Ferro (FOE) Q3 2019 Earnings Call Transcript

Ferro (FOE)
Q3 2019 Earnings Call
Nov 12, 2019, 9:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning. Thank you for joining the Ferro Corporation 2019 third-quarter earnings conference call. An archived replay of this teleconference will be available through the investor information section at ferro.com 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.

Kevin Cornelius Grant -- Director, Investor Relations, and Corporate Communications

Thank you, and good morning, everyone. Welcome to Ferro's third-quarter 2019 earnings conference call. This morning, we'll be reviewing Ferro's financial results for the third quarter ended September 30, 2019. 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'd like to remind everyone that some of the comments we are making today are forward-looking statements and are based on our view of conditions and circumstances as we see them today. However, those views may change as conditions and circumstances change. Please refer to the forward-looking statement disclosure in the earnings release 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 encourage you to review that information in conjunction with today's discussion. It is now my pleasure to pass the call over to Peter.

Peter Thomas -- Chairman, President, and Chief Executive Officer

Thanks, Kevin, and good morning, everyone. Macroeconomic uncertainty during the third quarter continued to challenge our business outside North America. I am pleased to say, however, that even though these conditions pressure our top line, we managed to increase gross profit margins in the quarter relative to the prior-year quarter. This is our first year-over-year quarterly increase in gross profit margin since the first quarter of 2017.

The higher gross profit margins were generated as a result of lower raw material costs and our optimization initiatives. These circumstances, macroeconomic pressure on the top line, but expansion in gross margins were as we anticipated. As you recall, we said over the past three quarters that we were seeing markets softening and customer inventory channels spinning as our customers become more conservative with their inventory management. This was especially the case in certain markets in which we participate, such as construction in Europe and automobile production, pretty much around the world.

To address this, we redoubled our efforts, as we said we would on optimization. In our prior calls, we have commented on the lack of visibility in the second half of 2019. Many of our customers have had limited visibility into what turned out to be softness in demand for their products and the period it would take to work through their inventories. The challenge we encountered when our customers did not have visibility was made more difficult because of the sheer breadth of our customer base and products.

We have 6,700 customers around the world and 21,000 SKUs. Even focusing on just our customers who represent 80% of our sales still involves some 700 customers. While this breadth of customers and products means we avoid the risks associated with heavy dependence on a few customers or products, it also means that gaining clarity with respect to demand in uncertain markets can be elusive. We expect current macroeconomic conditions to persist in the near term, and we continue to see conservative inventory management among our customers.

From our perspective, most economic indicators are not pointing to an improvement for the remainder of 2019 and early 2020. Exposure to Europe and its ongoing economic weakness, weighs on our sales and profitability. Demand in certain end markets remains soft, particularly in the construction industry in Europe, where weak demand for high-end tile coatings has been a drag in our Performance Coatings segment. The automotive industry also continues its slump globally, which impacts demand for our Performance Colors and Glass and Color Solutions products.

We are intent on managing what we can control. We cannot control global economic conditions nor can we control foreign exchange rates, which have shaved about $0.01 per share from our earnings in the third quarter. Our focus remains on innovation and optimization. We are capitalizing on technical expertise in functional coatings and Color Solutions to position Ferro to be the partner of choice for our customers as they develop next-generation platforms.

On the optimization front, we are advancing on multiple initiatives to manage costs and increase operational efficiency. We are seeing the benefits from optimization initiatives already under way, and we have significant additional actions in the pipeline. As I've said on previous calls, our intention is to create a better version of Ferro and, thereby, drive greater value for our shareholders. Towards these objectives, we continually pursue opportunities to improve our operations, upgrade our portfolio and enhance our value proposition with customers.

So at this point, I'll ask Ben to run through the financial results for the quarter, and then I'll discuss segment performance.

Ben Schlater -- Group Vice President and Chief Financial Officer

Thank you, Peter, and good morning, everyone. As Peter noted, softer industrial and construction markets, particularly in Europe, are impacting our top line. In addition, we estimate foreign exchange rates will impact EPS in the second half of the year by approximately $0.02 as reflected in our updated guidance. Moving to our consolidated financial results for the third quarter of 2019, please note that the non-GAAP numbers I refer to are on an adjusted basis and growth rates mentioned are on a constant-currency basis compared to the third quarter of 2018.

The financial highlights and results can be reviewed on Slide 3, 4, and 5 in the presentation accompanying today's call, which you can find on ferro.com in the Investors section. Turning to Slide 4 in the third quarter, net sales declined 5.8% to $365.7 million. Adjusted gross profit declined 2.7% to $101.9 million, adjusted SG&A expense was $57.4 million or 15.7% of net sales, adjusted EBITDA declined to $58.2 million or 15.9% of net sales, and adjusted EPS declined to $0.35. The performance in the quarter compared to the prior year was lower as expected.

However, we saw margin expansion across most of the businesses compared to the third quarter of last year. Our gross profit margin improved 90 basis points to 27.9% compared to 2018. These results reflect the following non-GAAP adjustments for the third quarter, primarily related to our corporate development, acquisition and optimization activities. I'll now provide more detail on these adjustments.

First, in the cost of sales, we have adjustments of approximately $1.6 million, primarily due to costs related to optimization initiatives. In SG&A, we have onetime adjustments of $10.4 million in the quarter, primarily consisting of cost for legal, professional and other expenses related to certain corporate development and certain optimization initiatives including the North American manufacturing optimization we announced in January of this year. Turning to restructuring and impairment, there was an adjustment of approximately $6.2 million, of which $3.1 million reflects an impairment charge related to our performance coatings business, and the remainder is related to actions to achieve our ongoing optimization initiatives and acquisition synergies. Finally, in other income and expense for the quarter, we had an adjustment of about $1.4 million, primarily related to the impact of currency-related items in Argentina.

Now moving to SG&A. In the third quarter, adjusted SG&A expense was $57.4 million or 15.7% of net sales compared with $55 million or 14.2% of net sales in the prior-year quarter on a constant-currency basis. This now brings me to adjusted free cash flow. Adjusted free cash flow for the quarter was an inflow of $46.7 million.

I'll spend a few more minutes walking through the details. We define adjusted free cash flow from continuing operations as GAAP net cash provided by operating activities less CAPEX. Then we add back cash used for our recently announced manufacturing optimization, acquisition-related items and restructuring activity. The most meaningful components for the quarter are as follows.

Starting with GAAP net income of $13.2 million, we add $14.7 million of depreciation and amortization, less $6.3 million for working capital, plus $4.2 million of changes in other balance sheet items and less $14.1 million of other noncash P&L items to arrive at cash provided from operating activities of $11.7 million on a GAAP basis. Then we subtract $3.2 million of capital expenditures and cash received on other receivables of $19.6 million to arrive at $28.2 million of free cash flow in the third quarter. Our practice has been to adjust this number for cash flow related to our strategic activities. These include: one, cash related to our manufacturing optimization announced in the first quarter of this year, two, M&A-related cash flow; and three, cash flow restructuring programs.

The quantification of those three adjustments for the quarter are as follows. $4.9 million for the optimization projects, $9.5 million related to M&A and $4.2 million related to restructuring. When we add these items back to our GAAP numbers, this brings adjusted free cash flow for the quarter to $46.7 million. The details of this calculation and the related reconciliation to GAAP operating cash flow can be found in Table 12 of the press release.

Regarding our balance sheet and cash flows, third-quarter adjusted free cash flow was strong, and we reconfirmed our full-year adjusted free cash flow conversion targets of 45% to 50%. Further, we finished the quarter at 3.5 times net leverage. As we think about the full year, we expect net leverage to be just above three times at year end. This change from our view last quarter was primarily driven by lower EBITDA partially offset with more favorable working capital.

And with that, I'll now turn the call back over to Peter to walk through each of the business units and discuss our updated guidance. Peter?

Peter Thomas -- Chairman, President, and Chief Executive Officer

Thanks, Ben. Now I'll take you through third-quarter performance in each of our three reporting segments. So let's begin with our performance coatings segment. Performance coatings volumes were up 3.2%, while net sales on a constant-currency basis were down 6.1% to $162.4 million from the prior-year period.

Gross margins improved in the third quarter relative to the prior year on a constant-currency basis by 150 basis points from 20.6% to 22.1%. Adjusted gross profit increased slightly from $35.6 million to $35.9 million. Sentiment remains cautious among our performance coatings customers, especially in European construction markets for high-end tile products. Customers are maintaining a conservative approach to inventory due to weak demand and slow market growth.

On a more positive note, the high-end tile coatings destocking that started about a year ago, may be leveling off as most of our customers have rightsized their inventories to reflect current market conditions. I should also note that in the third quarter, some of our key customers extended their European summer holidays into the month of September, which is longer than normal. With regard to performance coatings for the remainder of 2019, we expect our customers to continue focusing on working capital and keeping their inventory levels low because their customers lack visibility. Now let's take a look at our performance colors and glass segment.

In the third quarter, performance colors and glass volumes declined 12%, primarily driven by one-off sales in our decoration business last year and continued weakness in global auto production. Net sales on a constant-currency basis were down 6.8%. Despite the lower sales, gross margins improved by 40 basis points in the third quarter over the prior-year period on a constant-currency basis, moving from 32.5% to 32.9%. Adjusted gross profit decreased to $37.1 million from $39.3 million.

The portion of our performance colors and glass business that serves the automotive industry continued to experience weak demand. In the Americas, we experienced a low double-digit decline, in Europe, a mid-single-digit decline. And in Asia, we were relatively flat compared to the prior-year quarter. Overall, our automotive business sales were down approximately 6% in the third quarter as our customers work down their inventory levels.

Looking ahead, automotive demand remains weak with many of our customers. We expect automotive market weakness to continue through the remainder of 2019. Our glass decoration business was down high single digits in the quarter compared to the prior year, mainly because last year, we had a substantial off-cycle order from a large bottling company that were not repeated this year. In addition, as we have seen within other markets, some customers of our glass decoration business are working through inventories.

Our electronic materials business declined mid-single digits in the quarter, primarily due to weaker demand in automotive applications as customers work down their inventory and waited to see the impact of the automotive worker strike at GM. Now turning to our color solutions segment. In the third quarter, color solutions net sales on a constant-currency basis were up 3.9%, while volumes were down 8%. Despite lower volume sales, gross margins were relatively flat at 32%, compared to last year 32.3%.

Adjusted gross profit decreased to $29 million from $30.6 million in the prior-year quarter. For the second consecutive quarter, color solutions delivered sequential-quarter margin improvement with a 40-basis-point increase to 32% in the third quarter from 31.6% in the second quarter which was up from 30.5% in the first quarter. The primary driver of decline in sales in the quarter was related to surface technology. As we noted during the second-quarter 2019 earnings call, we anticipated weaker demand in the second half of 2019 due to the strong ramp-up that we experienced in the second half of 2018 that was driven by demand related to the adoption of 5G technology.

Also, we experienced instances of lower demand for certain pigments relative to the prior year because some customers built up inventories last year when trade friction between the U.S. and China began to emerge. And finally, we also saw softer demand for our pigments used in automobile applications, as auto production demand continued to be weak across the world. All in all, the third quarter was a mixed bag, sales were down, but gross margin was up.

Our customers continue to be cautious amid uncertain macroeconomic circumstances. And at the same time, there are encouraging signs in some of our markets that give us a sense that demand is firming up and that there are opportunities for growth on the horizon. Turning to Slide 8. We have revised our guidance for 2019 adjusted EPS and adjusted EBITDA to reflect the impact of exchange rates.

We now anticipate an adjusted EPS of $1.15 to $1.20 and adjusted EBITDA of $222 million to $227 million. We anticipate being toward the lower end of these ranges. With respect to our guidance on adjusted free cash flow conversion, we are reaffirming our guidance of 45% to 50% as our business continues to generate cash in line with our expectations. Even in the current environment of soft demand, global economic uncertainty and political and trade issues, we do see opportunity.

We continue to innovate for our customers. We are benefiting from lower raw material costs, and we are seeing the fruits of our optimization initiatives. All of these should advance us on the path of driving additional shareholder value. We are continually exploring opportunities and executing on initiatives to become a better version of ourselves.

There are multiple ways to enhance our business to become a better Ferro and to drive value for our shareholders, and we remain committed to these key objectives. So that concludes our prepared remarks. Kevin, we're now ready to take questions.

Questions & Answers:

Operator

[Operator instructions] And our first question comes from the line of Rosemarie Morbelli with G. Research. Please go ahead.

Rosemarie Morbelli -- G. Research -- Analyst

Thank you. Good morning, everyone. Today you have mentioned opportunities or pockets of opportunities, even in this environment, and I was wondering if you could elaborate a little on that and give us some more details as to what you are actually referring to, what you are seeing?

Peter Thomas -- Chairman, President, and Chief Executive Officer

Sure. Love to do that. Everything, of course, is based on where we sit in our strategy in terms of innovation and optimization. So right off the bat, as you know, since '17 we have been really solidifying our vitality index with new products and innovation application opportunities, as well as really, really loading up a pipeline with a plethora of optimization opportunities.

So as it relates to the pockets of growth, No. 1, which is in line with our innovation, which is in line with the 20 acquisitions we have done over the past five years, adding technology platforms, we're basically at a point after one year of, as you know, very limited M&A activity this year, the team's -- R&D teams have been spending more time cross-fertilizing at the technology level with the roughly 52 technology platforms that we have. And of course, after one year, and -- of this activity of the constant R&D exchange, we continue to lift the innovation of pipeline in a way that next year should be a pretty good year for launching a range of new opportunities from that cross-fertilized matrix of R&D activities with higher gross margins. And I can give you a really high-end example of the types of products without being specific, but understand that they will be commercialized.

We have a range of new storage data application technologies with surface tech. We have a range of new organic inks for container applications that are new to the world. We have a whole range of new products for sensor applications for a whole different type of range of applications, not only automotive, but also in we would call -- whether it's appliance and -- or industrial applications because we've been able to move them into new market segments. The performance class and colors team has been working really hard over the past couple of years to come up with a new range of glass-based sealants, which are really, really, really critical as more glass becomes the surface of choice with autonomous automobile applications.

And those glass sealants aesthetically and from a performance and conductive bases are going to be really, really critical for the advancement of EV application. We have a -- with a lot of -- I keep this at a high level, but with a lot of new military activity going on, we've come up with a whole range of new low-temperature co-fired ceramics for controlled applications, particularly in military applications. We've also come up with a whole new range of conductive polymer frits in our glass applications, whether it's in the base PCG business or advanced to the new types of applications through Dip-Tech, which would be all types of glass surfaces. And what's really exciting too about the pigment space is that we do have a whole new range of IR reflecting pigments, which will be novel to the space.

So after a whole year of really, really focusing on R&D, our expectation moving into 2020, that our innovation pipeline will maintain its 20% vitality index with an upgraded portfolio of products. And we feel this year, really, really good about that application. So as it relates to pockets. That's kind of a rough discussion on the new products.

But what's really important too, since our strategy is around, if you remember, our end goal is to create a more attractive portfolio that dilutes our concentration on just a few segments and also a dilution of our European exposure. We have been focusing on opportunities that are more outside of maybe what we would define as base Europe. And if you look at opportunities geographically, we do see stronger base growth that will come out of Mexico, particularly in appliance and flat glass applications. We also note where we are positioned to benefit from greater truck exports for Mexico, we see that potentially next year.

And of course, the Mexican demand for things like sensors, capacitors, anti-stick enamels and a whole range of other types of surface technology and PCG application. So we're looking for a stronger Mexico next year. As it relates to MENA, what you'll see looking through all the data that, overall, there's a better-than-average GDP in that region. And as you know, we're very strong in those regions.

It starts off -- we start off with a lower concentration of volume and sales. However, over the years, and I think, as you know, we've really increased our concentration of revenue in those areas that typically have higher margins, but the advanced GDP will also help us because we are at the end of the day a law of small numbers. We also see MENA construction for flat glass is starting to pick up. And we also continue to see the expansion of the population, migrating from Egypt to New Egypt, which would put a stronger demand for all of our construction products through that area, not just top products.

And Asia, you hear all the negative things. But as we target our opportunities, we see actually better demand in India with a lot of our types of construction and glass types of products. And also, we feel very optimistic about Vietnam next year. We see a greater demand for all of our -- a lot of our products from across all the platforms.

And even in China, where it seems like it's really down, everybody's talking about that. We do see certain pockets around our pigment business picking up, as well as let's call it, our flat glass expansion. And even though everyone knows that automotive is down in China. The good news for us is we're really not down.

We're actually flatter. What you'll see probably by the end of the year is a little bit of an uptick. So that gives you a perspective of why we feel good about -- I feel much better sitting here today than we did in the first quarter or second quarter of this year as we look forward with what appears to be, from our perspective, a stabilization of our environment across our customers. And what I just highlighted, just a range of new things, but don't forget this fourth phase also deals with not only the innovation I mentioned and the dilution away from Europe in terms of concentration, but the range of optimization activities that we see for next year that we've discussed in the past.

So your takeaway from this, I know it was a long answer, but the takeaway is something like this. As our base business is concerned, as we sit today, as we see it, with our range of visibility, we would feel like Ferro base business, aside from what I just mentioned, would be relatively equal to or maybe slightly better, but the add-on with innovation and the optimization will spur a more exciting opportunity for us with what might be considered a mundane environment. So we feel pretty good about that. The team is geared up to execute on all those things.

And certainly, we're eager to share with you when our budget's done what that all means.

Rosemarie Morbelli -- G. Research -- Analyst

Thank you, Peter. This is very helpful. Can you put a dollar amount in terms of the potential from all of those items you discussed, opportunities, and whether it is not necessarily in 2020, but maybe two years out, do you have a feel for what they could contribute to the top and bottom line?

Peter Thomas -- Chairman, President, and Chief Executive Officer

Yes. We have an idea. We're still working through our budgets. And so at this point, because we do have a range of moving parts, considering the types of activities we have going on and how we want to allocate our resources.

We're going to hold off until we provide our guidance for 2020. But I feel comfortable that there's -- we see more positive than negative. And just as soon as we zero in on certain forward activities, we'll be in a better position to provide that for you. But you should feel more comfortable now than you did in the past.

Rosemarie Morbelli -- G. Research -- Analyst

And if I may, outside of your internal work, whether it is the opportunities, innovations, cost-cutting, etc. Could you share with us what you are -- is there additional opportunities that you are working on, which are not specifically related to operations per se?

Peter Thomas -- Chairman, President, and Chief Executive Officer

Yes. We -- as you know, we have pipelines for everything because at the end of the day, unless things are defined and you have devil in the detail, they're not worth working on. So that's the reason, over the past seven years, we've been successfully executing against our strategy. In fact, if you go back to when we started, what I can tell you, because we just gathered this data, even from 2014 through this year, a real measurement is, have we been successful with our strategy? And of course, the phases define our actions.

They clearly represent the type of work we're going to do, as you know. And if you go back to '14 through the end of this year, whether it's revenue, whether it's gross profit or EBITDA margin or even EBITDA, we have a CAGR of double-digit growth for the most part. So to us that's a pretty good indication that how we pick and choose what we do, when we do it, the timing of it, we'll be successful because we're very thoughtful. We're a small-cap company, we don't have room for error.

So we want to make sure that we're being very judicious on what we say, what we define because one of the most important aspects of all this, as I've mentioned, and I've lightened up on it a bit is the culture of this organization, what's in our DNA and how we attack work and how we're successful. So we do have other types of add-on activities, I think you might be referring to. M&A, those M&A activities are still clearly defined. Our pipeline is robust.

We have a range of things that could keep us kicking the can down the middle like we have been over the past four years. We did mention this year that because of the slowdown in environment, this may be a good time for us to really step back, look at our strategic portfolio that we defined with you last year and say to ourselves, why don't we just focus on this, maybe this year, let the R&D teams catch up, let the organization stabilize, hit the synergies, get the innovation out and corporate will focus on trying to outline that model to move the organization toward that end state that I mentioned last year, which is a better version of ourselves, which would be, again, the dilution of our geographical positioning, particularly away from Europe and also don't forget the dilution of the concentration in our market segments around construction and automotive. I mean the idea, again, would be for us to tighten up and have things like construction, industrial, electronics, automotive and rest of everything, be pretty much equal. So we can more even-load modeling going forward so we can remove what remains still a little bit of a cycle -- cyclicality to our business, even though we're at the higher end.

So there are a lot of opportunities that corporate is looking at in order to step change that portfolio, while the rest of the teams are focusing on what they need to be focused on to move forward. So we'll continue to evaluate a lot of those opportunities, and we'll see where they go.

Rosemarie Morbelli -- G. Research -- Analyst

All right. Thank you, and looking forward to hearing more news on that project.

Operator

Our next question comes from the line of David Begleiter with Deutsche Bank. Please go ahead.

Christine Besselman -- Deutsche Bank -- Analyst

Hi. This is Christine Besselman on for David. So I was just wondering, how are you thinking about 2020 EPS, given the large base of optimization savings that are expected to be realized next year? And are you still expecting optimization savings of around $35 million to $40 million in 2020.

Ben Schlater -- Group Vice President and Chief Financial Officer

Christine, it's Ben. Yes, I'll just reiterate what Peter just mentioned. And so we're rolling up the budget right now, there's a lot of moving parts there. And as those settle down, and we begin to refine that, we'll be out with 2020 guidance.

So we're not going to get into the details today. But as soon as we have something, obviously, we'll be back to the market with it.

Christine Besselman -- Deutsche Bank -- Analyst

OK. But on the optimization savings, is that still up for question sort of too? Or are you still kind of expecting the 35%, 40% range that you had previously stated?

Ben Schlater -- Group Vice President and Chief Financial Officer

Yes. So look, I think on the optimization savings, all of those projects are still moving forward. What we're doing now is evaluating the impact of all of those into 2020. And when we have something from a wholesome perspective, we'll give a holistic view on 2020.

Christine Besselman -- Deutsche Bank -- Analyst

Got it. OK. That's helpful. And then just more near-term on Q4, are you guys expecting to see further destocking in the quarter due to aggressive year-end inventory management, either by you or any of your customers?

Peter Thomas -- Chairman, President, and Chief Executive Officer

It's Peter. Yes. The stocking has really been going on for the whole year, actually. And so we've built into our forecast, what we would define as a normal stocking period, much like maybe we would have seen in '16 or '17.

And so -- but what we can tell you is our customers, ever since the second quarter, as they've been thinking, and redefining and repositioning, we have a lot of, let's call it, last-minute type of orders or just-in-time orders that continue on a percentage basis to increase over the course of the year. But we've learned, as I mentioned in my prepared remarks, how to adjust our S&OP process to better -- to be better in line with what our anticipation is with a more stabilized customer base based on their expectations moving forward. So we're not -- we don't believe we're going to see anything really out of the ordinary. So we've built in what one might argue is a normal destocking activity in the fourth quarter.

Christine Besselman -- Deutsche Bank -- Analyst

OK. And then just lastly, just on the acquisition pipeline, do you expect, obviously, this year was a little bit more muted. Do you expect any more activity in 2020?

Peter Thomas -- Chairman, President, and Chief Executive Officer

Yes. At the end of the day, we constantly are looking at opportunities. We constantly have a handful of things that are in motion. And like I mentioned earlier, there are things that we would do like we have over the past four to five years.

And there are other things that we look at, that could be more meaningful relative to our portfolio. The portfolio, we are -- are really defining for the future. So there's a lot -- we have to be very judicious. And I'll use this time to really give you a perspective on -- we joke about being a small-cap company.

And what that means and small-cap companies are very interesting. They're very -- it's a very challenging environment when times get tough, the money moves out, money moves into defensive stocks. And whenever everything is undervalued in our space, everyone comes back in. But we need to be very careful on how we do things and not get rattled and make rash decisions based on that inflow and outflow of funds, depending on the macroeconomic environment.

But we pick and choose what we do and how we do it. We have what I would define as being a very successful model on how we behave around M&A activity and/or executing our strategy and/or making step-change -- changes to the business, and it's all fundamental around three different buckets. Whenever we look at an opportunity, we look at really five things that are really crucial. And we look at the type of scale of the business.

We look at timing, we look at complexity, and we look at staging. Does it make sense to do a one-step or two-step to meet our objectives? And of course, the most important is the impact on an organization. And in this first category, I mentioned that because the organization for a small company, we have what I used to joke about, the STP problem, whether it's the same two people, three people, 10 people, 12 people, 13 people, 20 people and the like, we only have a certain capacity for doing work, and it has to be meaningful. And when you think that through and you deploy your assets around activities, you want to make sure you're picking your choices with the right thought.

And then the next step other than that step is what's impacted by those five things that we need to consider? And of course, we're always -- particularly now, maybe unlike from '14 to the middle of '18, the balance sheet impact. Because even though we're in acquisitive mode, we're not going to be -- we're not going to not pay attention to our balance sheet. We have to look does it really strategically align with the impact on the portfolio. Then we also have to look at what the resultant impact would mean to the organization so that we can conduct business, integrate and move forward with the right level of assets.

And of course, on top of that, what's really important for us, is we do really care about, like we always have shareholder value creation. So we have to adjust those activities for what we would define as being the risk of execution, as well as the time value of money. So when you look at all those things together, that's how we pick and choose acquisitions or portfolio step-change activities or whatever the case is because those handful of things are what make our decision. So you may see, to your point, we've done little M&A activity because we're redeploying our assets, looking out for something maybe a bit more meaningful.

So you have to ask yourself the question, does that model work? Well, in the last five or six years, we have acquired 20 different companies, we've sold 5 different businesses successfully. And I gave you the data on double-digit CAGR growth across all the sales and gross profit and EBITDA margin activity. So we believe that model works. But again, remember, the first five things are very important.

It's about the scale. It's about the timing. It's the complexity, staging and the impact of the organization. So that's how we do it, and that's what we're engaged with right now.

Christine Besselman -- Deutsche Bank -- Analyst

OK. Thank you. That's helpful.

Operator

Our next question comes from the line of Kevin Hocevar with Northcoast Research. Please go ahead.

Kevin Hocevar -- Northcoast Research -- Analyst

Hey. Good morning, everybody. Can you talk about the trends here? As I look through the year, the constant-currency organic sales have gotten worse as the year has gone on. But at the same time, the decline in EPS year over year has gotten better as the year has gone on.

So could you kind of comment on those trends? Is that optimization efforts that are benefiting that? It looks like price raws has trended better throughout the year. Or could you give some color on how you've been able to do that as sales have kind of struggled as the years have gone on?

Ben Schlater -- Group Vice President and Chief Financial Officer

Sure. Kevin, it's Ben. I think it's essentially what you said. As we see the top line year-over-year compare more difficultly from a comp perspective, a lot of that is driven by some of the off-cycle stuff that Peter mentioned earlier.

From a GP perspective, where we've seen the benefit is from optimization and raw materials. And so we saw the most significant impact from raw materials in each of the quarters in the third quarter, and we would expect to see that again in the fourth quarter. So that's really what you're seeing.

Kevin Hocevar -- Northcoast Research -- Analyst

Yes. Gotcha. And to that point, you've done a good job holding on to price as you benefited from raws, I mean, how do you expect pricing to trend going forward as well?

Ben Schlater -- Group Vice President and Chief Financial Officer

Similarly, I mean, the net between price and raws in the third quarter was about $6 million. I wouldn't expect it'll be too different in the fourth quarter. So we would expect something in sort of that low to mid-single digits, again, in the fourth quarter between price and raws.

Kevin Hocevar -- Northcoast Research -- Analyst

Thank you. Thank you very much.

Operator

Our next question comes from the line of Mike Sison with Wells Fargo. Please go ahead.

Mike Sison -- Wells Fargo Securities -- Analyst

Hey, guys. Good morning. I think about -- I understand that demand continues to be weak and visibility is tough. But in the event that things get better over time or there is a recovery, what do you think is the earnings leverage or EBITDA leverage that Ferro offers, if things actually do get better over time?

Ben Schlater -- Group Vice President and Chief Financial Officer

Hey, Mike, it's Ben. So I think it will be similar to what we've seen in the past. And then you -- to that, you would add sort of the incremental optimization activities. So historically, what we've seen is, as new sales dollars come in, we generally see 40% plus of those fall through to EBITDA.

And I would say that that becomes fairly linear within the sort of the current revenue range. I would say that the thing that is incremental to that would be the optimization activities that you heard us talk about last year. And so that should increase that leverage in sort of a range that would be incrementally accretive with respect to EBITDA.

Peter Thomas -- Chairman, President, and Chief Executive Officer

Mike, Peter, just to add one more thing. You remember from just before the downturn in the third quarter of last year, we had a string of 12 quarters that averaged about 6.25% organic growth in a world that was growing at about 3%. And I think that when times were good, like we mentioned a long time, when we get into a steady state and they're more predictable, we will outperform the market. And what we're doing now because of what Ben's mentioned and what we've talked about, structurally, what's really important here -- let me put it this way, if we were a $4 billion company, I think our ability to shock absorb a lot of this would be really apparent.

But because we're small, I think we're doing a very good job managing the type of volatility and it shows the structural performance of the business and how there's nothing structurally wrong. But to your point, and I'm glad you asked that. When this thing turns around, my expectation would be that we are an even better company than we were from '16 through the middle of '18, when we were blowing it away at the organic growth level. Not only would we have the innovation but that cost structure on the leverage side will even be better.

So I can't wait till that happens again because then you'll see the Phase No. 5 of the strategy of what Ferro is.

Mike Sison -- Wells Fargo Securities -- Analyst

Right. OK. And then in terms of the cost savings initiative. When you take a look at each of the segments, is it similar in terms of what you're trying to improve in each of the segments? Or are there different opportunities within each that you're focusing on that could really position each better as things maybe potentially improve over time?

Ben Schlater -- Group Vice President and Chief Financial Officer

Mike, it's Ben. Look, I think the majority of the cost savings that we've been public about, in the past have been inside North America. And if you think about the North American business, it is primarily colors and glass and color solutions. So of the optimization activities that we have launched so far and are in progress, the majority of, let's say, the run rate benefit will impact those two businesses.

It's not to say that there's not savings inside performance coatings, there is, but the larger-scale activities that we've seen so far will impact color solutions, as well as color and glass. Further to that, we do have a particular amount of savings that we've announced in North America related to, let's say, half of the performance coatings business that we would also expect to realize as well.

Mike Sison -- Wells Fargo Securities -- Analyst

Right. OK. And then as you review the portfolio that you've mentioned there's acquisitions as you revisit some of the businesses that you own, are there opportunities to maybe divest businesses that might not make sense? Or do you think this is the core portfolio that you want to continue to build upon longer term?

Peter Thomas -- Chairman, President, and Chief Executive Officer

Yes. The interesting point is everything that we've acquired had a purpose to the portfolio, which as we've talked about every acquisition was really not an acquisition of a company as much as it was a technology platform to round out. Now I'll tie it together for you. Let's say that we had an idea of what the future state of Ferro would be maybe in 2021, '22.

As we were doing those acquisitions, we figured out the types of technology platforms we wanted to have and leverage the synergies between them in a way that can help us get to that end state, not only just with acquisitions, but with organic growth. Because what's really important, Mike, is when you grow, as you know, most companies can grow very easily with acquisition, have it be 90% to 80% of their growth strategy, but no organic growth. And remember what we said back in '17, that our objective by this year would be that 60% -- somewhere between 40% to 60% of our growth is organic and the rest of it would have come inorganically, and we've hit that. So no one could say that we're growing and we're defining all by acquisition because it's not true.

We're sitting here with a pretty -- as I mentioned, a pretty good mix of organic growth. In fact, 40% of our growth this year is -- 40% to 45% is organic and 55% to 60% is from acquisitions. So the idea would be to keep leveraging those platforms in a way that as we grow that it's more meaningful, and it's more real rather than by acquisition. So what am I getting at? Whatever we can't leverage in that mix of now 55 technology platforms.

And you heard me talk about leveraging them this year, what's been really exciting is watching all the companies that we brought together from an R&D perspective and having that activity leverage to deliver something pretty interesting for next year. And so the key point is that there's something always in the portfolio that doesn't make sense anymore, and we feel we can't leverage it. Of course, everything is for sale. Now everything in this company is for sale for the right price.

And we have to take a look at it. And it's not we're shutting anything down. It will -- if it doesn't fit, whether it's technology or a business or if it interferes with our ability to achieve that new portfolio objective that we'll take action on it. Nothing is sacred that way here.

Mike Sison -- Wells Fargo Securities -- Analyst

Got it. Thank you.

Operator

Our next question comes from the line of Mike Harrison with Seaport Global Securities. Please go ahead.

Mike Harrison -- Seaport Global Holdings LLC -- Analyst

Hi. Good morning.

Ben Schlater -- Group Vice President and Chief Financial Officer

Morning.

Peter Thomas -- Chairman, President, and Chief Executive Officer

Morning.

Mike Harrison -- Seaport Global Holdings LLC -- Analyst

I wanted to ask just on the operating efficiency initiatives. You had mentioned earlier this year that part of the problem from a margin standpoint was that some of those changes, those consolidations, and plant shutdowns were creating some disruption. I was wondering if you're still experiencing disruption here in the third quarter? And maybe just give us a better sense of when those changes stop being disruptive to -- from a margin standpoint and start to show benefits?

Ben Schlater -- Group Vice President and Chief Financial Officer

Yes, Mike, we saw that abate in the third quarter. So our expectation is that is largely behind us.

Mike Harrison -- Seaport Global Holdings LLC -- Analyst

And then maybe a question for Peter. On the M&A front, you mentioned it's been over -- a little over a year since you've done any meaningful deals. But just wondering if we could get a little bit of an update on that most recent batch of deals are performing, quimiCer and the UWiZ deal? And then I believe there were also two smaller deals that went into color and glass. Are those performing along your expectations? And can you talk about how the integration process has gone?

Peter Thomas -- Chairman, President, and Chief Executive Officer

Yes. The integration process has gone extremely well, and they are meeting or exceeding our expectations in some cases.

Mike Harrison -- Seaport Global Holdings LLC -- Analyst

All right. And then last question I had was on the surface technologies business. You mentioned that sales were down related to the strong prior year, and I assume that's also related to some of the semiconductor weakness. But just wondering, are you starting to see that business stabilizing on a year-over-year basis as we get into Q4, Q1.

Can you maybe talk about the trends you're seeing there and whether that semiconductor market is starting to show signs of recovery?

Peter Thomas -- Chairman, President, and Chief Executive Officer

Yes. We -- that's -- as you know, we really like that space. And a lot of our 5G movement and activity and product development is centered in that space. And as you heard us last year, we were very excited with launching a whole bunch of new types of products.

And with those spaces, as you know, sometimes there would be a big ramp-up in inventory for them so they can fill their pipelines, and which was done actually in the second half of last year. And we -- to your point, for the reasons we all know, which I can't get into certain because of the sensitivity of them, there's been some softness for a range of reasons. However, it doesn't mean that the interest in the space or the R&D activities aren't continuing because they absolutely are. So anything that's going on here, I think, through -- by the time we get through this quarter and moving into the first quarter when everyone equilibrates probably after the new year and they define what they think would be going on with tariffs and a range of other things, I think our customers will have a better perspective on what the forward is.

If everything stays as it is today, we feel good that the inventory positioning would be then to a point where it's more attractive to maybe build in the first quarter. And again, from a technology perspective, there's a lot of new-new there. And we are aligned with the new-new with all the customers. So we feel -- we continue to feel good about that space and our ability to innovate to keep up with our customers' movement and advancements.

Mike Harrison -- Seaport Global Holdings LLC -- Analyst

All right. Thanks very much.

Kevin Cornelius Grant -- Director, Investor Relations, and Corporate Communications

Operator, we have time for one last question.

Operator

Our last question comes from the line of Dmitry Silversteyn with Buckingham Research. Please go ahead.

Dmitry Silversteyn -- Buckingham Research Group -- Analyst

Good morning. Thank you for taking my questions. A couple of things. First of all, just to kind of try to understand your market exposure, you talked about the things that are weighing on you as far as European construction, automotive.

If you were to not look at divisions, but if you look at kind of revenue in aggregate, is there a way for us to -- for you to aggregate sort of how much of your revenue or company is exposed to sort of the negative portions of the current macro situation, which is obviously, auto and construction in general in Europe, specifically? And how much of your revenues are exposed to what is still doing well, which I'm assuming is consumer and some of the electronic applications and some of the new wins that you guys had?

Ben Schlater -- Group Vice President and Chief Financial Officer

Dmitry, it's Ben. Yes. So if you think about revenues on a year-to-date basis for this year, you've got more than half of the revenue of the organization that sits in Europe. And of that portion, greater than half sits inside of construction.

So you boil all that down, and we've got 25% of the revenue base or more that sits inside construction inside Europe. So this is an example of how that can impact the revenue line.

Dmitry Silversteyn -- Buckingham Research Group -- Analyst

OK. All right. And the automotive is, I'm assuming another quarter of your sales?

Ben Schlater -- Group Vice President and Chief Financial Officer

Yes. So exactly. So when we -- when you think about automotive, what we've said historically with respect to the automotive segment. Remember, we've got exposure to auto in two segments.

We've got it in the color and glass business, we also have it in the surface tech business. And so when you take those, in total, it's between, let's say, 10% and 12% of the entire organization.

Dmitry Silversteyn -- Buckingham Research Group -- Analyst

OK. OK. That's helpful. Secondly, as far as sort of new product wins and not just the ones that Peter talked about is sort of still in the comp, but the ones that you've gotten over the last couple of years.

If you sort of look at how those businesses have done for you in this environment versus your more legacy businesses, were there any differences in how they performed in terms of either market exposure or the appetite for your customers to continue to buy these products, perhaps they're going into industries that are continuing to grow? So I'm just trying to understand with your vitality index and 20% of your sales coming from new products. If those new products are going into areas that are less economically sensitive than the EU construction and the automotive business.

Peter Thomas -- Chairman, President, and Chief Executive Officer

Yes. That's a good question, actually. And the good news that you'll want to hear is our vitality index, still in this environment, is still floating around 20%. And that's typically in an environment over the past year was because of the downturn, there are many customers that are reducing their R&D activities and not wanting to develop new things.

But the good news for us is now over 90% of our revenue is coming from leadership positions. And to that end, many the key customers that we deal with, regardless of this environment will continue to work with us for new generation activities. Because they're typically the ones that will continue to introduce new products in this environment. In fact, there was a question, I think that was with Kevin, where we were talking about the -- our ability to have lower revenue or by the value a little bit better.

There's a perfect example of how we use this environment where it's soft, where we can, once again, and maybe not through a major scale, but chose to do a bunch of customer and product rationalization which is what we have done over the past year. We've used this as a vehicle or an event to upgrade our -- continually upgrade our customers and products, which, by the way, will lend itself nicely to the type of optimization programs we're going to be implementing next year to make sure that; one, our footprint is right; two, we have the right equipment that's operating at the right yield improvement and cycle time and capacity utilization level. So the good news is long -- it was a good question. I gave you a lot of information there that you should process.

But the good news is vitality index continues. New product development with our selected customers that will keep our revenue at over 90% of leadership positions are entrenched. We're delivering, we're executing. That which doesn't look attractive, we are extracting from the portfolio and using that as part of our forward-looking optimization activities.

Kevin Cornelius Grant -- Director, Investor Relations, and Corporate Communications

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 results with you again next quarter. Enjoy the rest of your day.

Operator

[Operator signoff]

Duration: 62 minutes

Call participants:

Kevin Cornelius Grant -- Director, Investor Relations, and Corporate Communications

Peter Thomas -- Chairman, President, and Chief Executive Officer

Ben Schlater -- Group Vice President and Chief Financial Officer

Rosemarie Morbelli -- G. Research -- Analyst

Christine Besselman -- Deutsche Bank -- Analyst

Kevin Hocevar -- Northcoast Research -- Analyst

Mike Sison -- Wells Fargo Securities -- Analyst

Mike Harrison -- Seaport Global Holdings LLC -- Analyst

Dmitry Silversteyn -- Buckingham Research Group -- Analyst

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