John T. Bingle - Director of Investor Relations and Treasurer Peter T.

Thomas - Chairman, Chief Executive Officer and President Jeffrey L. Rutherford - Chief Financial Officer, Principal Accounting Officer and Vice President

John P. McNulty - Crédit Suisse AG, Research Division David L.

Begleiter - Deutsche Bank AG, Research Division Michael J. Harrison - First Analysis Securities Corporation, Research Division Rosemarie J.

Morbelli - G. Research, Inc.

Michael J. Sison - KeyBanc Capital Markets Inc., Research Division

Thank you. Good morning, and welcome to the Ferro Corporation 2014 Third Quarter Earnings Conference Call.

Joining me on today's call are Peter Thomas, Chairman, President and Chief Executive Officer; and Jeff Rutherford, Vice President and Chief Financial Officer. Peter will open with a few brief comments.

Jeff will provide financial details for the quarter and will discuss our guidance. And we'll address your questions at the end of the call.

Our quarterly earnings press release was issued last night. You can find the release, as well as a reconciliation of reported results to non-GAAP data that we'll discuss this morning in the Investor Information portion of the Ferro's website, www.ferro.com.

Please note that statements made on this conference call about the future performance of the company may constitute forward-looking statements within the meaning of federal securities laws. These statements are subject to a variety of uncertainties, risks and other factors related to the company's operations and business environment, including those listed in our earnings press release and more fully described in the company's annual report on Form 10-K for December 31, 2013.

Forward-looking statements reflect management's expectations, as of today. The company undertakes no duty to update them to reflect future events, information or circumstances that arise after the date of this conference call except as required by law.

A dial-in replay of today's call will be available for 7 days. In addition, you may listen to or download a replay of the call through the Investor Information section at ferro.com.

Any redistribution, retransmission or rebroadcast of today's call in any form without the express written consent of Ferro is prohibited. I'd now like to turn the call over to Peter.

Thanks, John. Good morning, everyone, and thank you for joining us today.

As you read in our news release, we had another quarter of solid earnings, with adjusted EPS growth of 33%. The increase in profitability was primarily the result of higher sales and gross profit in our Performance Colors and Glass segment, coupled with reduced selling general and administrative expenses associated with continued cost-reduction initiatives and lower interest expense.

Performance Colors and Glass had a particularly strong quarter, with a 9% increase in net sales and an 18% gain in gross profit compared with the same quarter last year. This marked our seventh consecutive quarter of year-over-year quarterly growth in adjusted earnings per share since the fourth quarter 2012, when announced our value creation strategy to rejuvenate the business.

It also marks a major milestone related to our value creation strategy, achieving a 10% return on invested capital. Early on, we set an internal ROIC goal of 10% as the point where the company would begin generating positive value for shareholders.

We had estimated that the then current invested capital was generating returns of approximately 4%. While reaching the 10% ROIC threshold is something all of us at Ferro can be proud of, we continue to focus on our longer-term target of delivering consistent and predictable ROIC of 15%.

We intend to get there by the end of 2015. I think it also is noteworthy that we achieved this milestone in a quarter when we did not get a lot of help from the global economy.

On a value-added basis, excluding the impact of exited business lines and excluding precious metal sales, sales declined by 1% in the quarter. This decline is disappointing, but we are encouraged the underlying demand for the majority of our product lines continues to increase.

Overall volumes improved by over 3% in the quarter, with increases in both Performance Colors and Glass and the Performance Coatings. Volumes declined in the Pigments, Powders and Oxides segment.

As the trends in volume, earnings and ROIC show, we are succeeding in our transformation of Ferro into a higher value, more focused functional coatings and color solutions company. Last summer, we closed on a new $500 million credit facility and completed the asset sale of our specialty plastics business.

We remain on track with the marketing process for our Polymer Additives business, with interest in both the U.S. and European assets.

The new credit facility and these asset sales are providing the increased financial flexibility to pursue our growth initiatives. Last month, we announced Ferro's first significant acquisition in 14 years, a definitive agreement to acquire Vetriceramici, a leading global supplier of ceramic coatings to high-end tile manufacturers.

The EUR 83 million transaction is expected to close by the end of the year. Vetriceramici is an excellent strategic fit with our existing tile coatings business and our Performance Colors and Glass business.

It adds higher-value product offerings to our portfolio and enhances our technical capabilities, with state-of-the-art design and product development facilities. With manufacturing facilities in Italy and Mexico, and mixing plant in Poland and research and development and sales offices in Italy and Turkey, Vetriceramici will also accelerate our expansion into important growth markets, where we don't have a significant ceramic coatings presence, including the United States.

We expect the Vetriceramici investment will achieve a return on invested capital of greater than 12% in the first year of operation, and we expect synergies will enable us to improve the return on invested capital to greater than 15% within an acceptable time frame. This transaction is a very good example of the type of growth opportunities we're seeking to drive shareholder value and build upon our market leadership positions.

We are focused on our glass-based coatings businesses, specifically on opportunities to enhance our presence in emerging markets and add to our frit production capacity. Again, frit is at the core of Ferro today.

The majority of our manufacturing assets are related to the melting of inorganic materials to produce glass. We fracture the glass into pieces to create frit, and we melt it or grind it into smaller particular sizes and patterns that are the building blocks for a host of glass-based functional coatings.

We are invested in the production of pigments and colors, because we use them at our own glass-based coatings. Now turning back to the third quarter results.

Here are 4 key takeaways. Takeaway #1, we achieved overall volume growth of a little over 3% in the quarter, which is in line with our underlying view that our business should track GDP, plus 1%, of incremental growth from new products.

Estimated 2014 global GDP, weighted for the markets in which we participate, is just over 2%. So we believe we are on track as it pertains to volume growth, but unfortunately, we're not seeing all the volume growth convert to net sales.

Takeaway #2. Performance Colors and Glass continues to have an exceptional year.

Volume, revenue and gross profit were all up for the quarter and on a year-to-date basis. We are winning in all facets of the business, with improved sales and profitability across all regions and in all the major product lines, and this trend has been sustained for the full year.

The automotive glass business is robust worldwide and demand for decorative glass coatings remain strong, including ceramic coatings for European markets, as well as for container glass in Latin America. The electronics product line, while being our smallest line, is also having a great year, achieving the largest improvement in profitability for the quarter and year.

Since we started on our value creation strategy in the fourth quarter of 2012, gross margins for this segment have improved by approximately 580 basis points, an extraordinary performance. Takeaway #3.

Our Pigments, Powders and Oxides segment is performing in line with our prior guidance. We previously explained that the weakness in this segment sales was caused by reduced sales and the service polishing product line due to inventory control measures taken by a key customer.

As we have discussed, we expect this trend to last through year end. While the surface polishing product line has been challenged, we are beginning to see positive momentum in the Pigment's product line.

U.S. pigment demand is returning to normal levels after a slow start to the year, particularly caused by the extreme cold winter and its impact on construction-oriented businesses.

In the quarter, pigment's revenue was up 6% year-over-year, which is a good sign of improvement. Takeaway #4.

It concerns our Performance Coatings segment, where we had a weaker-than-expected quarter. Now this was due to 3 factors: First, porcelain enamel continues to face difficult market conditions in Europe, where demand for appliances, a major market for our Porcelain Enamel products has declined 2% to 3%.

This is something we discussed last quarter, and it is a trend that is continuing; second, we are seeing a further deterioration in selling prices for Tile Coatings products, especially for digital inks, where average selling prices have declined by approximately 20% over the last 12 months. The price competition is being fueled by competitors that are scrambling to fill idle capacity, and by changes in the competitive landscape in China, where we have only a minor position.

This competition, however, is spilling over to the more traditional markets in Southern Europe and Latin America, resulting in fairly significant price erosion. We will continue to reformulate product recipes to provide competitively priced materials for our customers, while at the same time, preserving profitability.

In addition, we will continue to promote innovative products, like our new line of water soluble digital inks, where we can offer a technically superior product that enhances our own and our customers' profitability. Finally, sales and profitability for the quarter in the Performance Coatings segment was negatively impacted by a few one-off items.

First, demand for frits and glazes was softer than expected, primarily in North Africa as is Islamic holidays -- due to Islamic holiday season. Our customers have indicated the extended shutdowns were needed for the industry to clear out excess inventory downstream.

We believe this inventory issue is transitory and that fundamental demand for tile frits and glazes will normalize in the fourth quarter. Tile profitability was also impacted by the temporary shutdown of several of our smelters in Egypt for normal maintenance, requiring us to support the region from our Spanish operations at higher costs.

On the bright side, in Egypt, the government's economic stabilization plan appears to be holding and both domestic demand and exports continue to be strong. Looking at the bigger picture, while we are generally pleased with our performance in the quarter, given the economic and market conditions, we know there is much left unfinished.

We will continue to pursue organic and inorganic growth, creating value and focus and also driving cost out of the business by working to reduce our direct and indirect spend, optimizing our tax structure and improving the overall efficiency and effectiveness of the business. Over the next several months, we expect to be integrating our recent acquisition of Vetriceramici, which will assist in driving growth and enhancing profitability in the Performance Coatings segment.

And we expect to complete the sale of our U.S. Polymer Additives assets, which will provide liquidity to pursue additional strategic opportunities.

We will also be focused on acquiring or building out additional frit capacity. So to summarize, volume growth for the quarter was in line with our underlying assumptions, and we continue to deliver improved earnings.

We are on track with our strategic initiatives, and we are confident that we can continue to increase shareholder value through a prudent cost management and by investing in value-creating growth opportunities. With that, I'll now turn the call over to Jeff.

Thank you, Peter, and good morning, everyone. As John mentioned at the start of the call, you will find reconciliations of non-GAAP results discussed during this conference call in our press release and also in the supplemental financial data that is posted in the investor information portion of our website.

My comments, in general, will focus on our continuing performance materials businesses, as adjusted for restructuring and impairments and other onetime items, to provide comparability of information from period to period. As you are aware, we are in the process of harvesting our specialty chemicals business units.

In July, we sold our Specialty Plastics business, and as Peter mentioned, we are in an active process to sell our Polymer Additives business. The marketing of our Polymer Additives segment continues to proceed as planned, and our goal is to complete the transaction by the end of the year.

We are in active negotiations concerning the business, so we are not going to discuss specifics or speculate on potential proceeds or timing. But as a reference point, this business had 2013 sales of $293 million and contributed direct EBITDA of $24.9 million.

Both Specialty Plastics and Polymer Additives are now being reported as discontinued operations. For the quarter, our discontinued operations generated income of $50 million.

Including in the income are the full quarter results of the Polymer Additives segment and a gain of $54 million on the sale of the Specialty Plastics business. The results of discontinued operations also include an impairment charge of $7.2 million associated with the impairment of our Antwerp, Belgium Polymer Additives assets.

This charge is related to the actual third quarter and planned future capital expenditures on the dibenzoates project and the current market value of the applicable assets. Note, there are no Specialty Plastics operating results included in discontinued operations, as the asset sale occurred on July 1.

Now I'll turn to our results for the quarter. For the third quarter of 2014, on an adjusted -- unadjusted basis, we reported income of $0.55 per diluted share compared with $0.15 per diluted share for the same period last year.

After recognizing Specialty Plastics and Polymer Additives as discontinued operations, we reported a loss from continuing operations of $0.03 per diluted share. This compares with income of $0.11 per diluted share last year.

On an adjusted basis, diluted earnings per share were $0.16 in the current quarter versus $0.12 last year. There are few notable adjustments, which were reported as onetime items in the current quarter, including the following: First, we incurred a charge of $14 million associated with the refinancing of our debt.

As you recall, in early July, we entered into a new credit facility, composed of $300 million term loan, priced at LIBOR plus 325 basis points, with a 75 basis point LIBOR floor and $200 million revolving credit facility priced at LIBOR, plus 275 basis points. The facility was then used, along with proceeds from the Specialty Plastics divestiture, to repay our $250 million 7-7/8% senior notes.

The charge is composed of 2 components, and approximately $10 million redemption premium incurred to repay the senior notes and an additional charge of $4 million related to the write-off of deferred financing fees associated with the replaced debt. During the third quarter, we also recorded $1.5 million of additional restructuring charges.

And finally, in SG&A, we had approximately $4 million of nonrecurring expenses, primarily, professional service cost related to our ongoing cost-reduction projects. Further, it should be noted that income taxes have been adjusted to reflect a 36% effective tax rate.

During the remainder of my remarks, I will refer to adjusted numbers, which will exclude the items I just noted. In addition, discussions about sales and sales-related profitability measures, such as gross profit margin, will reference value-added sales.

As a reminder, value-added sales exclude precious metal sales, as precious metal sales, in general, are passed through sales to our customers. Excluding precious metal sales removes the volatility in our results associated with significant movements in precious metal pricing.

Precious metal sales were $11 million and $21 million in the third quarters of 2014 and 2013, respectively. Value-added sales were $265 million in the third quarter of 2014, versus $277 million last year.

Adjusted for the impact of business lines exited during 2013, including the North American and Asian metal powders assets, which accounted for approximately $9 million of sales in the third quarter of 2013, value-added sales declined 1%. For the quarter, value-added sales and Performance Colors and Glass increased 8%, while the other 2 segments experienced sales declines.

Value-added sales declined by 6% in Performance Coatings and by 5% in the Pigments, Powders and Oxides segment, as adjusted for the exited Metal Powders business, as previously described. Adjusted gross profit was $73 million in the third quarter of both 2014 and 2013.

While adjusted gross profit, as a percentage of value-added sales, increased just 27.5% versus 26.2% last year. The $5 million gross profit increase in Performance Colors and Glass, primarily related to higher sales volumes, was offset by lower profitability in Performance Coatings segment, principally due to reduction in average selling prices in the tile coatings.

Excluding special charges in both periods, adjusted SG&A was $47 million compared with $50 million in the prior year, representing a reduction of 6%. The reduction was primarily due to lower personnel costs associated with restructuring initiatives and lower incentive compensation, partially offset by higher professional service fees.

For the quarter, we achieved $34 million of adjusted EBITDA, resulting in EBITDA margin of 12.8%. This compares to third quarter 2013 adjusted EBITDA of $30 million or a 10.7% margin.

At September 30, 2014, net debt was $214 million, a decrease of $94 million from the second quarter of 2014 and a decrease of $70 million year-to-date. The sale of Specialty Plastics business for $88 million in net proceeds was the primary driver of the net debt reduction.

Our liquidity position is strong. At quarter end, we held $95 million of cash, and had revolver availability of approximately $195 million.

Approximately, $105 million of this liquidity, however, will be used on the close of Vetriceramici acquisition in the fourth quarter. The following significant cash flows occurred during the first 9 months of the year, as part of the $70 million decrease in net debt.

For continuing operations, we generated $105 million of EBITDA with the following cash flows. A reduction of working capital was a source of $10 million; uses of cash were capital expenditures of $10 million; restructuring payments of $17 million; interest of $24 million; cash taxes of $4 million; pension and retirement contributions of $28 million; $18 million of refinancing fees, which include premiums paid on the repayment of the 7-7/8% notes; original issuance discount on the term loans and all other associated refinancing fees; and other net cash outflows of $24 million, including the payment of the 2013 bonus of approximately $14 million.

As previously referenced, net acquisition and divestiture activity generated approximately $82 million of cash. Our discontinued operations used approximately $1 million in cash, composed of the following items: $34 million of EBITDA, offset by capital expenditures of $21 million; and working capital investment of $14 million.

We estimate that our current pension GAAP funding level is 93%. Our precious metal consignment obligation was $25 million at quarter end, and we currently have no demands for cash collateral related to precious metal consignment program.

As Peter mentioned in his remarks, this quarter, the company exceeded the 10% threshold on return on invested capital for the first time in quite a while. This is significant.

It is now clear that our invested capital is creating value greater than our weighted average cost of capital, and we are now creating value. The 10% mark, however, is just an initial goal, as we have set 15% as our target for 2015, and 15% is the minimum threshold that we use in evaluating our value-creating growth opportunities and how we evaluate all of our individual asset locations.

Let's take a moment to explain how we measure ROIC. It's laid out for you in the last supplemental table in the press release.

As I start the calculation, only incorporates our continuing operations. So both the numerator and the denominator, or the return calculation, excludes the historical results in current investments and specialty plastics and Polymer Additives.

The numerator of the calculation is net operating profit after taxes or NOPAT. We use adjusted earnings from the businesses, adjusting out all of our onetime items, the same as in our adjusted EPS calculation.

We also adjust out the consignment fees we pay for the use of precious metal, as we treat the precious metal leases at debt. For taxes, we are using our adjusted tax rate of 36%.

The denominator of the calculation represents the equity and debt investments that have been made in the company. The equity is equivalent to the book equity on the balance sheet, while the debt component includes balance sheet debt, plus the value of our off balance sheet precious metal leases, the unfunded portion of postretirement liabilities and the value of environmental liabilities.

For the quarter, ROIC was 10.5%, a 300-basis-point improvement over where we started 2014. We'd like -- now like to provide a brief overview of year-over-year third quarter results for our reporting segments.

The analysis covers only continuing operations and is based on value-added sales. First, Performance Coatings.

Sales declined by 6%, with tile coatings and porcelain enamel experience similar sales decline on a percentage basis. Segment sales benefited from a slightly richer mix and an approximately 3% increase in global volumes.

But these positives were more than offset by lower pricing in both tile coatings and porcelain enamel. The decline in pricing, however, was primarily in the tile coating product line, particularly, in digital inks, where were average selling prices have declined by approximately 20% over the last 12 months.

We were also experiencing the adverse impact of weaker economic conditions and political instability in certain geographies, including China, Indonesia, Argentina and Venezuela, in addition to weaker pricing. As a result, sales have declined by 12% in Latin America and 9% in Asia Pacific.

As Peter mentioned earlier, in addition to lower pricing, sales for tile products were also impacted by a lower demand for frits and glazes in North Africa, as customers took extended manufacturing shutdowns during the recent Islamic holidays in part to allow excess inventory downstream to be cleared out of the supply chain. We believe this impact will be transitory, and expect the fundamental demand for tile frits and glazes in the region will normalize in the fourth quarter.

For porcelain enamel, sales declined in the quarter, due principally to reduced demand in Europe. For sales of appliances, a key end product of our porcelain enamel, have declined 2% to 3%, and in Asia, due to regional weakness and lower average selling prices.

Segment gross profit declined by $6 million, but the gross profit margin declined to 21.5% from 23.9% last year. The reduction in gross profit was primarily driven by the reduction in average selling prices.

Tile profitability was also impacted by the temporary shutdown of certain of our smelters in Egypt for normal maintenance. In the Performance Colors and Glass segments, we continue to experience strong growth in sales and profitability.

For the quarter, value-added sales increased by $7 million, or 8%, to $92 million. Increased volume was a primary driver for the increase in sales, partially offset by a weaker business mix.

Value-added sales increased in all major product lines and across all geographic regions. Gross profit improved by $5 million to $34 million, with gross profit margin improving to 36.9% from 33.7%.

Gross profit increased primarily due to the increase in sales and volumes. In Pigments, Powders and Oxides, value-added sales and gross profit declined by 26% and 8%, respectively.

Included in this change, however, is the impact of divesting the metal powders and flakes product lines last year. Third quarter 2013 value-added sales from the dispositions were approximately $9 million, and the associated gross profit was approximately $0.5 million.

Adjusted for the dispositions, sales declined by 5% and gross profit declined by 2%. The sales decline was attributable to a reduction in demand for our surface polishing product line, where sales were off by over 20%.

The decline is primarily due to inventory control measures taken by a key customer. As the customer continues to work off inventory built up at the end of 2013, the reduction in surface polishing is partially offset by a 6% increase in sales of pigments.

On a regional basis, value-added sales declined in the U.S., primarily due to loss of business in surface polishing. Sales declined in Latin America and Europe, primarily due to a reduction in demand for pigments, while value-added sales in Asia Pac were up slightly due to increased sales of pigments.

Segment gross profit declined in the quarter, primarily due to the reduced volumes, lower selling prices and unfavorable mix, partially offset by favorable raw material cost and improved manufacturing efficiencies. Based on our third quarter performance and current view of current market conditions, we now expect adjusted earnings for full year 2014 to be at the upper end of the range of $0.52 to $0.57 per diluted share, which we provided last quarter.

Value-added sales for the fourth quarter of 2014 are expected to be essentially flat compared to last year. As adjusted for dispositions, that represented value-added sales of approximately $3 million.

We are lowering our revenue outlook, based on the deterioration in pricing in Performance Coatings segment, reduced sales in Pigments, Powders and Oxides segment and continued political and economic uncertainty in Eastern Europe, Asia and Latin America. We expect the fourth quarter adjusted gross profit margin, expressed as a percentage of value-added sales, to be lower in the -- to be lower than the third quarter, in the range of 26% to 26.5%.

For SG&A, we expect fourth quarter expense -- expenses to be in the range of $45 million to $50 million, including a bonus provision of approximately $2 million. We did not provide a formal update to our 2015 targets in the press release, as we are not yet prepared to roll out formal guidance for the year.

We thought it would be premature to do so, particularly given the recent changes and volatility in global markets. We are in the middle stages of our budgeting process and are also working to analyze and better understand the synergies and earnings power of Vetriceramici.

Additionally, we are performing detailed expense budgeting, boarding on zero-base budgeting for the first time in a long time. We plan to establish formal guidance with the 2014 fourth quarter results.

Having said that, we have not seen anything in our planning process, to date, that would make us change our EPS target. So there may be changes in components, volume and sales growth, gross profit margins, SG&A, et cetera.

And we will reassess our outlook as the budgeting process continues and we have the benefit of analyzing results as the quarter progresses. From where we stand today, we expect continued volume growth in the range of GDP, plus 1%.

However, given the current competitive environment, it is likely that we will continue to experience pricing pressure, which may cause us to reset sales growth and gross margin expectations. As you know, a good part of our earnings growth is related to continued cost reduction initiatives, and our stated goal is to reduce SG&A, excluding the AFP bonus and the impact of Vetriceramici to a $40 million quarterly run rate by the end of 2015.

We continue to work towards that end. That said, we are not moving away from our current 2015 target.

That concludes our prepared remarks. I'll now turn the call back over to John for the Q&A session.

Thank you, Jeff. Operator, we're now ready to begin the question-and-answer session.

Please repeat the instructions to assist our guests, and then we'll get take the first question.

With regard to the Performance Coatings, and in particular, the weakness that you're seeing in the inks area, can you give us some color as to sequentially how the pricing moved? Because it sounds like it's pretty big year-over-year, but I'm wondering if it's getting, or how much worse it actually got, throughout the quarter.

And then also tied into that business, since you highlighted some maintenance in Egypt and that was maybe resulting in some slightly higher cost, can you breakout what that cost impact was?

Yes, first, John, it's Peter. As it relates to the FAS pricing, as we mentioned year-over-year, it was down about 20%.

But we are noticing that sequentially that, that pace of, let's call it price erosion, is slowing up. We think we've reached a point where the pricing for most of our competitors, as well as us, at a cost to produce, is at a point, where we think it's going to be like a nominal kind of a price reduction going forward.

Now let me explain a little bit more about the FAS market, so everyone has maybe a clearer perspective. Remember that the FAS market, the digital inks, replaces old-school type of coating of tiles, which would include, that's called the fundamental screen printing mechanism, as well as RotoReviewer [ph] and the FAS expansion in the market started with all the top, top producers that wanted the best looking products and design.

Now we mentioned a while back that this market, even in 2009, we thought it would be $100 million back then. Up-to-date, we're approaching $400 million and the market is growing.

And our growth actually is about 50% in volume. So the question is, what's happening with the volume?

Why is it increasing so much? And why are the price points coming down?

And what I'll tell you is the fact that the price points that are coming down is also attracting an accessible market of those other 2 coating mechanisms that I mentioned. So at the end of the day, let's call the accessible market for digital inks being a couple of billion dollars instead of this $400 million we're talking about.

And each time, there's a 10% reduction in price, it opens up and expands the new addressable market for digital ink. So that's the reason why the market is expanding so quickly.

Again, each time there's a new price point, more and more people convert from the old-school technology. So the market -- the accessible market's pretty large, but it all depends on price, right?

So what's happened? We've seen this big drop year-over-year from $23 a kilo to $15, and maybe it will drop.

What we're seeing now is maybe down to $13 and the like. So that will open up more opportunity for growing the volume.

So what's the trick here? And what have we've been doing as a market leader here?

As you know, we have 4 generation -- we're in the fourth generation, which are water-based inks. The good news about water-based inks, at the low price point that I just mentioned where we're competing today, we have launched, we're first ones that have launched the water-based inks in the marketplace.

Those margins are pretty high. So what we have is a new low price point for water-based inks, but the cost to produce is a lot less than with the old solvent based inks.

So what you're going to see, moving forward, is even though the price points may be lower, that's how we continue to keep our margins up in the marketplace. So again, the new price points is a good news, bad news.

The lower price points is allowing the market to expand, and that's why it's growing so quickly. And as a market leader, we're in a very, very good position to keep the volume growing, price points low, but then we'll start to see some margin expansion.

And the impact of the maintenance in Egypt, we estimate at approximately $400,000.

Okay, great. And then just a question with regard to the portfolio changes.

You're looking to -- I believe you said you were looking to close on plastic additives by year end. Was it close, or announce the actual transaction by then?

And then when you think about the opportunities and where you may be able to roll some of the proceeds of that, can you walk us through what you're seeing in the M&A markets at this point?

Relative to us, what our goal is, what we've mentioned is to have the Polymer Additives business harvested from our portfolio by the end of the year. And that's our goal.

The non-Antwerp asset.

The non-Antwerp asset, yes. As it relates to the forward look with M&A, as we've mentioned, we have identified 30 to 40 bolt-on acquisitions, and we're in the process of reviewing a handful of those, as well as looking to expanding our capacity in strategic emerging market locations.

Because for example in Egypt, the growth there year-over-year is 23%. So that market, because of the stabilized economy and the quality of the product in Egypt, now allows those tile producers to go ahead and export more.

So it's prudent -- it'll be prudent for us to really place more capacity where the demand is. So we have opportunities for acquisitions.

We have opportunities for adding to our capacity. So we're in good shape with -- on the growth in terms of having targets.

But keep in mind that our standards are fairly high, relative to acquisitions. And as we've talked earlier and in previous calls, we want to be able to acquire an asset and have an adequate return within a really relatively very short period of time, relative to functional synergies.

So we've set that at 10%. And then within a reasonable period of time following the acquisition with -- that we would get to 15%.

So we see deals, right? All the time, that people will bring to us and argue relative to earnings accretion.

And we argue back, it's value creation. When we're sticking with our formula here, it took our return on invested capitals to 4, to 10, to 15 by the end of '15, and we know that's how you create value for shareholders.

So we're looking for the same thing in acquisitions. So although we see a lot, and we know of a lot, I mean, that we're going to be very disciplined about M&A activity, and we're only interested in transactions that are going to create value.

And as we've said earlier, if we can't do that, right, for whatever reason, right, we would rather turn that capital back to shareholders than spend on something that's not going to create value.

First, Jeff, just on interest expense, given the various moving pieces of the sales and acquisitions, how should we think about interest expense in Q4 and 2015?

Interest expense?

Interest expense.

Yes, I mean, we're basically -- our interest expense is going to be $300 million at 4%. We're at 325 plus 75 basis points floor on LIBOR.

We feel very comfortable that we're going to be able to get through '15, John and I have side bets on this by the way, John Bingle and I, on LIBOR rates. And we can go up to as long as 6-month LIBOR.

So we stay short-term. We monitor long-term.

As we approach 75 basis points, we can always go in to 6 months and lock in for 6 months if it happens, and then look at what else we're going to do. So what we're modeling for '15 is $300 million at 4%, and then the interest coming off our other facilities is relatively minor, right, John?

Yes. And then there's an amortization on the financing piece.

On the discounts? Or on the fees and the discounts?

What's that total for quarter?

We're showing it to be right around $13 million to $14 million for on top, instead of just to the pure $12 million. So another $1.5 million.

$1.5 million for the year.

Correct.

And the rest is basically in cash, right? And we're not getting a whole heck of a lot for our cash.

Right. And just on the Q4 guidance, can you just be -- just to be clear, is it $0.07 to $0.08, the implied Q4 guidance?

Or is it more than $0.10 per share range? At the high end of the range of...

It's $0.07 to $0.08 to get us to the -- to our current to high end of the current range.

Got it. And, Peter, just on the Vetriceramici transaction, why were they willing to sell?

And what's the attraction of them to you guys?

Yes, there's a whole history as to why they would sell, and -- but let me focus on why it's of interest to us. As we've mentioned, our -- we plan on, with these acquisitions, to continue down the value creation path.

That's #1. Number 2, we were looking for acquisitions in these spaces that brought a complement and new technology to our portfolio with lesser volumes and higher margins, kind of like in the tile business, looking at our Color and Glass business with that type of profile.

So Vetriceramici deals with all the high-end customers. They do all specialty products, no commodity products.

And they have a very, very nice model of going to market. They use a, what we'll define maybe in the U.S.

as an MTS approach, which is a Marketing, Technical and Sales approach to the customer, where they actually work with the customers in their R&D facilities. They actually work at the production level.

So it's almost an extension to the customer. And those customers, which I, by the way, was there last week and spent a couple of days with the team, as well as meeting the customers, and I can tell you that those customers love that business, love the people and they have a wonderful business model.

So what they were unable to do was globalize the business, and that's one of the reasons why a sale process with a company like Ferro would make sense to fund them to move into all the emerging markets where they don't exist today, and where we have a position. So it's -- what we'll do is, we'll fund the globalization of that business, expanding their volume, enjoying those rich gross margins.

In the meantime, we will use that business model that they have to help with our existing business to retool and refocus our teams on approaching the MTS approach to our current customer base in a way that we can bring Vetriceramici into there as well. So it's a mutually beneficial relationship, and the teams are very excited about joining Ferro.

And I can tell you, our teams are embracing them. So it's going to be a very, very nice, nice deal for us.

Just a couple of other questions on the pricing pressure in digital inks. The 20% decline, I assume that's an average across all digital inks.

So can you talk about maybe what you're seeing in the newest generation of inks, as opposed to some of the older generations?

Yes, so as I mentioned this is the fourth generation, which is water-based. And we're the only ones that have commercialized and are actually in the market.

And again the price points, because they're water-based, are at the market price where we exist today. However, the cost of goods to produce those inks are a lot less in a way that when we introduce those products, those gross margins are a lot higher than what our current business is.

And that's typically the case, Mike, with each generation that's launched. Each time -- Ferro's been in this business since 2009.

We launch, we enjoy the gross margins that are 40% to 45%. The average, it takes about a year, maybe, to reengineer and figure out what we're doing, then the rest of the competitors join in.

At that point, in the second half of '10, we launched generation 2. Again, we had higher margins for 1 year, 1.5 years.

And then our competitors caught up and so forth. So we're now in generation 4.

Generation 4 is based on water, and at the price point where it exists today, our margins are extremely -- are very, very good. Let me put it to you that way.

So again, we're the only ones that have launched the water-based inks so right now, and we expect to move some nice tonnage going into first part of next year.

But it would be fair to say though that the newest generation is flattish in terms of pricing, and the older generations might be down quite a bit more than 20%, maybe 30%, 40%?

Yes, I think what we're saying is that we expect '14 to '15, that, that pricing will continue to decline possibly another 20% and we'll be in that range for '15. We have something going on in the industry, right, where we have competitors who are protecting their capacity, and they are taking down the pricing and it's affecting the pricing globally.

We anticipate that going into '15, we will see another 20% decline in pricing. And so what we're looking for on the water is to match that pricing, but at greater value.

Okay. So let me ask you about the capacity issues you're referring to on digital inks.

So you mentioned that you want to require or buildout additional frit capacity, and then you're talking about competitors on digital inks trying to fill idle capacity. Are we talking about 2 different things there?

Or is there some kind of an opportunity to maybe rollout these competitors that are struggling?

Yes, there are 2 different issues there, one is the digital ink market, and the other is the base frit market. As we mentioned, we're [indiscernible] basically out of capacity with base frit, as we mentioned in the last 2 quarters.

So one of our growth opportunities is to either expand existing facilities or maybe acquire another facility to support our frit growth, because it's there. Particularly, in Egypt, as I mentioned, our revenue growth year-over-year is about 23%, and if we would've doubled the size of our facility, we would've enjoyed greater sales in the tile business.

So that's the frit side of the business, and what Jeff is referring to on the ink side of the business, there's 2 competitors that built a lot of capacity in China. We elected not to do that a few years back, because we understood -- we understand that market, we know how aggressive it is, and we know how quickly margins can be taken down from our experience working there before.

We elected not to do that, but some of our competitors really put a lot of capacity in China, in a way they got the quick volume then sales prices start to decline, and of course, that carried over into the markets that we protect, and actually are the market leaders, which would be in Southern Europe, and kind of the rest of the world. What exacerbated their problem is that the Chinese pigment producers decided to afford integration play to get into the commodity pieces of the FAS business.

So then not only do they have a couple of, let's call them European competitors battling it out in China, we also have 5 or 6 brand-new ink producers in China fighting against them for the local market. So that's really what the issue is, this competitive intensity in China that's causing collateral damage around the rest of the world.

But Mike, just to be clear, there is no glass in this product. That frit is our manufacturing of glass coatings.

This is basically pigments formulated into inks for application onto tile, so -- and then it's covered with our -- the frit products. So there's -- when we talk about capacity relative to frit and capacity relative to inks, these are completely different capacity discussions.

Got it. Okay.

And then just quickly on the Color and Glass business, it sounded like you were still seeing a little bit of mix pressure. Last quarter, you referred to higher demand for some of your lower priced products that still come at higher gross margin.

Is that dynamic still in play there?

Yes. Let's make sure we're clear, that's we don't view that as pricing pressure, which we've been able to do, is bring a range of new products to the market offering lower price points, not because of competitive intensity, but because of working closely with our customers, and that reformulation activity allowed us to lower the price point, but yet, increase our margins pretty significantly.

So we were willing to do that to get the -- to get more absolute gross profit dollars and increase our gross margin. It wasn't what you would define as a tile competitor pressure point.

That's our new organic growth activity that's kicking in.

Following up on the frits capacity extension, Peter. What is the difference in cost in terms of adding more smelters in Egypt versus the potential cost of buying assets that are sitting up there somewhere?

Yes, the way -- they're equal. Like if we were to start a brand-new facility, the smelter themselves would have a price parity, but it's the infrastructure that would make a difference between the new facility and just expanding the old facility.

So without being real specific, there's probably, in total, a 30% increase in what would be defined as a new facility or just adding smelters. So for us, we have room to expand in Egypt, for example.

So we would just add the smelter cost, because the infrastructure's there. If we found an acquisition in Egypt or decided to put a new facility there, it would be equivalent to what we had spent on the original Egyptian site.

So why would you build a new facility in Egypt, theoretically, if you're have enough room to add several smelters?

Because we don't -- we only have room to add maybe another 30% smelters at the existing site, and we need more than that to satisfy the market demand for our products in that region. So we would have to do both.

Okay. Are there any frit facilities available for acquisition?

Still in the region, let's call it Turkey, it is a little further away but closer to Europe.

Yes, we're looking around for opportunities.

Okay. And talking about Europe, you have about 40% of your revenues denominated in euros, if I did the math correctly, and if you look at about a 6% decline in the value of the euro versus the dollar, that could hit you by about $0.03, if that 40% in revenues is actually 50% of operating income.

Am I looking at this the right way?

Yes, Rosemarie, that's the way that we look at it as well.

So now are you doing -- so with this in mind, are you doing enough in terms of self-help to affect that potential $0.03 hit on your EPS for 2015, looking at the full year at this level? We don't know where this is going, but let's pretend it's going to stay where it is.

If you're referring to hedging, there's no, like, derivatives being used to hedge the projected income.

No, no, I'm not referring to hedging. I am referring to what more you can do in terms of lowering cost in order to offset that FX impact.

Oh, we're always looking at opportunities to lower costs. I mean, we're -- as I said in the prepared comments, we're going through -- one of the reasons we don't have our plan now today is we are going through a significant amount of detail relative to expenses in this budgeting cycle.

In fact, we've got 3 day set aside next week to go through in detail, and our expectation really for the first time in a very long time at Ferro's, we're effectively doing zero-based budgeting on SG&A. So everyone who's got -- who owns a piece of SG&A here is coming in and are required to present to us their plan for cost reductions.

And in conjunction, both with structural issues, and with indirect spend plans and we have a pretty good idea where everyone's going to end up. And we encourage everybody who's coming in next week to be prepared for that.

And -- but we absolutely, Rosemarie, we are looking for ways to offset that impact, and that's part of our planning process.

Everything that we do, Rosemarie, we have by the way we conduct our affairs and the way we're doing things, if we see shortfalls in any aspect of the business, the teams are rushed to put mitigation plans together as quickly as possible. So we would have plans that we would have, that are in place to execute.

Okay. Based on your remarks, Peter, it sounded as though we should expect the announcement, not necessarily the closure, but the announcement of potentially another acquisition between now and year-end, and maybe this frits coming up the line or down the line.

Yes, what we've mentioned is we're in the process of looking at a whole range of things when we discussed the Vetriceramici acquisition, because you know at the end of the day you have to work on a handful of things to get something. So at this point, our goal is to close the Vetriceramici, begin the integration and continue our work with looking at what's next.

So since we are -- if I may, since we're on the Vetriceramici subject, the game plan is to expand their product line, which goes through high end tiles into emerging markets. Is there a demand for high-end tiles in emerging markets?

Or are they sticking more with commodity type of tile?

Absolutely. And in fact, one of our big success stories when we started 4 years now, in Egypt only about 10% of the tile production in Egypt was being exported as high-end tile.

Since we've been there, we've helped that whole economy upgrade the quality of their tile production in a way that 50% -- almost 50% of that tile production in Egypt is being exported to areas like the Saudi and the Emirates, where high end tile with really, really expensive design is actually in great demand. So the answer is, yes.

Us moving Vetriceramici into the emerging markets will be a very nice thing.

And my last question for Jeff regarding free cash flow. You had initially said, Jeff, that you expected to use -- to have negative free cash flow of about $20 million to $25 million for this year.

Now I think you are talking about a negative $15 million. Can you help us understand what you anticipate for Q4?

Well, first of all, where the free cash flow is for the first 9 months and then how do we get to year end?

What's going to be different is -- from our previous guidance is, is for continuing operations, we will not spend as much on capital spending as we anticipate. Now that's good and bad, right?

It's good from a cash flow. It's bad that we're not seeing internal projects for capital with the proper value creation.

So -- but that's the main difference. We're going to end up being -- we're going to -- I'm looking at it right now, tax wise, we're going to be around $8 million for the year.

We already talked about interest. Pension, we've kind of made the contributions we're going to make it for pension.

CapEx, we originally thought it was going to be $25 million. We think it's going to be something less than $25 million.

And actually, we're doing a little better on working capital for continuing operations. It's -- we're building -- we're not as favorable in discontinued operations, because we've built some inventory for the plant conversion.

But on a continuing basis, the ops people continued to do a really good job of managing inventory. And because our sales are down a little bit, we're harvesting some level of planned receivables.

So between working capital and CapEx, we think that we're going to mitigate that number down to $15 million on use of cash, while restructuring payments are going to be probably something over $20 million.

Okay, and next year?

Next year, we haven't given guidance on next year, but much of the same. We would anticipate taxes to go up a little bit next year, something in the mid-teens.

We talked about interest, cash out about $14 million. Pension, we have modeled in still a $25 million pension contribution.

Working capital is really based off the receivables growth. We have something around $10 million in.

CapEx, we're modeling at $35 million. That might be a little on the high end for continuing ops.

And then we're going to have some continuing restructuring payments, as we've committed to that extra SG&A reduction, and we're putting that somewhere around $10 million to $15 million in restructuring payments for next year. And you put in the EBITDA growth.

You will see that we'll get to a level of free cash flow next year.

Rosemarie, let me -- let's mention a couple more things around CapEx and Vetriceramici to tie this together. One thing it's very important for everyone to understand of what our new model is, we are becoming an asset light and heavy touch organization.

Our CapEx requirements for the type of manufacturing facilities that we have, best practices would suggest 1% to 1.5% of annualized sales should be sufficient for good manufacturing practices versus an organic facility that should be somewhere between 3% and 4%. So that's the piece about this asset-light type of concept.

In terms of heavy customer touch, that's what Vetriceramici does extremely well, and we're bringing that behavior into the organization as we further do develop the full concept of becoming an asset-light and heavy-touch organization with really intense customer service.

Operator, we have time for one more question, please.

Jeff, I just wanted to make sure I understood your comments on '15. Your prior outlook for '15 was $0.90 or better.

You feel good about the EPS potential, but just the components there have changed?

That's correct.

Okay. And then for Vetrami -- I can't pronounce that, whatever, Vetriceramici, I think it's...

Vetriceramici. Yes, and you can use Vetri by the way, that's there.

Vetri. Vetri.

So given some of the demand issues and pricing issues, that you still feel good about that accretion potential for that business next year?

Yes, yes. It's not where we are currently participating in a big way, and the demand for high-end tiles is always going to be there, because high-end consumers want high-end design and that particular business is in that space.

All right, thank you. That concludes our call this morning.

For copies of our press release, replay to this call, or to access our SEC filings, please visit our website at www.ferro.com, and click on the investor information button. Thank you for your time this morning, and have a good day.

Bye-bye.