourselves which would be again.
Dilution of our geographical positioning, particularly away from Europe , and also don't forget the dilution of the concentration in our market segments around construction in automotive I mean, the idea again would be for us too.
You know tighten up and have things like construction industrial electronics automotive and rest of everything pretty much equal so we can more even.
Our modeling going forward. So we can remove what remains still a little bit of a cycle cyclicality to our business, even though we're at the higher end. So there are a lot of opportunities that corporates looking ahead in order to step change that portfolio, while the rest of the teams are focusing on what they need to be focused.
I want to move forward. So we'll continue to evaluate a lot of those opportunities and.
We'll see where they go.
Alright, Thank you and looking for interviewing more news on that project.
Okay.
Your next question comes from the line of David Begleiter with Deutsche Bank. Please go ahead.
Hi, This is creating both from then on for David.
So I was just wondering how are you thinking about 2020 bps given the large base of optimization savings that are expected to be realized next year and are you still expecting optimization savings of around 35 to 40 million and Tony Tony.
Hey, Christine its Ben Yes, I'll, just reiterate what Peter just mentioned.
We are rolling up the budget right now there's a lot of moving parts, there and as those settled down and we begin to refine that we'll be out with 2020 guidance. So we're not going to get into the details today.
But as soon as we have something obviously will be back to the market with it.
Okay, but on the optimization savings or is that still up for questions sort of two are you still kind of expect in that 30 540 range that you had previously stated.
Yes, so look I think on the optimization savings all of those projects are still moving for what we're doing now is evaluating the impact of all of those into into 2020 and and when we have something from a whole some perspective, we'll give a holistic view on on 2020.
Got it Okay. That's helpful. And then just more near term on Q4 are you guys expecting to see further de stocking in the quarter due to aggressive yearend inventory management, either by you or any of your customers.
It's Peter Yes, the stocking is really being going on for the whole year actually and so we've built into our forecast what we would define as a normal.
Stocking period much like maybe we would have seen in 16 or 17.
And so but what we can tell you is.
Our customers ever since the second quarter as they've been thinning and redefining in repositioning.
We have a lot of let's call. It spent that types of orders or just in time orders that continue on a percentage basis to increase over the course of the year, but we've learned as I mentioned in my prepared remarks, how to adjust our our SLP process to better.
The.
The better in line with what our anticipation is with a more stabilized customer base based on.
Our expectations moving forward. So were not we don't believe we're going to see anything really out of the ordinary. So we've built in what one might argue is a normal de stocking activity in the fourth quarter.
Okay. Thank you and that and just lastly, just on the acquisition pipeline do you expect obviously this year with little bit more muted do you expect to any more activity in 2020.
Yes at the end of the day, we constantly are looking at opportunities we constantly.
Have a handful of things that are in motion.
And like I mentioned earlier, there are things that we would do like we have over the past four to five years and there are other things that we look at that could be more meaningful relative to our portfolio.
The portfolio. We are are really defining for the future. So theres a lot we have to be very judicious use this time to really.
Give you a perspective on we joke about being the small cap company and what that means and small cap companies are very interesting they're very.
That's a very challenging environment when times get tough money moves that money moves into defensive stocks and whenever everything's under value than our space everyone comes back in but we need to be very careful on how we do things that not get rattled and make rash decisions based on that inflow.
An outflow funds the depending on the macroeconomic environment, but.
We pick and choose what we do and how we do we have what I would define as being a a very successful model on how we behave around M&A activity and we're executing our strategy and or making step change stages to the business and it's all fundamental around three different buckets.
Whenever we look at an opportunity.
We look at really five things that are really crucial.
And we look at the type of scale the business. We look at timing we look at complexity. We look at staging does it make sense to do a one step or two step to meet our objectives and of course. The most important is the impact on an organization.
And in this first category I mentioned that because.
The organization.
For small company, we have what I used the joke about the STP problem.
Whether it's the same two people three people 10 people 12 people 13 people 20 people and the light.
We only have a certain capacity for doing work and it has to be meaningful.
And when you think that through and you deploy your assets around activities.
You want to make sure you're picking your choices with the right and then the next step other than that step is what's impacted by those five things that we need to consider and of course, we're always particularly now maybe unlike from 14, the middle of 18.
The balance sheet impact Doug is even though we're an acquisitive mode that we're not going to be.
We're not going to not pay attention to our balance sheet. We have to look does that really strategically aligned with the impact on a portfolio. Then we also have to look at.
What the resultant impact would mean to the organization. So that we can conduct business integrate and move forward with the right level of assets and of course on on top of that what's really important for US is we do really care about like we always have shareholder value creation. So we have to adjust those activity.
As for what we would define as being the risk of execution as well as the time value money. So when you look at all those things they gather that's how we pick and choose acquisitions or portfolio step change activities or whatever the case is because those handful things are what make our.
Decision so.
You may see to your point, we've done little M&A activity, because we're redeploying our assets looking for something maybe a bit more meaningful.
So.
You have to ask yourself. The question is that model work well, though in the last five or six years, we have.
Acquired 20 different companies, we've sold five different businesses successfully and and I gave you the data on double digit CAGR growth across all the.
Sales and gross profit and EBITDA margin activity. So we believe that model works, but again remember the first high things are very important it's about the scale. It's about the timing, it's a complexity staging and the impact on the organization. So that's how we do it and that's what we're in.
Gauge with right now.
Okay. Thank you that's helpful.
Thank you. Our next question comes from the line of Kevin Hocevar with Northcoast Research. Please go ahead.
Hey, good morning, everybody.
Good morning, Hey, Marty just talk about the the trends here.
The year the constant currency organic.
Sales of gotten.
Versus the years gone on.
But at the same time that the decline in EPS year over year, they've gotten better as the years gone on could you kind of comment on those trends.
Is that you know.
Optimization efforts that are benefiting that it would take price raws has trended better throughout the year or could you give some some color on I've been able to do to do that as sales of kind of struggled as the years going on.
Sure, Yes, Kevin fan.
I think it's essentially what you said.
As we see that top line year over year compare more difficult difficultly from a out from a comp perspective, a lot of that is driven by some of the the.
The off cycle stuff that Peter mentioned earlier from a GP perspective, where we've seen that benefit is through optimization and raw materials and so we saw the most significant.
Pack from raw materials and each of the quarters in the third quarter and we would expect to see that again in the fourth quarter. So thats really what you're seeing.
Gotcha and see that what you've done a good job holding on to price as you've benefited from abroad. I mean, how do you expect.
Pricing to trend going forward as well.
Similarly, I mean, the net between price and Rod in the third quarter was about $6 million I wouldn't expect there'll be two different.
In the fourth quarter. So we would expect something in sort of that low to mid single digits again in the fourth quarter between price and Ross.
Okay, great. Thank you very much.
Okay.
Thank you. Our next question comes from the line of Mike Tyson with Wells Fargo. Please go ahead.
Hey, guys good morning.
You might think about.
You know I.
Stand that demand, okay, weak and visibility stuff, but in the event that things get better overtime or are there is a recovery what do you think the earnings leverage your EBITDA leverage that feral offers.
If things actually do get better over time.
Hey, Mike it's been so I think it'll be it will be similar to what we've seen in the past and then you too that you would add sort of the incremental optimization activities. So.
Historically, what we've seen is as new sales dollars come in we generally see 40% plus of those fall through to two EBITDA.
And I would say that that becomes fairly linear within thats sort of the current revenue range.
I would say that the thing that that is incremental to that would be the optimization activities that you heard us talk about last year, and so that should increase that leverage.
In sort of the in sort of a arrange that would be incrementally accretive with respect to EBITDA.
Hey, Mike Peter just add one one more thing you remember from.
Just before the downturn in the third quarter of last year, we had a string of 12 quarters.
That averaged about 6.25% organic growth in a world that was growing at about 3%.
And I think that.
When times were good like we mentioned a long time, when we get into a steady state.
They are more predictable, we will outperform the market and what we're doing now because of what Ben's mention and what we've talked about structurally what's really important here, let me put it. This way if we were a $4 billion company I think our ability to shock absorber lot of this would be.
Would be really how apparent but because we're small I think we're doing a very good job managing the type of volatility in that shows the structural performance of the business and how theres nothing structurally wrong, but to your point and I'm glad you asked.
When this thing turns around my expectation would be that we are eight and even better company than we were from.
16 through the middle of 18, when we were blown away at the organic growth.
Not only when we have the innovation, but that that cost structure on the leverage side will even be better. So I can't wait to that happens again, because then you'll see that phase number five of the strategy of what Faro is.
Alright, Okay and then.
In terms of the cost savings.
Initiative when you take a look at each segment is it.
Similar in terms of what you're trying to improve it into the segments or are there different opportunities within each that youre focusing on that.
Really position.
Better.
Helpful.
Maybe potentially improve over time.
Hey, Mike It's been look I think I think the majority of that cost savings that we've been.
Public about in the past had been inside North America, and if you think about the North American business is primarily colors and glass and color solutions so of the of the.
Optimization activities that we have launched so far and are in progress. The majority of let's say the run rate benefit will impact those two businesses. It's not to say that there is not savings inside performance coatings, there as a larger scale activities that we've seen so far.
Will impact.
Color solutions, as well as color and glass.
Further to that we do apps, we do have a particular amount of savings that we've announced.
In North America related to.
I'd say half of the performance coatings business that we would also expect to realize as well.
Right, Okay and then.
Yes.
For the portfolio there.
Mentioned those acquisitions.
As we visit some of the business that you all other optical to maybe the VAT that.
That might not make sense or do you think this is the core portfolio that you want to continue to build upon longer term.
Yes, the interesting point is everything that Weve acquired.
Had a purpose to the portfolio, which as.
We've talked about every acquisition was really not an acquisition of a company as much as that was a technology platform to round out now tied together for you, let's say that we had an idea of what the future state of Faro would be maybe in 2021 too.
22, as we were doing those acquisitions, we figured out the types of technology platforms, we wanted to have and leverage the synergies between them in a way that can help us get to that end state.
Not only just with acquisitions, but with organic growth because what's what's really important Mike.
Is when you grow as you know.
Most companies can grow very easily with acquisition have will be 90 that 80% of their their growth strategy, but no organic growth and remember what we said back in 17 that our objective by this year would be that 60 somewhere between 40% to 60% of our growth is organic downward.
The rest of would have.
Inorganically and we've hit that so no one could say that we're growing and we're defining all by acquisition because it's not true we're sitting here with a pretty as I mentioned, a pretty good mix of organic growth in fact, 40% of our growth. This year as 40 to 45 years organic and.
55 to six these from acquisition. So the idea would be to keep leveraging those platforms in a way that as we grow that it's more meaningful and it's more real rather than by acquisitions. So what am I getting gap whatever we can't leverage in that mix of now 55 10.
Acknowledging platforms and you heard me talk about leveraging them. This year, what's been really exciting is watching all that companies that we brought together from an R&D perspective, and having that activity leverage to to deliver something pretty interesting for for for next year.
And so so the key point is that Theres something always in the portfolio that doesn't make sense anymore. We feel we can't leverage it of course, you know everything's for sale that everything in this company is for sale for the right price and we'd have to take a look at it and it's not we're shutting anything down it will that doesn't fit whether its technology.
Our business or if it.
Interferes with our ability to achieve that new portfolio objective that we will take action on it nothing is sacred that way here.
Got it thank you.
Thank you. Our next question comes from the line of Mike Harrison with Seaport Global Securities. Please go ahead.
Hi, good morning.
Good morning, good morning.
Wanted to ask just on the operating.
Efficiency initiatives, you had mentioned earlier this year.
Part of the problem from a margin standpoint, but some of those changes those consolidations and plan.
Shutdowns were creating some disruption I was wondering if you're still experiencing disruption here in the third quarter.
Maybe just just give us a better sense of when those changes stopped being disruptive to from a margin standpoint and start to show benefit.
Yes, Mike we saw that abate in the third quarter. So.
Our expectation is that it that is largely behind us.
And then.
Maybe a question for Peter.
M&A front.
You mentioned that span over a little over years and you've done any meaningful deals just wondering if we can get a little bit of an update on the most recent batch of deals are performing acumen fair and the you with deal and then I believe there were also to smaller deals that went into color and glass are those.
Performing a along your expectations and can you talk about all the integration process has gone.
Yes, the integration process has gone extremely well and they're meeting or exceeding our expectations in some case.
Alright, and then last question I had was on the surface technologies business.
You mentioned that sales were down.
Related to the strong prior year and I assume that's also related to.
Some of the semiconductor weakness, but just wondering do you are you starting to see that business stabilizing on a year over year basis as we get into Q4 Q1 can you maybe talk about the trends you're seeing there and whether that semiconductor market is starting to show signs of recovery.
Yes, that's as you know, we really like that space and a lot of our fiveg movement and activity and product development.
Centered in that space and.
As you heard us last year, we're very excited with launching a whole bunch of new types of products and with those spaces. As you know sometimes there is there would be a big ramp up in inventory for them. So they can fill their pipelines.
Which was done actually in the second half of last year.
As we tier point for the reasons, we we all know, which I can't get into certain because of the sensitivity of them.
Theres been some softness for arrangement reasons. However, it doesn't mean that the interest in the space or the R&D activities.
Aren't continuing it because they absolutely our so anything that's going on I think through by the time, we get through this quarter and moving into the first quarter when everyone equivalent rates, probably after the new year in a defined what they think would be going on with tariffs and a range of other things I think.
Our customers will have a better perspective on what the forward is.
If everything stays as it is today, we feel good that the inventory positioning will would be sent to a point, where it's more attractive to maybe build in the first quarter and again from a technology perspective as a lot of new there and we are aligned with the new new with all the customers. So we feel we.
We continue to feel good about that space in our ability to innovate to keep up with our customers.
Movement in advancements.
Alright, thanks very much.
Operator, we have time for one last question.
Okay. Thank your last question comes from the line Dimitri.
We have research. Please go ahead.
Good morning, Thanks for taking my questions.
All of things first of all just to kind of.
Right to understand your your market exposure you talked about the things that are weighing on you.
As far as European construction automotive if you work you might look at.
Divisions, but if you look at that up revenue in aggregate.
Is there way for us to refer you to aggregate sort of how much how much of your revenue or company is exposed to.
But negative portions of the current macro situation, which is obviously auto and.
Construction in general in Europe , specifically and how much of your revenues are exposed to what is still doing well, which I'm assuming as consumer.
Some of the electronic applications on some of the new wins that you guys had.
Hey to major it's Ben Yes. So if you think about our revenues on a year to date for for this year, you've got more than half of the revenue.
The organization that sits in Europe and of that portion is greater than assets inside of construction. So you boil that down and we've got 25% of the revenue base or more that sit inside construction inside Europe . So just as an example of how.
That can impact the revenue lineup.
Okay.
All right and the automotive is I was hoping another quarter of your sales.
Yes, so exactly when we do you think about automotive what we've said historically with respect to.
Automotive segment remember, we've got it exposure to auto in two segments. We've got in the color and glass business. We also added in the surface business and so when you take those in total it's between let's say 10 and 12% of the entire organization.
Okay.
Okay.
Thats helpful. Secondly.
As far as sort of new product wins and not just the ones that that Peter talked about as sort of still on a comp, but the ones that you've gotten over the last couple of years.
If you sort of look at how those businesses have done from you for you in this environment versus your more legacy businesses.
Were there any differences in how they performed in terms of if the market exposure or the appetite for.
For your customers due to.
Continue to buy these product, perhaps theyre going into industries that are continuing to grow. So I'm just trying to understand what's your what's already index and 20% of your sales coming from your product. If those new products are going into areas that are that are less economically sensitive.
That.
Your construction on the.
Automotive business.
Yes, that's a good question actually and the good news that you'll want to hear as our vitality index is still in this environment is still floating around 20%.
Thats typically in an environment over the past year will because of the downturn there are many.
I'll summarize that are reducing their R&D.
Activities and not wanting to develop new openings.
But the good news for US is not over 90% of our revenues coming from leadership positions and to that end men. The key customers that we deal with regardless of this environment.
We'll continue to work with us for new generation activities, because they're typically the ones that will continue to introduce new products. In this this environment. In fact, there was a question I think that was with Kevin.
Where we were talking about the are built on to have lower revenue or bought the value Robo better. There is a perfect example of how we use this environment, where a soft where we.
Once again, and maybe not to a major scale, but she wants to do a bunch of customer and product rationalization, which is what we've done over the past year. We've used this as.
Vehicle or in advance.
To upgrade our continue the upgrade our customers and products, which by the way.
I will lend itself nice all each of the type bops optimization programs were going to be implementing next year to make sure that one our footprint is right to we have the right equipment. That's operating at the right yield improvement and cycle time and capacity utilization levels. So the good news is long.
The good question I gave you a lot of information or that you should process, but the good news is vitality index continues new product development with our selected customers that will keep our revenue at over 90% of of leadership position, our entrenched we're delivering we're executing that which doesnt.
Look attractive we are extracting from the portfolio and using that as part of our forward looking optimization activities.
We would like to thank everyone for joining us on the call today. We appreciate your interest in Faro and we look forward to discuss and results with you again next quarter enjoy the rest of your day.
That does conclude the conference call for today, we thanks for your participation and ask me. Please disconnect your lines.