Q2 2020 Ferro Corp Earnings Call
Ladies and gentlemen, please standby the conference will be getting momentarily.
Thank you for your patience and ask that you. Please continue the standby.
[music].
Corporation second quarter, and fully or excuse I was not 20 earnings conference call.
An archive replay of this teleconference will be available through the Investor information section.
<unk> Com later today and will be available for approximately seven days.
I would now let's turn the conference call over to Mr. Corneas Grant director Investor Relations and corporate communications.
[music]. Thank you and good morning, everyone welcome to for a second quarter 2014 earnings Conference call. This morning, we'll be reviewed barrels financial results for the second quarter ended June Thirtyth 2020.
I'm pleased to be joined today by Peter Thomas or Chairman, President and CEO.
Ben Schlater group, Vice President and Chief Financial Officer.
The earnings release conference call presentation deck are available in the Investor section of our website.
I like to remind everyone that some of the comments were making today are forward looking statements are based on their view of conditions in circumstances as we see them today.
However, those views may change as conditions the circumstances change.
Please refer to the forward looking statement disclosure in the earnings release in earnings presentation.
Oh, So today's call will contain varies operating results, 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 Good morning, everyone. Thank you for joining us to discuss Ferro Corporation's second quarter 2020 results.
During the second quarter performance demonstrated the resilience of our portfolio and the value we provide to our customers. Despite a 20% decrease in sales volumes in the quarter, we increased gross profit margin to 32.1% and an increase of 30 basis points, we were able to do this impart because of our market leadership positions.
I mean criticality of our products two essential industries.
In addition, our focus on innovative product development and the actions, we have taken to increase efficiency and our manufacturing facilities and optimize operations also contributed to the gross margin improvement.
The quality of our business continues to improve and we believe our second quarter performance demonstrated the power of our business to sustain and expand gross margin levels, especially as economy stabilized and recover.
We achieved this performance while navigating through the challenges of the global covert 19 pandemic and the difficult macroeconomic certain cancers that resolved.
We have no higher priority than the health and safety of our employees.
And we recognize their dedication and professionalism during these challenging times.
They have continued advancing our strategic priorities and delivery at the highest level to maintain our market leadership positions.
We are grateful to our teams all around the world for what they have accomplished.
As we said in second quarter press release issued yesterday, our second quarter results, while down from the prior year were in line with our expectations demand improved in the latter part of the second quarter relative to earlier in the quarter with a trajectory that was quite favorable as the second quarter and.
We are seeing size, they give us confidence that the third quarter will continue this favorable trajectory with meaningful sequential improvement in demand relative to the second quarter, albeit not yet up to the levels of last year.
Although the timing and strength of the economic recovery around the world is unknown. We see no reason at this point to expect that we cannot continue with favorable momentum through the year.
Let me give a little more explanation regarding the basis of our expectations for third quarter.
One thing we do to maintain our position as a market leader is to stay in close contact with our customers providing technical assistance based on her expertise and functional coatings to help them designing products. This is key to our market leadership positions.
Conversations with our customers and order patterns, we began to see the second quarter from certain industries. We serve indicate that our customers believe the macroeconomic trough is largely behind them and they are on an upward trajectory.
We are gaining a clearer picture their needs for the second half of 2020, and we didn't turn our learning more about their inventory status and expected demand.
This forms the basis for our confidence that the third quarter will track in the same favorable direction that we saw coming out of the second quarter.
In addition, we're cautiously optimistic that we will see sequential improvement from the third quarter into the fourth quarter adds customers worked through inventories and ramp up production.
In addition, the breadth of our product lines and the industries, we serve providing measure of protection against declines in demand for particular products were from particular industries in these uncertain times.
We also are optimistic about the future because our portfolio and innovation initiatives are aligned with macro trends, which continue even in the current unsettled macroeconomic environment.
We have previously explained that these macro trends create the opportunities for our innovation programs.
Functional coatings and color solutions are at the core of our product innovation.
Our functional coatings products are used in a wide range of applications across the automotive.
Industrial decoration construction and electronics markets, we have invested in technology platforms that position fair to play a central role at the early stages of customers development of new products designed to address these emerging trends leveraging our existing portfolio imprudently enhancing get without.
Opportunities for additional growth.
As an example, one of the macro trends that we are aligned witness electrification, which is driving increased demand for our pace and sensors.
Demand in the electronics sector was strong in second quarter, resulting in double digit sales growth.
Our R&D efforts related to electrification are converging around materials for next generation electronic applications, such as Fiveg, the internet of things babies East virtual communications and more.
We also are well positioned for the continuing adoption of digital technologies.
Our R&D in this area is focused on digital printing on a variety of substrates with inorganic and organic gains as well as digital printing equipment.
And our color solutions business, we offer a wide range of organic and inorganic specially pigment products that support next generation product applications.
Our R&D for color solutions is directed toward continuing to modify individual pigments for customized functions in such areas as infrared reflection.
Uhhuh packaging and anti Chris.
Our market leadership positions in innovation programs have opened the door to relationships with well known innovation leader as of today.
These relationships offer significant scope for growth and value enhancement.
We are a supplier of choice to these global and regional innovation leaders.
Our strength in technology global presence and focus on partnering with our customers enable faro to provide.
Nipigon value to our customers and benefit from their growth.
We're very enthusiastic about our business model, we're focused on high margin.
Central products cemented by innovation of optimization initiatives that are aligned with significant macro trends.
With that I'll turn the call over to Ben for more insight into the second quarter results that I'll discuss our segment performance.
And.
Thank you Peter and good morning, everyone I'd like to start by echoing Peters comments on the resiliency of the business in the quarter, especially during the economic contraction due to the pandemic during the second quarter. We continued to see the true performance of our continuing operations with two consecutive quarters of adjusted gross profit margins above 32%.
We believe this is a good example of the quality of the business and the underlying portfolio to which all of the fair associates have contributed.
It's also gives us the confidence as Peter mentioned about the momentum going forward.
With that I'll move on to discuss our consolidated financial results for the second quarter of 2020 from continuing operations.
Please note that the non-GAAP numbers I refer to our on an adjusted basis and growth rates mentioned on a constant currency basis compared to the second quarter of 2019.
The financial highlights and results for the second quarter can be reviewed on slide three four and five in the presentation accompanying today's call, but you can find on Faro dot com and the investors section.
Moving to slide four in the second quarter.
Net sales declined 19.6% to $204.8 million adjusted gross profit declined 19% to $65.7 million adjusted gross profit margins improved 30 basis points to 32.1%.
Adjusted SGN expense declined by 6.9% to $45.2 million adjusted EBITDA declined 29.5% to $30.9 million or 15.1% of net sales and adjusted EPS declined 50.5% to 12 cents.
Now moving to slide five on a year to date basis net sales declined 12.8% to $457.1 million adjusted gross profit declined 7.1% to $147.6 million.
Adjusted gross profit margins improved 130 basis points to 32.3%.
Adjusted EPS, you can expense declined by 5.6% to $96.8 million.
Adjusted EBITDA declined 8.5% to $71.6 million adjusted EBITDA margins improved 80 basis points to 15.7% and adjusted EPS declined 2.6% to 37 cents.
These results reflect certain non-GAAP adjustments for the second quarter, primarily related to costs associated with previously divested businesses corporate development and optimization activities for both our Americas manufacturing optimization and global optimization programs.
First in cost of sales, we have adjustments of approximately $1.9 million, primarily due to costs related to our Americas manufacturing optimization initiative.
NSG M&A, we at one time adjustments of $5.4 million in the quarter $3.8 million back consisting of cost for legal fees professional fees and other expenses related to certain corporate development and optimization initiatives, including the Americas manufacturing optimization of 800000.
And 1.5 million related to divested businesses.
And finally, turning to restructuring and impairment there was an adjustment of approximately $8.6 million, reflecting actions to achieve our ongoing optimization initiatives and acquisition synergies 800000 of which related to the Americas manufacturing optimization, and 7.8 million of waste related to our global optimization program.
Turning to adjusted gross margin the business continues to show resiliency in has delivered adjusted gross profit margin above 32% for two consecutive quarters.
And the second quarter adjusted gross profit margins improved 30 basis points to 32.1% compared to the prior year second quarter.
This was driven by lower raw material cost better product sales mix and product pricing as Peter mentioned, we expect to continue to see this momentum and adjusted gross profit margins.
Ill now move to SGN eye in the second quarter, adjusted SGN expense was lower by 6.9% to $45.2 million or 22.1% of net sales compared with $48.5 million or 19.1% up net sales in the prior year quarter on a constant currency basis.
This brings me to GAAP cash flow from operating activities I will also discuss adjusted free cash flow or what we would view as cash flow, but available for items, including but not limited to strategic investments that service and shareholder returns.
We calculate this metric by combining the following lines from our statement of cash flows.
GAAP cash flow from operations less capital expenditures and plus cash collected under our securitization programs.
This information can be found on table 12 in our press release.
In the second quarter GAAP cash flow from operations was an outflow $33 million.
From that we subtract 6.7 million of capital expenditures and then add cash received on other receivables of $33.8 million to arrive at $5.9 million of adjusted free cash flow used in the second quarter, the largest drivers being our cash earnings and changes in working capital driven for the most part by inventory.
Builds related to our Americas optimization program, which we expect to be temporary nature.
Continuing with our discussion on the balance sheet Faro is well positioned from a liquidity standpoint as of June Thirtyth 2020, we had liquidity of approximately $548.2 million consisting of cash availability under our various credit facilities.
Mary primarily ferros revolving credit facility, we have no significant debt maturities prior to February of 2023.
With that I'll turn the call back over to Peter to walk through each of the business units and that is final comments before we take questions Peter.
Thanks, Ben now I'll take you through second quarter performance in our continuing operations reporting segments. As a reminder, early this year, we changed the name of our former performance colors and glass segment to functional coatings, which now also includes our porcelain enamel business.
So let's begin our discussion with the functional coatings segment.
In the second quarter functional coatings net sales on a constant currency basis were down 17.3% gross margins declined to 28.7% in the second quarter from 31.1% over the prior year period on a constant currency basis.
Adjusted gross profit declined 23.6% from $49.6 million to $37.8 million.
The vast majority of the decline in sales volume in gross profit resulted from weaker demand due to the Covidien 19 pandemic. This broadly impacted many of our end markets such as automotive and industrial certain of our larger home appliance manufacturing customers also worked through inventories during the quarter.
However, what we began to see through the second quarter is what we would call borrowers proof growth brought on by the transition from workplace in schools to working from home.
Examples in this space or high end electronics that support virtual communication and memory devices.
Our electronics materials business was up approximately 24% in the quarter compared to the prior year.
Over the past several years, we have focused on investing in the electronic space to broaden our customer mix.
Ferros electronic materials technology has found not only in the automotive sensors in high end consumer electronics, but also in the electronics that enable people to do their jobs or school work more efficiently away from the workplace or classroom.
Our products also our critical elements in the devices being used to monitor and assist people using health care apps and Tele medicine.
As anticipated during the second quarter sales in the automotive sector declined significantly across the globe by approximately 50%. This was primarily due to automotive production shutdowns in the U.S.
However, we started to see some Asia Pac automotive production ramp up late in the second quarter and as a result that region was down in the quarter a comparatively modest 25%.
Our decoration business was down approximately 30% driven by lower demand in the U.S. as hobby distributors that are used by schools and retailers were closed for several more months.
There was also lower demand in your for luxury item bottles and decoration products, which resulted from closures in the hospitality segment of bars hotels and restaurants.
In both the industrial materials business and porcelain enamel business sales were down approximately 20%.
These declines were primarily due to commercial construction delays due to the coven 19, pandemic and softer demand for digital printing equipment.
As I mentioned, some larger home appliance manufacturers work through their inventories early in the coded 19 outbreak.
This is causing some of them to have larger backlogs to deliver the finished appliances, we expect to see benefit from increased production by these customers during the second half of 2020.
Now turning to our color solution segment.
In the second quarter color solutions net sales on a constant currency basis were down 23.4%.
Gross margins improved 510 basis points to 36.9% compared to the prior year quarter, which was at 31.8%.
From a sequential quarter perspective, gross margins improved 200 basis points, primarily driven by lower raw material cost price increases in plant utilization.
Gross profit declined 11.2% to $27 million from $30.4 million in the prior year quarter.
Like many of our end markets are pigment segment was down in the high teens range, but we started to see a pickup in the latter part of the quarter with the do it yourself paint segment and consumer packaging you from a regional perspective, our pigments business. The EPS was down mid teens in your pigments were down 25%.
And in the Asia Pac region, we had a mid single digit decline.
So to sum it up we manage through the second quarter and believe we are largely pass the low point of the economic challenges that our customers have experience.
We expect increasing demand to continue to sequentially improvement in the third quarter and based on what we know today are cautiously optimistic we will sustain the momentum in the fourth quarter, we anticipate ending the year at a point, where we can begin to.
Accelerate the growth potential of our business with the benefits from our major initiatives, including those related to the sale of our tile coatings business.
We also wanted to update you on the Silvertowne coatings business to Lonestar and its affiliate asthma glass since the announcement of the transaction.
We have been targeting a closing in the second half of 2020.
Faro and Lonestar are actively working so that the transaction can close according to its turned in a timely manner, which the parties currently expect to happen in October or November of this year.
As we look at our business today, we have a more focused portfolio and more efficient operations.
Discuss the resiliency of our technology led and innovation driven business.
Confidence for the third quarter, and our cautious optimism for the fourth quarter.
Although we acknowledge that conditions are fluid to some extent, we continue to execute on our innovation and optimization initiatives.
Based on order patterns and customer insight.
We expect a meaningful increases sales in the second half of 2020.
Compared to the first two quarters of the year.
In the first half our Remainco business performed to the level. We have been telling you. We would expect from the portfolio with significant year over year improvements in gross margin and EBITDA margin as well as positive earnings outperforming many of our peers.
This gives us confidence that the second half has the potential to be even more positive.
One factor contributing to our optimism is that the favorable mix we saw in electronics during the second quarter is starting to occur in our other businesses as well.
Current volume levels can match those projections in fact, we see signs of a V shaped recovery for Faro as a result of the improvements made during the innovation and optimization phase of our strategy, which has enrich the mix of our entire portfolio.
So we have good reasons to expect that when we are in a more normalized macroeconomic environment. We will see a returned to pre coated volumes and the opportunity to grow both the top and bottom lines from there.
So thank you again for joining us today, and we look forward to your question.
Thank you Peter with that operator, let's open up the call for first question.
Thank you, ladies and gentlemen to register for a question. Please press the one that followed by the four on your telephone.
Our first question is from the line of Rosemarie Morbelli with GE Reds.
Please go ahead.
And Joe Good morning, everyone. Congratulations.
Thank you.
Hi.
Yes, I missed the beginning of the coal as I had problems getting on.
I was wondering if you have touched about how govi. It has changed the way you I'll give raising the new company.
And.
What we should be looking at in terms of the potential for remain co post the tiles and post who feed well, even post tiles and deals with the uncertainty appropriated actually.
Yes, Thanks, Rosemarie I think that lets address the that Cove point, because we see something up during the last call, which the more we've looked into it.
We are going to speak with more conviction about.
Some of the indications regarding what our business is using co that as an accelerant.
And what we're seeing if you look at things like emerging structural changes as a result.
Cove. It there are maybe seven or eight key items that certainly investors I mean, I know, we do it as a team here looking at the things we do personally on investment and we do look around this concept of emerging structural changes and of course, we apply to our business.
If you look at a handful of things that will structurally change we're looking at things like sustainability in recycling and certainly we have a lot of our products that would go into.
Plastic bags.
Where this concept of the single use will become more prevalent again, we have pigments and inks that go into those spaces of course health risk associated with all this multi use type of a concept not just bags, but any type of.
Food, where or dinnerware, and the like not dimension and things like the higher carbon footprints that many single alternate use so if we look at the sustainability recycling piece, we hit the spot.
And in terms of post cobot. Another piece, that's really important I think you've heard on prepared marks would be the concept of entertainment leisure and of course.
The migration of large venue entertainment to smaller environments.
Certainly we see will drive an increase in consumer electronics and even in home remodeling of course, you know our position with the electronics between home improvement.
Construction electronics and alike that represents as much as 35% to 40% of our business. So we feel very good around that we should more germane to us which show that a more positive a long lasting impact on demand for things on our end markets like packaging.
Electronic chemicals.
The new R&D work that we're doing which I'll talk to and a bit about selective pipes of polymers and other types of substrate printing that were.
Hang on polymers and of course, the functionalization of our pigments.
The architecture area with some of the major the pain houses. So the concept of postcode it for us and entertainment leisure is very high.
How about the value food value chain, we think thats very important no changes in food purchasing and consumption behaviors will certainly caused a structural shift of food packaging were starting to see it we saw it at the tail end of the first quarter sharply in the second quarter emerging here in the third quarter and we feel good about the fourth quarter.
And this in the space as well.
And something that's really surface quite nicely for us and you've heard it in the repair remarks medical and healthcare industries.
Yeah, there's significant investment and medical and healthcare industry than certainly will bolster the demand for our types of products that would go into that space whether its.
Our electronics that we mentioned that would go into telemedicine type of activities or even respirators or ventilators and any type of operating equipment.
You'll hear more going forward that we have new product commercialization activities and what we're defining as bio ceramics, which are both in and out of the body type of applications and we're starting to see a nice put pull on demand for some of those new products.
Also.
So even though the automotive industry is down we talk about road traveled automotive sector I'm sure everyone's noticing the sharp demand and recreational vehicles as people want to stay close as they're traveling that one and this the experience, but maybe they don't want to fly maybe they don't want to stay hotel and the demand for our types of pro.
Thanks and transportation.
Have moved up a bit here.
Certainly in the second and definitely into the third quarter as it relates to other than automotive applications because as many people know automotive has been down but there is a bright story that we can discuss here little bit. So we do also see that you know the resulting increase in the use of private vehicles and if you dig into auto.
Emotive demand going forward, even though there's a lot a negative we always talk about our positive versus the market because when things get good we do better when things are bad were not as bad and certainly that was the case in the first quarter and in the second and of course, everyone knows if you read all the studies and pushed cobot aside for a second.
The demand for automotive, particularly with our type of products, we can see it in the third quarter and have some limited visibility, but good visibility in the fourth quarter. We're all about content. So we can see a pickup in the order patterns for some of our product for the second half a year, but also the concept is is that.
People don't want to use public transportation and we're also seeing a pick up on some in depth studies around how.
You know people that late teens in early twenties about 30% of that population going back five years ago.
Didn't feel the need to have to have a license to drive and that was one of the challenges that the automotive dealers and the company's we're trying to deal with the lack of demand for millennials and a like for cars. However, what you're seeing and what we're reading is that there is a demand.
Nice demand.
For those first generation drivers again much like.
I don't know if you've noticed but people are moving out of the urban area because of this and the first time homebuyer situation is starting to pick up and we're positioned quite nicely in that space. So I think the concept of dense urbanization road travel.
Medical and healthcare food chain entertainment leisure sustainability recycling.
Based on our.
Estimate and also use it and by the way.
And outside lens from some experts in the space, we can say that a leased 85% of our portfolio fits the bill of using coated.
As an accelerated to enhance our business model.
Does that Kevin.
Okay.
Yes in Norway, Finland.
[music].
You could just easily the more detailed and then they get back on Q, Jim you mentioned.
New relationships with innovation that either.
Yes.
On this and what you are actually doing and who with.
I would we would really like to share some of that with you, but unfortunately, we're in some pretty heavy constant confidentiality agreements that we have to be.
We've committed to be very.
Cautious with that but rest assured you think of all the nice novel things that are going out there I would bet more than not that ferros involved with some of those exciting opportunities Albion, maybe some other very abstract however, looking forward those things to become functionally important and with certainly enhance our portfolio.
Okay, great. Thanks.
Youre welcome.
Our next question is from the line of Mike Sison with Wells Fargo. Please go ahead.
Hey, guys that corridor.
Hey, Mike.
You mentioned that you felt there could be good sequential improvement into the third and may be carrying till I meant some in the for US can you give us a little more color was that more on what you can control in terms of profitability or or maybe walk us through some of the trends that you're seeing in July in terms of sales.
Sort of give you the confidence that yeah, we'll get that improvement.
In the second half.
Okay. Good.
That's a good question forgive me an opportunity to underscore an important point that I've been making the last three calls about how you need to view the remainco business in terms of order.
But as you know many many of our peers and many people have mentioned that April.
Was the softest month for them and for US. It was actually May we have a reasonable.
April and a lot of that has to deal with the framework of the order patterns for the Remainco, what do I mean by that wise it is important.
When you look at more Commoditized business, you may find that after 10 days in a month, 70% to 80% of the bookings are already made so the order pattern for some of those to be every 10 10 days or so but with Remainco, we have eight and to use that you all know of.
Each one of those has a very interesting order pattern for example.
The more the lower gross margin type products in the eight NB use in aggregate, we may see an order pattern every four to five weeks, which seems to be an average.
As you move up in gross margin all the way maybe two in electronics piece relative to US you may find that those order patterns can be 10, 12, 13, 14 weeks that clip and if you look at surface Tech maybe those are eight to 12 week patterns and the rest of performance colors and glass functional.
Coatings would be and that spot between four to nine or 10 weeks. So.
We're trying to.
The more predictable around how we're going to talk through the order patterns because think of the first quarter first second how we had a really really good first quarter. We did mention that they're part of the reason why that quarter was good is because some of the sales that moved into the first quarter were actually order back in November.
And the like so they did come to fruition and people did take orders so.
I made the comment that may be a good way of looking at Remainco would be a basically a trailing.
18 month type of the pattern or a forward 15 month pattern to allow for the gestation of the portfolio are they used to go through a full flush of a yearly order pattern as a minimum. So you know so thats one dimension is understanding the dynamics of the order pattern, how it may come into the.
Here as you think through your planning process like we are that's one part the second part why do we why do we feel good about the third and fourth quarters and what might that looked like and what are we looking okay. So back to the first part about the second quarter being light for many many folks.
Yes.
For us.
As you know we were roughly versus last year down about 20%, but say so when we talk about meaningful movement. It's a lot of it is going from the second to the third quarter because when you look at the gap between last year and this year.
The third quarter is going to be very meaningful is really tightening up that spread between last year and this year, we're going to do a lot better from where we sit today than being down 20% and that's the meaningful piece and we have very nice visibility in to the third quarter now why is that.
It gets back to the order pattern that I mentioned, because going from the first quarter to the third quarter. We have some of those longer order patterns hitting in the third quarter because of the 12 weeks or 10 weeks period. So the third quarter of makes us feel really really good now you've also heard.
Thank you make a comment that our business model resembles kind of of the.
No I know the global thing isn't like that but our business model is different and where do we mean by that well are what visibility we have into the fourth quarter.
Which suggest that gap that delta between 2020, and 2019, even tightens up more going into the fourth quarter in no way that sequentially, we could see a third quarter better than the second and a fourth quarter better the third and although we have limited visibility into.
Someone argue is the first quarter next year.
If you think through what I, just mentioned and you anticipate.
Putting togut aside that those longer lead time.
Orders that are tend to 16 weeks gone with the highest margin one might argue that would start to manifest itself into the first quarter. So that's the comment around we see a resemblance of some sort of of the with the business model.
And so we.
We would expect.
In addition to that concept.
Our margins because it's a mix now you've heard us talk about we had a nice electronics.
Opportunity here in the second quarter moving into the third quarter. Each one of our eight A.M.B. use will perform.
Equal to or better than this third and fourth quarters, we see that and also understand that we talked about mix a lot and the second quarter.
And that was in electronics, but what we can tell you every other NPU because of the whether it's the new products that we've commercialized late last year and moving into this year with the type of ramp up.
The mix enrichment within each MB you will start to manifest themselves into the third quarter not dimension to the fact that we have a range of products that will be introduced in the third and fourth quarters that are very very novel and for us and.
Some things like that but let me give me a couple does I think it's really important because this business model, we talk a lot about innovation and vitality index and it will help to underscore why we feel pretty good about what we're saying if you think about some of the new products that we haven't commercialized yet, but you may see tailing.
The second half of year in surely going into the beginning of next year not to mention the additional run rate of what we've already introduced its embedded within each of the product mixes with ours sub in views and views you might have things you've heard me talk about buyers ceramics for healthcare food and cosmetics, that's a very interesting plan.
Warm very novel and.
There is some very interesting applications.
We have a new range of polymer conductive materials that would put us in the adhesive space in a very niche oriented way that we view in adhesives as coding and our minds the way to look at it, particularly where there is extremely high high temperatures and Paul how about new enamels for food contact that are actually.
Biocidal properties are clean properties that can be cleansed off nicely without disrupting the types of finishes for a whole range of applications.
We also have one of our dimensions on Mega trends is.
Our eco friendly organic colors, particularly substitute and things like chrome and other materials, but still offering the market plays very vibrant yellowish in one just type payments with functionality.
Another very important thing that you'll see moving forward again with some of these.
Let's call them innovation leaders around the world.
I would be our glass enamels.
The white coatings for solar cells that will improve transmission efficiencies.
That's a very interesting dynamic for us and we're very excited to be working with certain individuals and companies with that because of the long lasting and long range types of applications for those products and of course, you may have remember Mike I think you brought it up maybe about four four.
Our calls ago, and we were joking about dip tech and how we said please understand this is the beginning of us digitally coloring the world and so with that acquisition. We now have an integrated solution with equipment that has organic and inorganic means in a way than now.
We would be able to color lesser of.
Substrates like PVC concrete wood fiber board and a whole range of others. So.
It's this commercialization that's already occurred embedded in the mix and then that which is coming out and why else. It's going to Echo again, you look at the automotive industry, which is a big piece for us and if you look at already if you read the studies you'll find.
That moving into.
The fourth quarter second third quarter, rather rather you know the European auto business, although it's been down almost 40 or 50%, it's only projected to be down 10% in the third quarter and then in the fourth quarter. It's supposed to be flat. If you looked at North America signed in the third quarter up.
2% in the fourth quarter and so on in the way that with a drastic drop it will end the year up around the world about 20, 25%, but more importantly in order for that to occur you look at 2021, and the newest projections would be that the automotive space will be up twice.
3%, which means we might see some of that impact a little earlier going into the yet. So I gave you a lot of data, but I'm trying to provide you with some color around why we feel the way, we do and again pushing cobot aside because everybody's using that and whatever in the bottom line. It is there we're not ignoring yet.
But understand that in order to be.
Thoughtful and move forward and not be contaminated with that constant ugly cloud is that impacting your business, we want to give some visibility and what we would think would be some normalized state.
So when you add it all together there is your visibility of why we feel the way, we do around the third quarter and moving into the fourth.
Great. Thanks, and then a quick follow up.
Can you give us your degree of confidence at the close the tile and commitment in the buyer and then your balance you can be pretty good shape, what do you think the.
Capital deployment priority will be once you get the cash.
Thank you.
Yes, so we'll answer it.
In two parts and I'll do want to do the other.
Understand because the agreement we have anything that we comment.
Make comments on we do have to.
We share that with Lonestar and we have to agree that whatever we say is a joint agreement. So we did provide some color more detail this time around but.
The color we can give you that both parties agreed to if you will is that no faro and basically lonestar. We continue to certainly work together to close the transaction I can tell you and Ben will Echo this is mark because everyone at this pace.
We're in constant.
The conversations with virtually.
Multiple times per week to discuss projects in next steps and certainly in particular, the parties and focused on two main key areas for this deal and it would be anti trust.
And the separation apparel as Paolo Nanthealth businesses, and certainly we continue to support Lonestar.
As much as we possibly can and even more in some cases to obtain antitrust approval and substantial review the transaction by regulatory forward.
Then as it relates to Faro, how we separated Stalin on top businesses. We we are doing that and all the related IP functions basically in July so and that's how business is now running on its own I.T. system, which we plan to hand over to Lonestar close.
So.
If you the sale agreement is public we made it public right away so everyone.
That make it would have answered a lot of folks questions I know its laborious maybe for everybody to get into it but it was.
Very nicely defined and everything was laid out and so both parties are working very hard to get this deal done.
Yes, Mike with respect to capital deployment.
Lastly, with the sale proceeds we would expect to pay down long term debt and then beyond that.
Well, we'll remain focused I think on leverage.
With with also evaluating a number of different opportunities as you've heard us talk in the past a proposed continued optimization inside inside the facility as well as looking at both organic and inorganic growth opportunities, but all the while.
We spent a lot of time.
Getting leveraged now to a place that post deal, it's going to be pretty good well stay pretty focused on that.
Got it thank you.
Okay.
Our next question is from the line of John Mcnulty with BMO capital markets. Please go ahead.
Yes, thanks for taking my question.
You had mentioned mentioned earlier, just because of some of the optimization in the Americas side that inventory was maybe a little chunkier than you would've liked and admittedly. The working capital was was it was a little bit bigger of a use of funds as opposed to a source. So can you can you give us some color as to when we might see some of that working capital released and.
The cash flow pick back up again is it something that we could see in the second half or is it something that maybe maybe drags on into 2021, how should we think about that.
Yes, yes, if we look at working capital in the second quarter.
And we have to remember we have been that what we collect on the on the AR securitization ticket against that was actually favorable.
By about four or $5 million and as we as we unpack that a little bit if we look at both Aer and HP.
With respect to as a percentage of sales. So we look at that in terms of leverage those are NHP actually perform.
As expected in fact, a little bit better if you look at the percentage of sales we are actually better than we were in the first quarter on both accounts receivable as well as accounts payable, which makes sense given what volumes did in the second quarter and we were also better on a are unhappy and we were in the second quarter of last year as a percentage of sales were seeing real traction there.
From a working capital perspective.
You're correct switching over to inventory, where we see the headway this inventory and so that inventory relates to build that we've had to do because we're shifting so much product down into lower cost facilities.
The magnitude of a product that we're shifting required. These large built and so a lot of this product is very high from a technology perspective. So we have to build up that inventory and then we'll release that over the course of this year and into the beginning of next year, but that will be temporary in nature and like I said, we'll expect release that over the course next.
Six to nine months.
Got it then that's helpful and then and then Peter like when I look at the end markets that you serve I mean electronics looks like it's still holding up solidly autos is bouncing back neatly.
So when we think about the magnitude of the improvement from Twoq to Threeq. I mean are we at a point, where realistically threeq you sales could be down high single digit something like that or is that is that too aggressive based on kind of the timing. It actually takes for you to start to feel feel that demand pull is that the right way to think about it.
The best way of looking at that and I'll keep it at this level, what we mentioned.
And I think it through if we were down 20%.
The second quarter from from last year, we made the comment that theres going to be a meaningful improvement and tightening that gap between the third quarter last year and this year is the way where you should look at it and meaningful means meaningful.
Got it fair fair enough thanks for the color.
Okay.
Our next question is from the line of David Begleiter with Deutsche Bank. Please go ahead.
Thank you good morning.
Due to follow up on John's question can you tell us what drive volumes were versus June.
How much they improve.
Yeah, we we.
We won't be specific but we can tell you they were they were better.
June was better as I've mentioned.
May was our stop so June was better than May.
July is better than in June and.
Like what we're seeing in August so definitely we were clear about what we where we see that trough and then it gets back to how I answer John's question. If you. If you feel good about what we said about July made the August and of course.
This meaningful gap closure.
20 in the second quarter this year versus last year and third quarter that tightening is meaningful.
Very good and maybe Ben just few the gross margin call. It solutions in Q2 was quite impressive.
Is that level sustainable going forward and maybe a little more color on what drove that sequential increase.
Versus sales being down sequentially.
So so I think thats an area, obviously, we feel really good about.
I would say, there's three things with respect to to color solutions. One as you guys recall last year and the second quarter 2019, we had some headwinds from manufacturing perspective that are behind US now the cops are better the big it single piece is the fact that work that we've done on the manufacturing optimization really started.
Take hold in the second quarter and the products that we moved into the lower cost facilities first what's color solutions.
And we saw that really has significant impact in the second quarter. The other piece I would tell you is that much of color solutions from a from a manufacturing perspective, particularly in.
Western Europe, and in Latin America, our and lower cost facilities that we can take cost out much more rapidly as volume starts to move so I'd say those three things with the biggest piece being the impact of the optimization.
Thank you very much.
Operator, we have type one more question.
Certainly our final question that's from the line of Mike Harrison with Seaport Global Securities. Please go ahead.
Hi, good morning.
Right.
Peter.
Looking at the Q3 EBITDA number.
Just kind of wondering we did 31 million in the second quarter, we did a little over $40 million in the first quarter.
Third quarter get back towards that first quarter number is is that what you're pointing toward.
Meaningful improvement.
Yes, we Mike we haven't said anything like that and that's I think we should.
Just go back to modeling a meaningful improvement from the second to the third.
To third quarter.
And.
See what you feel about that.
Alright, and then wanted to ask in the color business can you give a little bit of additional detail about your exposure to the coatings space.
You mentioned that the our why improvement yet it still looks like your pigments business was down quite a bit so how much of your business is architectural versus auto related coatings versus other industrial coatings and can you maybe talk about where you're seeing customer inventory levels within the coding space.
Yes, Hey, Mike expense, so actually within within color solutions. If we look at what's what each of the business did the payments businesses were actually down the lease. So we saw those businesses performed the best.
Inside of.
Of color solutions, which makes sense with with what we're hearing and what you're hearing.
From a from it from a do it yourself perspective, and then the larger fall off would have been in the the higher technology space, which goes back to some of the order patterns that Peter talked about earlier.
Alright, thanks very much.
We would like to thank you for joining us. This morning. We appreciate your interest in Faro, we look forward to discussing our results with you next quarter.
That does conclude the conference call for today.
Thank you for your participation and ask that you. Please disconnect your lines.
[music].