Q4 2020 Ferro Corp Earnings Call
[music].
Good morning, and thank you for joining debt Ferro Corporation fourth quarter and full year 'twenty 'twenty earnings conference call on.
An archived replay other teleconference will be available through the Investor information section at Ferro Dotcom.
Later today and will be available for approximately seven days I would now like to turn the call over to Mr. Kevin Cornelius Grant Director Investor Relations and corporate communications.
Thank you and good morning, everyone. Welcome to Ferro is fourth quarter and full year 2020 earnings conference call.
This morning, we'll be reviewing ferro its financial results for the fourth quarter ended December 31 2020.
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 and conference call presentation deck are available in the investors section of our website.
I would like to remind everyone that some other comments we are making today are forward looking statements and are based on our view of conditions and circumstances as we see them today.
However, those views may change as conditions and circumstances change.
Please refer to the forward looking statement disclosure in the earnings release and earnings presentation.
Also today's call will contain.
Various operating results on both a reported and adjusted basis.
Descriptions of these non-GAAP financial measures and reconciliations are included in the earnings release and presentation deck. We're on.
Courage you to review that information in conjunction with today's discussion.
It is now my pleasure to pass the call over to Peter.
Thanks, Kevin Good morning, everyone and thank you for joining us to discuss Ferro is fourth quarter and full year 2020 performance.
<unk> delivered very good results for the fourth quarter performance was significantly stronger than the prior year quarter with increases in sales gross profit and net income.
<unk> revenue and gross profit increased for the second consecutive quarter as demand for our products across the globe strengthen in the V shaped recovery that we previously described to continue.
Adjusted gross margins expanded relative to the prior year quarter and third quarter of 2020, we expect this trend to continue as we bring additional innovative higher margin products to market and reduce cost at the Cogs level.
Both our reporting segments functional coatings and color solutions delivered increased sales and gross profit with the strongest growth coming from our automotive industrial construction electronics and porcelain enamel product lines.
We believe that there was fourth quarter performance sets the baseline for the company's performance going forward as we continue to increase the value proposition of our products and services.
Full year 2020 versus 2019 comparisons are of course thrown off by the impact of the COVID-19 pandemic, especially in the second quarter. Many parts of the global economy were temporarily shuttered in response to the pandemic as.
As we previously have explained Ferro generally continue to operate during this difficult time on.
Although at a lower level, because many of our products and services were deemed essential or sold into markets considered essential ask for.
For those markets around the world more heavily impacted by the pandemic, we stay close to our customers, which informed our preparation as these markets began to recover.
The increases in demand, we saw on the third and fourth quarters and in early 'twenty 'twenty, one give us confidence that the economic recovery will continue to strengthen at least in the first half of this year, our visibility into the second half of the year somewhat clouded by potential risks to economic growth, resulting from the <unk>.
<unk> spread and variant strains of COVID-19, even as vaccines become more widespread.
We do recognize that we can't control what happens with COVID-19, or the vaccine, but we can stay close to our customers to understand their expectations for demand provide excellent technology products and services and develop innovative products aligned with the trends in their businesses.
We also can continue to optimize our business with these leavers, even with some uncertainty about the second half of the year. We are confident that ferro can deliver a strong 2021.
Let me change gears here for a minute to say a word about the Ferro work force.
I am really proud of our teams around the World 2020, Shirley was one of the most challenging years in our more than 100 year history as.
As the pandemic spread across the globe, disrupting economies east and West North and South our team responded and adapted with extraordinary dedication and professionalism.
Despite all the challenges they manage the supply chain kept our manufacturing operations running and serve our customers at a very high level.
And they did this while keeping the wellbeing of Ferro personnel Paramount.
The tubing, new health and safety protocols implementing remote working and supporting their teams through this challenging environment, we have a very talented and dedicated workforce and I am deeply grateful to them for all that they have accomplished especially in 2020.
Along with these accomplishments in 2020, we also advance toward the completion of the sale of our tile coating systems business.
Sale was completed on February 25th as we announced in our news release that day.
Wanted to thank our tile coatings associates for their many contributions to ferro over the years and wish them every success as they enter a new chapter in their professional lives.
The divestiture of the tile coating systems business, what's the latest step in our strategy to transform ferro into a leading functional coatings and color solutions company.
Forward Ferro will have more attractive financial and operational metrics any more focused higher margin portfolio of businesses.
As a reminder, following the sales with how coating systems business.
Arrow has.
Greater focus on markets with stronger underlying growth.
More concentration on our industry, leading technology innovation and services.
The capacity to generate sustainably higher margins.
A more balanced end market and regional mix.
Less exposure to cyclical markets.
Raw material consumption.
A streamlined manufacturing footprint.
Lower capital intensity.
Lower working capital requirements and reduced financial leverage.
Good day, as a leading functional coatings and color solutions company Ferro is a technology led innovation driven business with a profile for attractive sustainable profitability and value creation.
I will now turn the call over to Ben for his report on the fourth quarter and full year financial results. After bad finishes. His comments I will discuss segment performance and Ferro strategic priorities for the next phase of our strategy.
Ben.
Thank you Peter and good morning, everyone.
I would like to Echo Peter's comments on how pleased we are with the Companys performance in the fourth quarter and the completion of the tile coatings sale.
The business delivered top line growth in the fourth quarter with continued gross profit expansion and lower SG&A spend.
We are especially proud of Ferro associates around the world for what they accomplished in 2020 day.
[noise] exhibited exceptional effort to navigate the global pandemic and at the same time advance the extraordinary work necessary to complete the sale of the tile business.
I'll now discuss our consolidated financial results for continuing operations for the fourth quarter and full year 2020.
Please note that the non-GAAP numbers I refer to are on an adjusted basis and growth rates mentioned are on a constant currency basis.
All comparisons are for the fourth quarter and full year of 2019.
The financial highlights and results can be reviewed on slides three four and five in the presentation accompanying today's call, which you can find on Ferro dot com in the investors section.
Turning to slide four in the fourth quarter net sales increased three 5% for $260 million adjusted gross profit increased three 7% to $86 million adjusted gross profit margins were 31% adjusted SG&A expense declined 11, 6% to $45 million.
Adjusted EBITDA increased 22, 1% to $45 $2 million for 17, 4% of net sales, which is an increase of 227 basis points.
And adjusted EPS increased 47, 1% to 25 cents.
Now turning to slide five I will go through our full year 2020 performance.
Net sales declined five 3% to $959 million adjusted gross profit declined four 6% to $304 million.
Adjusted gross profit margin was 31, 3% on increase of 20 basis points from 31, 1%.
Adjusted SG&A line 66, 3% to $186 $9 million adjusted EBITDA declined two 7% to $153 $7 million or 16% of net sales an increase of 46 basis points and adjusted EPS declined two 4% to 81.
These results reflect certain non-GAAP adjustments for the fourth quarter, primarily related to legal costs associated with previously divested businesses corporate development and optimization activities.
I'll now provide more detail on the adjustments for the fourth quarter of 2020.
First in cost of sales, we have adjustments of approximately $1 $5 million, primarily due to costs related to optimization initiatives.
In SG&A, we have onetime adjustments totaling $3 million on a quarter, primarily consisting for up cost for legal professional and other expenses related to certain corporate development and certain optimization initiatives, including the north American manufacturing optimization, and approximately $800000 related to divested businesses and assets.
Turning to restructuring and impairment there was an adjustment of approximately $5 $2 million related to actions to achieve our ongoing optimization initiatives and acquisition synergies.
And finally in the quarter under other income and expense, we had an adjustment of about $9 $5 million. This was primarily related to pension and other post retirement benefit mark to market adjustments.
Lastly for the quarter, we haven't had an adjustment of $4 $6 million for special items being tax affected at the respective statutory rate where the item originated.
The fourth quarter, adjusted SG&A expense was $45 million or 17, 3% of net sales compared with $59 million or 22% of net sales in the prior year quarter as stated on a constant currency basis.
Interest expense for the quarter was $4 $6 million compared to $5 million and the price for your core for the year interest expense was $20 3 million compared to $21 4 million in the prior year.
This brings me to GAAP cash flow from operating activities I will also discuss adjusted free cash flow from operations are what we define as cash flow available for items, including but not limited to strategic investments debt service and shareholder returns.
We calculate this adjusted free cash flow metric by combining the following lines from our statement of cash flows.
GAAP cash flow from operations capital expenditures and cash collected under securitization programs.
This information can be found on table 11 in our press release.
In the fourth quarter GAAP cash flow from operations was an inflow of $93 $3 million then we.
Track $10 $1 million of capital expenditures and add cash received on other receivables of $32 $7 million to arrive at a $115 $9 million of adjusted free cash flow in the fourth quarter.
Which reflects the earnings benefits, we mentioned and changes in working capital for seasonality, but also for certain optimization initiatives.
With that I'll turn the call back over to Peter to walk through each of the business units.
Peter.
Thanks, Ben now I'll take you through highlights of our fourth quarter performance and our continuing operations reporting segments will begin our discussion with a functional coatings segment. As a reminder, our functional coatings business, formerly was called performance colors and glass and it now also includes our courses.
On the enamel business.
In the fourth quarter functional coatings net sales on a constant currency basis increased 2% compared to the fourth quarter of 2019 on.
On a sequential basis net sales increased eight 3% from the third quarter of 2020, adjusted gross margins increased 50 basis points to 37% in the fourth quarter from 32% in the prior year quarter on a constant currency basis.
<unk> gross profit increased three 6% from $49 $4 million to $51 $2 million compared to the prior year quarter or on a sequential basis increased 19, 2% from the third quarter of 2020.
Our automotive business increased approximately 12% compared to the prior year fourth quarter. The strongest increase was in Europe, where we achieved double digit growth due to market share capture in our silver conductive pace, which performed well and our environmentally friendly.
In Asia, we saw low double digit growth in the North American and Latin America, we saw high single digit growth.
And our electronic applications business, we saw mid single digit growth.
Catalyst here continues to be the Covid environment, which has accelerated the use of virtual work environment.
Generalization and telemedicine. This has driven higher demand for our products that are incorporated into items, such as consumer electronics Peter.
Peter elements satellites and high frequency communications systems.
On the downside our decoration business declined low single digits compared to the fourth quarter of 2019.
We'll circumstances of less travel and leisure spending as a result of the pads that are directly impacted our decoration business. There were some bright spots in our decoration business. However in Latin America. For example, our decoration business increased market share capture in the beverage and its.
<unk> installed some resurgence in demand due to restocking of inventories. In addition relative to the low point experienced by the decoration business in the second quarter of 2020 sales in the fourth quarter increased nearly 42%.
Our industrial materials business also declined relative to the fourth quarter 2019, but this relatively weaker performance was due to an especially strong 2019 fourth quarter in our flat class digital printing business, which made certain off cycle sales that corridor.
Offsetting the relatively weaker sales with strong demand in Asia for our glass enamels that provide greater power generation efficiency and solar panels.
Porcelain enamel was another bright spot as I mentioned in prior quarters home appliance manufacturers have grown their backlogs in the wake of the Covid outbreak.
Causing strong demand for our porcelain enamel products Bart P. E business grew in the fourth quarter by approximately 11% from the fourth quarter of 2019, we expect continuing strong demand for Ferro a P E and other products used in home appliances.
From a full year perspective sales for our functional coatings business declined five 5% to $608 $2 million compared to the prior year 2019, adjusted gross profit declined seven 2% to $181 $1 million on a constant currency basis.
Adjusted gross profit margins declined 50 basis points to 29, 8% for.
Full year 2020 weakness relative to the prior year was due to the impact of Covid on economies around the world, especially earlier in the year.
Now turning to our color solutions segment in.
In the fourth quarter color solutions net sales on a constant currency basis were up six 4% compared to the fourth quarter of 2019 and on a sequential basis net sales increased six 2% from the 'twenty 'twenty third quarter adjusted gross profit increased five 9%.
To $29.9 billion adjusted gross margins were down slightly 10 basis points to 32, 1% compared to the prior year fourth quarter on a constant currency basis.
The increase in sales compared to the prior year fourth quarter, mainly was attributable to higher demand for pigments used in food packaging automotive construction and industrial coatings.
As mentioned demand for certain Ferro products has increased as a result of changes in consumer behavior, resulting from the pandemic.
In our color solutions business. For example, we continue to see higher demand for our products that go into single use and disposable packaging applications.
We also are seeing strong demand for our surface technology products utilized in NAND memory applications, which has been driven by digitalization and five G and the increase in work and school from home.
From a full year perspective sales declined five 1% to $358 million compared to the prior for year 2019, again due to the impact of Covid earlier in the year. Nevertheless, adjusted gross profit increased two 2% to $119 six.
On a constant currency basis.
And adjusted gross profit margins increased 240 basis points for 34, 1% from 31.7%.
So now I'll turn the call back to Ben for his comments on 'twenty and 'twenty one guidance.
Thank you Peter.
Now I'd like to spend some time reviewing our 2021 guidance.
We expect to deliver sales growth in the range of 8% to 12% adjusted EBITDA in a range of $175 million to $185 million, which would be up 14% to 20% from 2020.
Adjusted EPS in a range of 90 to $1, an increase of 11% to 23% from 2020.
Our 'twenty and 'twenty, one guidance reflects foreign exchange spot rates as of December 2020, which reflect a euro to USD exchange rate of roughly $1 20.
As a common practice, we have provided FX sensitivity in the guidance section of the earnings release in 2020 Ferro, excluding discontinued operations generated approximately 35% to 40% of its revenues in euros and approximately 35% to 40% in U S dollars.
We estimate that a 1% overall change in foreign currency exchange rates weighted for the countries, where we do business would impact sales by approximately $5 million to $8 million and operating profit by 700 to $900000.
If you isolate for sensitivity on the Euro a 1% change would impact operating profit by approximately 300000 to $500000.
We expect net leverage at the end of the year to be approximately one times EBITDA.
And with that I will now turn the call back over to Peter to provide a few closing comments before we open it up for Q&A Peter.
Thanks again Ben.
As we move into the next phase of our value creation strategy. We are building on the transformation of our business over the year earlier earlier phases.
The three main strategic components of the stage of this strategy are first growth as a specialty materials company with niche high value high margin products in high growth markets. This includes broadening the use of functional coatings and color solutions products in areas such as medical equipment.
High frequency communications systems, and containers for drinking water and food.
We also are excited about expanding our involvement in the electrification of vehicles, where our applications are being designed into future prototypes.
Second intensified emphasis on innovation, bringing to market, new functional coatings and color solutions products and application, we will redouble, our efforts to address customer needs with creative solutions and market leading products and services.
And lastly optimization, we will continue to advance initiatives to drive efficiency remove stranded costs and deliver overall margin enhancement across our global operations.
We are enthusiastic about the opportunities before us in this phase of our strategy the megatrends with which we have aligned our company play to our strength and innovation product development and customer service, we are partnering with customers to develop certain products and independently.
Developing other products, our R&D investments have targeted applications for five G. The internet of things.
E vs and virtual communications, we also have invested in digital printing with organic and inorganic inks on various substrates.
Pigments for customized functions, such as infrared reflection anti corrosive and paste used on electronics surface technologies for plastic lens and automotive applications health care apps and Tele medicine.
And eco friendly materials view.
Viewed at a higher level, we intend to participate in green and smart <unk>.
Markets as the shift to these preferences continues.
As I mentioned earlier Ferro also.
Supplies functional coatings and color solutions, better and greater demand because of changes in behavior, resulting from Covid. We expect many of these changes to remain as we move past the Covid era.
And into the next normal.
So this provides a brief overview of where we see opportunity to extend our market leadership and develop new products and applications. We expect our company to grow at 1% to 2% above the relevant market with gross margins in the range of 35%.
From an optimization perspective, the initiatives that we have implemented in recent years should provide a step change contribution to profitability in 2021.
Even so we see more opportunities to remove stranded costs consolidate manufacturing facilities reduce sourcing and raw material costs and drive efficiencies in our logistics and supply chains.
Our balance sheet in 2021 also will be substantially improved now that we have completed the sale of the tile coatings business, we intend to use proceeds from the sale to reduce debt and by the end of 2021 as Ben noted expect net.
Leverage to be at approximately one times.
I look forward to sharing our continued progress with you during future updates and now Ben and I will be glad to take your questions.
Thanks, Peter with that operator, let's open up the call for questions.
Thank you if you'd like to register a question. Please press the one followed by the four on your telephone you will hear three Tom from technology or request.
He for your question has been answered and you would like to withdraw your registration. Please press the one followed by the three.
Once again to register a phone question of is the one followed by the for on your telephone.
One moment please for our first question.
And our first question comes from Rosemary more belly with G. Research. Please proceed with your question. Thanks.
Thank you good morning, everyone.
And congratulations for closing 2020 on a strong no debt and for successfully closing the sale of tiles.
Thank you. Thank you.
So Peter you gave US you know a quick laundry list if I can call. If I can use that to them all for all of the areas. You are planning to grow to grow into a I can't write that fast. So I was wondering if you could talk.
About the new Ferro was most attractive end market, which should touch on a lot of them, but you know in a in a more organized fashion for me to understand and the main areas of growth within those until this particular market and in terms of not just you know a disc.
<unk> of the project, but also the potential for top line growth and and their profitability level.
Okay. So that.
For a bunch of questions in there. So let me try to answer it from on high level first because.
We have to be very careful.
Around some of the things that we speak.
Regarding our technology and innovation because we are aligned.
With many of the technology leaders that you may be aware of them out there and we do have a lot of confidential confidentiality agreements in place. Unlike the old days.
What will speak to is the framework looking for which we would talk about in our Investor Day, you would think of this particular portfolio is on market plus 1% to 2% historically that would be on revenue.
Means that we are looking at 4% to 5% at a minimum.
We've talked about in our prepared remarks, 35% I would think that a range. If we were doing an investor day to day would be 30 for 36% to 37% range.
And of course, EBITDA margins of that 'twenty.
On a range and of course cash conversion of 50% to 60%. So let's leave that as a framework for us going forward starting today.
With the Genesis of the new Ferro.
Again those numbers do not include any additional.
Opportunities from the plethora of pipelines that we have including organic growth inorganic growth technology growth with its own separate pipeline optimization pipelines and the like we have many opportunities for creating additional shareholder.
And of course with the type of balance sheet that we spoke off meaning adjusted for the end of the year at $1 three or less than one times by the end of the year you could see why we are pretty excited with the optionality that I mentioned around those pipelines of creating additional shareholder value.
When we talk about the areas to focus on I think that.
You have to look at where the emphasis is being placed with the business for the next three to four to five years.
And.
I won't give you like values for a lot of reasons, what I can tell you is that our current vitality index right. This second we ended the year at 21%, which is best in class. We're looking at that for this year as well as a starting point.
We have an organic pipeline that would show a five year sales of anywhere between $4 million to $500 million.
We have an innovation pipeline of whether it's new to ferro newly.
Creative products with advantage customers are those technology customers I referred to earlier.
That pipeline is reasonable at this point I don't want to get too specific with that but what's important to note is the organic pipeline.
Is that a gross margin of about 40%, but that innovation pipeline can be between 50 and 60% of that gross margin level. So you can see why we feel very comfortable about discussing a range of gross margins, maybe up to 37% because with the perfect storm of the vitality.
Audi index from the.
Base organic pipeline the innovation pipeline the optimization activities all coming together like they are on.
In 2021 for that which we started two years or three years ago. We have another evolution of the next three years on another set of those activities. So the continuance of lifting the portfolio with a gross profit level was pretty significant.
When we looked at focused in what we would ask the shareholders to really think about.
Would be the following areas and this is going to sound quite a bit different you know as with the old Ferro. If you go back and listen to our calls and transcripts from 13, 14, 15, and 16 versus what you've heard the last three or four quarters, there's no doubt that people.
But understand that there has been a significant transformation with the company. So what we would ask everyone to focus on our shareholders.
Is the thought we would talk about the falling you should focus on.
Digital printing.
Across many applications many substrates different types of equipment different type of printing heads and the like we're talking about.
Many digital inks and printer combinations on various substrate with both organic and inorganic gains.
And we have pigments and Colorants for digital applications, and we may have a site tagline going forward that ferro will digitally color. The world you have to think about.
What we're doing in these areas you know that we bought dip Tech you know that has a certain technology certain equipment certain hedge certainty on our largest market segment. So we jumped the chasm twice on covering glass for many applications.
And then you have to look at smart cars, Alright, we have a broader offering and very familiar and markets like sensors lidar as a big application for us.
Communications satellite applications low frequency monitoring and measuring those types of activities and applications are very much in our innovation portfolio.
We look at the digital Internet of things and <unk> is the third segment, we certainly have superior materials for low temperature co fired ceramic products for antenna fitting to five five G applications everywhere and you can see the success that we're having with them.
Covid environment, where that's been accelerated.
We also have the fourth would be I would say the next generation <unk> device, we have glass and ceramic materials with superior heat conduction and installation properties. Another big area very important and we're gaining traction with that starting actually in the fourth quarter.
Next we all have to be concerned about environmental I think theres a responsibility for.
Companies to really have programs.
<unk> environmental applications, we continue to look at everything on our portfolio and challenge ourselves what can we do modifying or extending our different MD user product lines in a way that we create a more environmentally friendly ferro and of course, one way we can do that quickly is with more.
Our organic colors, and inks and we have developed a whole range of next generation inorganic green Chemistries that youll be hearing <unk> balance as we move through the course of the year.
And again energy efficiency I mean, another big Big word.
<unk>, our market segment, and again Faros portfolio lends itself nicely to that we have materials for weight reduction and IRR reflective applications, we have enamels that absorb.
<unk> energy in and created a mechanism for greater electrification properties and again. This is all in the electronics side of our business and of course, how about healthcare, we have a client's advanced glass materials for medical applications, we have coding materials for medical devices I mean, that's the new.
<unk>, that's the Genesis phase so those would be the top seven areas that we are really focusing on and we mentioned it in the repair remarks, Theres a redoubling of AV technology effort in these areas and if you really isolate what Ive just mentioned on the seven segments and you.
Look three to five years on you would probably see another paradigm shift in this business with our success on developing both jointly with high Tech companies and those that we can cross fertilize with ourselves to offer those to leaders and or create either new market.
Opportunities so I'm not sure if that answers everything but understand we have to be somewhat further with.
The type of information we can communicate.
With everyone because of the.
The constraints, we have on on secrecy agreements.
No I understand and yes. It is a it is very helpful and I was wondering just one additional quick question well actually two what festival.
What would need to happen for you to reach the high end of your EBITDA range in 'twenty 'twenty, one and then could you quantify the.
The benefit from the optimization and the stranded costs that are left to to eliminate in 2021.
Yeah, and so let's start with the high end of the EBITDA I mean, what we've said is that we have pretty good visibility for the first half of the year I can tell you and we all can tell you that our order book is pretty defined for the first half.
Why do I say that if you look at let's look at two important components, because we separate that which is back order and that which is lead time oriented so with at least five <unk> for us I can tell you that with five of them.
There's probably an average of a couple of months of back orders.
And if you look forward in some cases, a couple of the M views may we may have orders on the books already.
In August and September.
July and August.
And two to three months out so we feel.
Pretty good about what we're seeing for the first half of the year.
As it remains.
As it relates to the second half for the year I mean, there are a lot of com everyone is saying that there is uncertainty and there is but I will tell you.
On certainly doesn't necessarily always be negative.
Uncertainty means on certain either way.
People need to be careful of using that as just a negative kind of a headwind I'm not saying, it's negative I'm not saying, it's positive what I'm, saying is either way. So if if we have a second half that.
Is really good we may be able to hit that upper range.
But at the end of the day, what we've done with this is we've taken a look at our order book, we've looked at the backlogs we feel good about the first half of the year and we feel reasonably good about what we're seeing today in a way that fits into that range.
So that's.
Kind of how we see the year again uncertainty is always negative, but it's not always positive it's neutral for us.
And what was your other question.
Okay.
Our optimization, yes.
Yes, the optimization about.
Rosemarie you there.
Sure.
She dropped okay alright.
Yes.
Okay.
Our next question comes from the line of Mike Sison with Wells Fargo. Please proceed.
Hey, guys nice.
Nice finish to the year there.
Thanks.
Yeah.
In terms of your sales growth outlook than 8% to 12%.
Maybe talk a little bit about seasonality is.
Two Q, obviously, you've got an easy comp but with.
With the new portfolio is it is it similar to in the past where <unk> would be the strongest and then.
<unk> then then the <unk> are kind of.
On the outside.
Yeah, that's right, there's not a lot of change the seasonality of the business you are right to point out obviously to two key was the easiest comp, but the balance for the quarters would.
It would be similar to how they would look historically.
Right and then in terms of your guidance.
Yeah, I I recall, you should get a good portion of cost savings in 'twenty one to hit.
Sure.
And it just seems to me that youre, not giving credit for sales growth or maybe there's some conservatism as he noted Peter it's tough to really understand what's going to have in the second half of the year. So.
Any any other.
Sort of factors that are in the guidance for 'twenty one that.
That is maybe a negative that we're not seeing.
Yeah, Yeah, so I think that there let's start with Tom.
Some other positives right I think we expect momentum from from both growth as well as the optimization as you would expect and then we would expect some headwinds principally in the second half of the year from raw materials.
And then we expect some headwinds from SG&A for two reasons right at year over year SG&A spend adjusted spend for us was down about $12 million.
Two or three of that was comp and we would expect that piece to come back.
So that would be part of it and then the balance I would say of the SG&A spend is look we did it we did a good job in 2020 of really getting rid of a lot of discretionary spend.
A lot of that will stay on the business, but some of that will come back as sales growth comes back as we look to reinvest into the higher end from a technology perspective that sort of thing some of that's going to come back, but I would say those are that those are the two things that debt.
Would create headwinds obviously it doesn't it doesn't outweigh the positive from both the growth and the optimization, but those are probably the pieces your message on line.
Our next question comes from the line of David Begleiter with Deutsche Bank. Please proceed.
Thank you good morning on banking go through some of the key cash flow items, we should be looking for in 2021.
Yeah. So.
From a cash flow perspective, David I think what we've said is we expect to be from a net leverage perspective about one times by the end of 2021.
From a from a capex.
Perspective base Capex.
We'd probably be around $20 million, we're not going to get into all the details relative to working capital taxes interest that sort of thing those would be typically what you would what you would normally expect from an interest rate perspective, and from a working capital perspective.
And then total Capex, we would expect to be somewhere around $44 million. So we've got $20 million to $25 million project type spend for the for the different types of projects that we've talked about the path for various optimization.
Projects et cetera, and then when you boil all that up.
Youre going to get to about onex by the end of the year.
Very good on Peter just on capital allocation, where does share buybacks Russ rank in your preference for allocating some capital back to shareholders.
So David I'll start and then Peter can chime in look I don't know that its different than its been in the past obviously now the balance sheet is much stronger.
And so we will obviously be looking at a range of opportunities, but I think we would look at that like we would look at anything else with respect to capital deployment on a return basis. So.
Look opportunistically at share buybacks as we will.
Repayment of debt as we will M&A.
M&A.
Our next question comes from the line of John Mcnulty with BMO capital markets. Please proceed with your question.
Yes, Thanks for taking my question, maybe a follow up to that.
Peter you you had a huge period, where you did a lot of M&A and I think that was part of what helped to really kind of transform the portfolio. It seems like you're a little bit more or maybe a lot more heavily on the on the innovation side I mean, how should we think about your appetite for M&A as we look forward because you've certainly proven you can do it but it.
Seems like maybe that's not necessarily the the lead thing that youre that youre thinking in terms of in terms of how you grow the portfolio. So I guess, how should we think about the opportunities for that.
Yes. Good question again, the way we framework for this.
John is we have three pillars of Av.
Of our Genesis phase and again one of it is growth in mix is technology and the third is optimization you know at the end of the day nothing has really changed with the M&A activity. We have so many different M&A targets.
That hasnt changed and even though we were going through the sale process and closing process of Tayo that doesn't mean that we were sitting around doing nothing.
Our M&A team.
Was split between that which worked on the tile business and that which continue to socialize acquisition targets as soon as we closed we can jump back into at least in an incremental way starting to do what we where we ended off which is look for innovation platforms.
Bolt on remember the 20 acquisitions that we did in for five years. We've always stated that they were not acquisitions of companies. We acquired over 30 different technology platforms to round out our technical base. So right now we are.
Looking at a handful of opportunities that we now can certainly engaged like I said, it's honest we have to start the machine up it's been going it's been festering has been on a low boil until we start up and again there are plenty of opportunities, but we would probably start off in a way.
Net where we ended where we look for smaller type of Av capability fillers. However.
With the new balance sheet.
We've always been clear that we feel in a good range for the business and everyone concerned with on the leverage of about two and a half so sitting there at less than one.
That's something that.
Looks good but it may not be the best for the business. So what we would not do it.
Is go out and just for the sake of doing a big deal and blowing up the balance sheet, because we're in that position that would not be something that's prudent for anybody.
We have a profile of a business thats really.
Created John it environment, where some of the bigger deals that we may have looked at in the past or maybe coming on the market or in the market or whatever however, you want to look at it.
If those businesses don't profile like we do in terms of growth in terms of gross margin in terms of cash conversion and in terms of EBITDA margins. You know, we kind of shake them out on the funnel on a throw them away.
Because we don't need those types of deals any longer.
There are a bunch of things that we can do.
Around M&A, so our appetite hasnt changed at all maybe the types of targets that we're going after will be a little more scrutinized in terms of just how much we want to extend we don't want to do anything to dilute the financial.
Metrics on this company at this point.
Got it and it makes us makes sense.
And then I guess, a second question would just be on the raw material front, just given all the changes in the portfolio can you remind us of kind of what the major raw material baskets are and then just given all the I mean admittedly kind of crazy dynamics that we're seeing across across a host of kind of raw material.
I guess can you speak to whether you're seeing any supply chain disruptions or any kind of outsized inflation that we should be thinking about that rolls in in the first half of the year.
Yes, I think Ben hit it on his last answer on the second half, but there are a couple of very important points. I mean, you have the types of raw materials that put us at a disadvantage state with the tile coating systems business to an extent have gone with them.
But with US I think we've been very clear on things like cobalt titanium nickel chrome those types of things.
There are announcements so raw materials lithium is another one for the remain co business. So what Ben mentioned there are some increases that are coming through.
However, what we're doing in this environment is that we're putting pricing strategies together like we always do in light of making sure that we do everything we can to cover those as quickly as possible and in this case our strategies around remain Kobe maybe not.
Covering we try to put plans together that preserve margins and.
You have to look at the industry structure, maybe pricing is a little more sticky, but certainly we're seeing like everybody. There are some raw material increases.
And you mentioned supply chain disruptions I'll I'll tell you one thing that I think its talked about but you're not hearing maybe a lot of is the art everybody's ability to get containers, particularly with movements back and forth with China, So that seems to be a little disruptive.
Securing containers that container prices are inflated a bit and alike.
But a lot of those can be passed on through through cash.
Cost pass throughs and light, but be clear that we do see a raw material increase it does present, where one would argue is a headwind, but we're doing everything we can to try to minimize the negative impact of raw materials. Ben did you want to add no I think thats right I mean, we're not really seeing anything from us.
Supply disruption perspective, I think the team has done a nice job there to sort of keep that attack, particularly in 2020.
I mean, the big the big raw materials in terms of remained how we're going to be some other stuff that we've talked about in the past cobalt chrome zinc.
Our business is going to be and therefore on that sort of thing. So we're not obviously buying as much cobalt.
We did when we had the tile business, but it still remains.
One of the top two or three for us.
As a reminder to register for a question. Please press the one followed by the for on your telephone.
And our next question comes from the line of Mike Harrison with Seaport Global Securities. Please proceed with your question.
Hi, good morning.
Hey, Mike.
Wanted to ask about.
On the digital printing.
Business it kind of headlined the list of seven or so different areas that youre very excited about I know you guys bought the dip tech business back in.
In 2017.
But it seems like that is a business that really could be poised for significant growth.
Given not only recovery in commercial construction, but kind of the turnover that maybe going on in commercial space.
<unk>, if you will and maybe the refining that needs to.
To happen are redesigning of some of those spaces. So can you talk about kind of the opportunity that you see for digital printing overall and maybe specific to commercial construction.
As you look at.
That market recovering in 2021.
Yes. So I think you have to look at digital printing at a higher level.
You have to look at digital printing.
Like you may remember in the old days with tile, whereas just color on inks organic inner mostly inorganic or organic water base.
On ceramics.
We talk about digital printing.
It goes beyond that it could be digital printing on for electronic applications.
Move away from whatever you used to think about.
Digital printing with Ferro you have to think about it.
The other digital printing kind of component could be.
Fluorescent.
Laser marking printing.
For ethane with lasers, and that's all digitally apply to us when we think of digital we think of things like that not to mention.
We're also mentioned that you have all kinds of other substrates that can be that can be printed on whether it's fiber board plastics details. You know there are a whole bunch of other things that we're working on very quietly over the last couple of years, it's not like there is a single focus with.
That one technology on industrial glass, I mean that debt isn't.
What what the future is the future is how do you apply everything as much as you can digitally I mean, you could look at.
Particularly in electronics industry I can tell you some very fascinating.
Digital printing with precious metals and the like on different substrates that could be burned off I mean, the digital printing concept for us isn't historically, what you would think and as I mentioned on the onset because we're involved in so many different type of maybe esoteric type applications.
<unk>.
Can't get into I'm, not going to be able to quantify I'm not going to we're not going to sit here and say that particular pipeline is X and it has certain things I can give you that.
Like I did it's bigger is emerging as a certain percentage of our organic already we're already seeing traction in the gross margin for those things are 50% to 60%. So we can framework that concept with right. This second.
Because of a lot of reasons, we just cannot be real definitive other than the fact that we take all that data and we have done what we feel is good for the shareholders for years to 5% growth, which would be historical market plus 1% to gross margins between 34% to 37% EBITDA margin.
On a 20% close to it and of course, the cash conversion and remember this is all asset light heavy touch types of applications small volumes high margins.
Very proprietary and in the big scheme of things on the value of those products create for the end user.
Relative to what we're doing it isn't like the big deal.
A question of moving the technology jumping the chasm twice.
And that's what we're doing but don't think of digital like you might think of in the old days, it's just a different different types of animals.
Understood and then on the color solutions business, you saw really nice year over year growth, but that margin was pretty similar to where it was last year could you just talk about.
Some of the margin drivers that you saw this quarter and maybe how to think about color solutions margin performance into 2021.
Sure, Yeah, Hey, Mike, It's Ben look I.
I think from a color solutions perspective, they've benefited from the Americas optimization initiatives.
The most significantly so far functional coatings will benefit benefited in the last half.
2020, and will benefit again more in 2021, but a lot of what youre seeing from a margin perspective is.
He is really the optimization and then obviously as the volume comes back.
Get better fixed cost absorption. So I would say those are the two biggest drivers.
And there are no further questions at this time I'll turn the call back to you for closing remarks.
We would like to thank everyone for joining us on the call today. We appreciate your interest in Ferro and we look forward to discussing our results with you again next quarter.
That does conclude the conference call for today, we thank you for your participation and ask that you. Please disconnect your lines.
Okay.
Tom.
[music].
Okay.
[music].
Okay.
Okay.
Okay.
[music].
Okay.
[music] zone.
Thanks, Tom.
Okay.
Thanks, David.
[music] credit.
Okay.
Tom.
Peter.
Thanks, David.
Okay.
Tom.
[music] for units.
Okay.
[music].
Okay.
Sure.
Okay.
Okay.
Okay.
[music] for employees.
John.
David.
Tom.
[music].