Ferro (FOE) Q4 2019 Earnings Call Transcript

Ferro (FOE)
Q4 2019 Earnings Call
Mar 03, 2020, 8:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning. Thank you for joining the Ferro Corporation's fourth-quarter and full-year 2019 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 conference over to Kevin Cornelius Grant, director of investor relations and corporate communications.

Please go ahead.

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

Thank you. And good morning everyone. Welcome to Ferro's fourth-quarter 2019 earnings conference call. This morning, we'll be reviewing Ferro's financial results for the fourth quarter and full year ended December 31, 2019.

I'm pleased to be joined by today 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. However, those views may change as conditions and circumstances change.

Please refer to the forward-looking statement disclosure in the earnings release and the 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

Thank you Kevin. And good morning everyone. We're pleased to have this opportunity to provide you with commentary on our fourth-quarter and full-year 2019 performance. We also will share with you this morning some thoughts on the opportunities we see for Ferro once the sale of the tile coatings business is completed.

Regarding 2019 performance, Ferro including our tile coatings business, completed 2019 at the midpoint of our adjusted EPS guidance and near the range of our adjusted EBITDA guidance. It was not a stellar year of financial performance for sure, but our team showed considerable tenacity managing through the macroeconomic challenges we encountered. And by the end of the year, this helped us regain operating margin. Also encouraging was that in the fourth quarter, we began to see indications of improving macroeconomic conditions in certain markets.

As we move through the first quarter of 2020, we remain optimistic that our optimization initiatives and the steps we have taken to reposition our business through the sale of the tile coatings business put us on a good track for 2020 and beyond. Now, a few words about the anticipated sale of our tile coatings business which we continue to expect to be completed in the second half of 2020. Let's start by putting the transaction into the context of our strategy. When we implemented our value creation strategy in 2012, we set out to create a focused, efficient and high-value functional coatings and cover solutions business.

By simplifying operations, harvesting underperforming assets, investing in higher value opportunities and focusing on innovation and optimization, we successfully delivered on that strategy. Ferro went from a diversified chemicals and materials company to a focused specialty materials company. Those accomplishments did not signal the completion of our strategy, but rather introduced a new set of opportunities for us to generate additional value. This management team, as I hope you appreciate, constantly evaluates options to improve our business and generate value.

With that mindset, we concluded that it would be appropriate this time to harvest the value that we have created in our tile coatings business. If you step back for a moment, you can see how well the sale of the tile coatings business advances our strategy. We've been sharing our thinking with you over the past several quarters about how Ferro might get to the next better version of itself. We talked about continuing to move the company toward a more tightly focused portfolio with greater concentration in specialty materials, higher gross margins and higher underlying market growth rates.

We said we wanted to take advantage of Ferro's technology leadership positions and innovation to be less euro centric and to rebound our portfolio so that we would be more evenly balanced across end markets and less concentrated on the building and construction sector. With this transaction, we move toward all these objectives and more. The tile coatings sale will result in for having higher sustainable margins, stronger underlying end market growth, more emphasis on technology and innovation, more streamlined manufacturing operations, more balance across end markets and geographic regions, less exposure to cyclical markets and less consumption of raw materials. We believe this is a formula for success.

As you can see on Slide 2 of our presentation deck, we expect the tile coatings transaction to benefit Ferro's gross profit, gross profit margin and adjusted EBITDA. We also expect it to reduce Ferro's foreign exchange sensitivities with euro exposure decreasing from 50% to 40%, for example, and the Egyptian pound essentially becoming irrelevant. Slide 3 shows how our portfolio will be more balanced geographically and by end market, with less reliance on Europe, Middle East and Africa markets. Within the EMEA markets, we are shifting our presence toward Northern and Eastern Europe and away from the southern part of the region.

From the perspective of end markets, the tile coatings sale reduces Ferro's exposure to building and construction segments which are more cyclical and slower growing than the markets we are targeting for higher growth, namely electronics and industrial goods. We are very excited about the opportunities ahead in the next phase of our strategy. Our portfolio will be more focused on higher growth technology-driven markets, like functional automotive glass, sensors, defense systems, decorative glass coatings and electronic server ports. These are areas in which we have world-class products and services and world-class expertise.

Now this is not to say of course that these markets don't present challenges of their own, they do. For example, in these higher technology markets there are production ramp-up and ramp-down periods that occur when transitions are made from one generation of products to the next, and this could cause some lumpiness in demand for Ferro products. We intend to address this by staying close to our customers and assisting in the development of their next-generation products which should help us to anticipate and manage demand for our products. These are challenges we gladly embrace for the economic benefits of these higher growth, higher-margin markets.

Now, 2020 will be a year of transition for Ferro to get the company to that next better version of itself. We have four main objectives for 2020 which we intend to pursue in an orderly and disciplined manner. Specifically, they are closing the tile coatings systems transaction, continuing optimization initiatives throughout the company, moving assets to rightsize our business and taking on stranded costs that we can eliminate because of the sale of the tile coatings business. As noted, optimization is one of our main objectives for 2020.

We have said previously that optimization is not just taking out cost. It's also controlling costs, increasing efficiency, adjusting our manufacturing footprint and rightsizing our operations. Our optimization initiatives do all of these things. Given the significance of the tile coatings transaction, the opportunities we have, the timing of certain actions and the levers we pull may change as we move through 2020.

Ferro should be well positioned for a more normalized run rate in 2021, when we can realize the benefits of the actions we are taking this year and frankly the actions we have taken in previous years that have enabled us to get to this point. We look forward to moving through this transition year and into the value creation opportunities of 2021. Now, I'm going to turn the call over to Ben to walk you through our financials. Then I will discuss our continuing operations segment performance for the fourth-quarter and full-year 2019.

I will also comment on our 2020 guidance.

Ben Schlater -- Group Vice President and Chief Financial Officer

Thank you Peter. And good morning everyone. I'd like to start out this morning discussing our consolidated financial results for continuing operations for the fourth-quarter and full-year 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.

All comparisons are versus the fourth-quarter and full-year 2018. While we continue to manage closely our tile operations and intend to do so through the anticipated closing of that divestiture, in terms of the format and context of this call and future calls, our intention is to primarily review continuing operations in our prepared remarks, and our guidance going forward will be in that regard. To that end, the financial highlights and results can be reviewed on Slides 5, 6 and 7 in the presentation accompanying today's call which you can find on ferro.com in the investors section. Turning to Slide 6.

In the fourth quarter, net sales declined 6.8% to $245.9 million. Adjusted gross profit declined 8.7% to $76.3 million, adjusted gross profit margins were 31%, adjusted SG&A expense was $49.4 million, adjusted EBITDA declined to $37.4 million or 15.2% of net sales and adjusted EPS declined $0.17. Now, turning to Slide 7. I will go through our full-year 2019 performance.

Net sales declined 3.3% to $1 billion. Adjusted gross profit declined 6.3% to $316.2 million, adjusted gross profit margin was 31%, adjusted SG&A expense was $198.8 million, adjusted EBITDA was $158.8 million or 15.6% of net sales, and adjusted EPS was $0.83. The performance in the quarter was lower compared to the prior year. As Peter discussed in his remarks, we experienced some off-cycle events within some of our products.

Setting those events aside, we performed in line with our markets. These results on an adjusted basis reflect the following non-GAAP adjustments for the fourth quarter primarily related to our corporate development, divestiture and optimization activities, the details of which and the related year-to-date figures can be found on tables five and six in the press release. I'll now provide more detail on the adjustments for the fourth quarter. First, in cost of sales, we have adjustments of approximately $900,000 primarily due to costs related to optimization initiatives.

In SG&A, we have onetime adjustments of $4 million in the quarter primarily consisting of cost for legal, professional and other expenses related to certain corporate development and optimization initiatives including the North American manufacturing optimization initiative we announced in January of 2019 and $1.2 million related to divested businesses and assets. Turning to restructuring impairment, there was an adjustment of approximately $3.1 million related to actions to achieve our ongoing optimization initiatives and acquisition synergies. Finally, in the quarter, under other income and expense, we had an adjustment of about $13.2 million. This was primarily related to pension and other post-retirement benefit mark-to-market adjustments.

And for the quarter, we had an adjustment of $6.3 million for special items being tax affected at the respective statutory rate where the item originated. The fourth-quarter adjusted SG&A expense was $49.4 million or 20.1% of net sales compared with $51.5 million or 19.5% of net sales in the prior-year quarter as stated on a constant-currency basis. Newly acquired businesses primarily accounted for the increase. Interest expense was $5 million compared to $5.2 million in the prior-year quarter, and for the year, interest expense was $21.4 million compared to $20.5 million in the prior year.

This brings me to adjusted free cash flow for consolidated Ferro which includes both continuing and discontinued operations. Adjusted free cash flow for the quarter was an inflow of $111 million. I'll spend a few more minutes walking through the details. We define adjusted free cash flow as GAAP 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 loss attributable to Ferro Corporation of $30.8 million, we add $11.7 million of depreciation and amortization, $55.6 million for working capital, $5.5 million of change in other balance sheet items, $8 million of other noncash P&L items; and finally, $34.9 million of restructuring and impairments. This amount primarily reflects an impairment charge of approximately $33 million to the remaining goodwill of the tile business. That charge sits in discontinued operations.

The sum of those figures equals our cash provided from operating activities of $85 million on a GAAP basis. Then we subtract $24.2 million for capital expenditures and add cash received on other receivables of $23.7 million to arrive at $84.5 million of free cash flow in the fourth 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 2019; two, M&A-related cash flow; and three, cash flow restructuring programs.

The quantification of those three adjustments for the quarter are as follows: $18.3 million for the optimization projects, $5 million related to M&A and $3.2 million related to restructuring. When we add these items back to our GAAP numbers, this brings adjusted free cash flow for the quarter to $111 million. The details of this calculation and the related reconciliation to GAAP operating cash flow can be found on table 12 of the earnings press release. Regarding our balance sheet and cash flows, fourth-quarter adjusted free cash flow is strong, and we finished the year at 3.2 times net leverage, in line with our expectations.

With that, I'll now turn the call back over to Peter to walk through each of the business units. I'll return later in the call to walk you through our 2020 guidance. Peter?

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

Thank you, Ben. Now I'll take you through fourth-quarter and full-year performance in our continuing operations reporting segments. In the presentation deck, you can see summaries on Slides 8 and 9 of fourth-quarter and full-year performance for our two main business segments. So let's begin with our performance colors and glass segment.

In the fourth quarter, net sales on a constant-currency basis were down 3.9% and volumes declined 16.7% primarily driven by continued weakness in global auto production as well as lower demand in the glass decoration of porcelain enamel businesses. Despite the lower sales, gross margins improved by 130 basis points in the fourth quarter over the prior year on a constant-currency basis, moving from 28.6% to 30.1%. Adjusted gross profit increased from $47.8 million to $48.3 million. The part of our performance colors and glass business that serves the automotive industry continued to experience weak demand.

In the quarter, Americas had low double-digit decline and in Europe, low single-digit decline. However, in Asia, we saw mid-single-digit improvement which we attribute to gains in market share. Overall, our automotive business sales were down approximately 2% in the fourth quarter as our customers work down their year-end inventory levels. Our glass decoration business was down mid-single digits in the quarter compared to the prior year, mainly because last year, we received substantial off-cycle orders from two large average companies 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 was relatively flat over the prior year as customers continue to work through inventories used in end markets like appliances, construction, automotive. In the industrial materials business, we saw high single-digit improvement driven primarily from installation of digital printing machines. This is a normal pattern as most orders are placed through the middle of the year and installations of Ferro's digital printers typically occur closer to the end of the year to work around logistics and placement within customers' facilities.

Turning to the porcelain enamel business which is now being reported under the performance colors and glass segment. We experienced high single-digit declines in the quarter due to lower demand from the U.S. appliance and European roofing sectors. For the full-year 2019, performance colors and glass net sales declined 3.4% to $649.1 million and volumes declined 10.4%.

Adjusted gross profit declined year over year to $196 million. Gross profit margin for the year was 30.2%. Now, turning to our color solutions segment. In the fourth quarter, color solutions net sales on a constant-currency basis were down 11.8%.

Gross margins declined from 34.2% to 32.6%. Adjusted gross profit decreased from $33.1 million in the prior-year quarter to $27.8 million. For the full-year 2019, color solutions net sales declined 3% to $369.7 million, while volumes declined 3.8%. Adjusted gross profit declined year over year to $117 million.

Gross profit margin for the year was 31.6%. The primary driver of the decline in sales in the quarter was related to our surface technology business. As we noted during the second-quarter 2019 earnings call, we anticipated weaker demand in the second half of 2019 compared to the prior year due to the strong demand that we experienced in the second half of 2018 related to the adoption of 5G technology. Also during the quarter, we continued to see customers work through inventories built up through the year for use in automobile applications as auto production across the globe remained weak.

Now, as I mentioned earlier in the call, we saw signs of macroeconomic stabilization in some regions and end markets in the fourth quarter of 2019. We hope that these trends continue, but clearly, geopolitical and macroeconomic uncertainties remain in 2020. Perhaps most notably are the uncertainties accompanying the outbreak of the coronavirus including its potential impact on manufacturing, supply chains and consumer sentiment. Our focus is, as usual, on controlling what we can control and leveraging our market leadership to continue to make gains notwithstanding such uncertainties.

With that said, I'm going to ask Ben to comment on our 2020 guidance. Ben?

Ben Schlater -- Group Vice President and Chief Financial Officer

Thank you Peter. Now, I'd like to spend some time reviewing our 2020 guidance. We expect to deliver sales growth in the range of flat to 2% or 2% to 3% on a constant-currency basis. This translates to the following 2020 full-year guidance for continuing operations.

Adjusted EBITDA in the range of $160 million to $170 million which would be up nominally 1% to 7% or 2% to 9% on a constant-currency basis over 2019. Adjusted EPS in a range of $0.82 to $0.92, an increase of flat to 12% or 1% to 13% on a constant-currency basis over 2019. And we anticipate our net leverage to be approximately 1.5 times at the end of 2020, pro forma for the closing of the tile coating systems sale and cash flow through close. Our 2020 guidance reflects foreign exchange spot rates as of February 21, 2020 which reflect a euro to U.S.

dollar exchange rate of roughly $1.085. As a common practice, we have provided FX sensitivity in the guidance section of the earnings release. In 2019, Ferro excluding discontinued operations, generated approximately 35% to 40% of its revenue in euros and approximately 35% to 40% in U.S. dollars.

We estimate that a 1% overall change in foreign currency exchange rates weighted for the countries where we do business would impact sales by approximately $5 million to $8 million and operating profit by $600,000 to $800,000. If you isolate for sensitivity on the euro, a 1% change would impact operating profit by approximately $500,000 to $700,000. At this point, keeping with prior practices, I'd like to spend a few minutes bridging our adjusted EBITDA and EPS guidance. Starting with adjusted EBITDA of $159 million from 2019, you add organic growth of $5 million to $7 million, $12 million to $14 million for our optimization programs, then you subtract $5 million to $6 million for incentive compensation plans reflecting a headwind from a reduced expense in 2019, $4 million to $5 million for SG&A investments.

And finally, we subtract a headwind of $2 million to $4 million due to FX. The sum of those items to the 2019 adjusted EBITDA of $159 million equals our guidance range of $160 million to $170 million. Now turning to our walk for EPS. Starting at our adjusted EPS for 2019 of $0.83, we add $0.04 to $0.05 from organic growth, $0.11 to $0.13 from our optimization programs, then we subtract $0.04 to $0.05 for incentive comp, $0.03 to $0.05 for increased SG&A investments and $0.01 to $0.02 to reflect an increase in our effective tax rate from 2019.

Finally, we subtract about $0.02 to $0.04 for FX headwinds. The sum of those pieces to the 2019 adjusted EPS of $0.83 equals our guidance range of $0.82 to $0.92. In terms of the distribution by quarter, we expect the second and third quarter to be our strongest earning quarters, followed by the fourth and then finally the first, similar to the earnings distribution in 2019 on an adjusted continuing operations basis. And given the extent of the unknown impacts of the COVID-19 or coronavirus to our customers and supply chain, we have included in our guidance a headwind of approximately $1 million to $2 million to gross profit, most of which we expect to occur in the first quarter.

As Peter mentioned, we are in regular contact with our teams in the field. And while it's too early in the year to be certain, our current expectation is the impact will be limited to that range. With that, I'll now turn the call back over to Peter to provide a few closing comments before we open it up for Q&A. Peter?

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

Thank you Ben. Before we take your questions this morning, I want to reiterate that 2020 is a transition year. We will be focused on the objectives I mentioned earlier. Optimization will continue to have a significant role in driving performance during the year, with only modest line growth expected, at least at this point.

We do expect to remove $10 million to $12 million in stranded costs related to the disposition of the tile business, and we expect those benefits to be fully realized in 2021. To the extent the tile coatings transaction closes earlier in the second half of 2020, a portion of those benefits may be realized this year. Further, we discuss optimization benefits in the mid-$30 million range on the second-quarter call last year before we entered into the agreement to sell the tile coatings business. Currently, we still expect the total benefit from those actions to be in the low $30 million range because only a small portion of the benefits were associated with the tile coatings business.

Of this amount, we anticipate about $12 million to $14 million through 2020 and the rest in 2021. We also will be making certain investments in strategic SG&A and infrastructure to enhance the performance of Ferro in 2021 and beyond. Now, amplifying what I said earlier, once we complete the sale of the tile coatings business and move into 2021, we will have a portfolio of businesses more concentrated in specialty materials and more targeted to higher growth end markets. We will have significant scope for expansion and applications in markets with an addressable market that is approximately $9 billion and growing nicely.

We will have a more balanced geographic footprint. We will have a stronger balance sheet with more financial flexibility to invest in organic and inorganic growth through R&D and strategic acquisitions. We will have leadership positions across the vast majority of our product lines. Looking out over the next several years, we will be developing products for growth markets in digital printing, smart cars, digital, Internet of Things, 5G applications, next-generation LED lighting, environmental chemistry, energy efficiency and functional coatings for the healthcare market.

These are exciting markets in which to participate, and we are going to be very focused on participating in them at market growth plus levels of performance. We expect our 2021 adjusted EBITDA margin approaching 20% when the characteristics of our new company are more fully realized in subsequent years, we would expect high 30% gross margins and adjusted EBITDA margin exceeding 20%. These are exciting times for Ferro. We are taking the step through the sale of the tile coatings business, the transition to a higher growth, higher profit company.

We are enthusiastic about the path ahead. And now, I'll turn the call over to Kevin to start the question-and-answer segment of our call.

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

Thanks Peter. With that operator, let's open up the call for questions.

Questions & Answers:

Operator

[Operator instructions] Our first question comes from the line of Rosemarie Morbelli with G. research. Please proceed.

Rosemarie Morbelli -- G.research -- Analyst

Thank you. Good morning everyone.

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

Good morning.

Rosemarie Morbelli -- G.research -- Analyst

Peter, I was wondering if you could give us a little more details on the steps you are taking prior to the sale of tile coatings, meaning that of a solidly geared toward tile coatings, you insinuated that actually you are probably doing more than that. And I am just wondering if we could get a little more details and have a better picture of what remainco is going to look like.

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

OK. I think there may be two questions in there. So let me address the first one from the perspective of what our strategic priorities here immediately moving into the year. Number one, as we mentioned, we have a lot of activity going around closing and focusing on the tile transaction.

Number two, we have fully a developed and laid-out plan to attack our stranded costs. The third piece is that there are certain assets which need to be moved around to rightsize the remainco business. And four, we're working really hard on realigning the organization around more of an innovation and technology go to market kind of a structure. So that's -- those are the strategic priorities going into the year.

However, it doesn't mean that we're not certainly -- or that we're not doing other things. You heard us mention again that we do have the optimization pipeline which has about 19 different programs in. And just to be clear, last -- I think in the second-quarter call, we laid out those plans, but now everyone on the call should understand what we were doing in the last eight months of last year that put us in a mode that we had to refocus our energy be that as it may with the tile business. So what we're saying is out of that bucket.

We're looking at realizing $12 million to $14 million of those optimization programs, and we're looking at $16 million to $18 million next year. We do have the $10 million to $12 million stranded cost. So hopefully, you're doing the math on why we're saying this as a transition year and that 2021, you'll see what we would define as the new framework, an etch-a-sketch moment for remainco. So that's one part of the question.

The second part of the question is what are the strategy buckets that everyone should be paying attention to. As our normal course of business, everything else I just mentioned is what everyone does for 32 hours a day. So let's talk about what we do with our normal course of business. And that's focusing on our three strategic pillars for Phase 5.

We have, starting today, we're launching what we call Phase 5 of our strategy. That shouldn't surprise anyone since we harvest the tile business. And that Phase 5, we have a name for it, it's called the genesis phase. And the genesis phase goes with a tag line is that we are shifting the center of our -- the gravity of our business, to be a higher margin, higher value portfolio.

And that again shouldn't surprise anyone because for the last two or three quarters, we've been -- if you have put the pieces together, you probably would have felt that we were doing something in a way that would create what we've just created. And now we're moving it up a notch. We're starting with a more focused and higher value business. So the three pillars around Phase 5 would be our specialties growth, continued innovation and continued optimization.

So as it relates to specialty growth, you have an organic program. Again, this particular organic pipeline has over $400 million of value over the next five years at a gross margin at 44%. So unlike it was last year at 32%, because of the new portfolio, we're now up to 44%. So that's a very important reference point.

The second part of that would be what we would call our innovation growth. And the innovation growth will be focused on things. Another theme would be our market trends of going green and going more into the electronics type areas or automotive applications. So you have to think about those two as it relates to 5G, AVs, LEDs, IOT, OLEDs and a range of others, where the innovation rises above our base organic program.

So we have two organic pipelines running. The next in the growth would be our inorganic growth. Now the inorganic growth, nothing has changed with our pipeline. We still have a pipeline that's replete with opportunities.

We're going to continue with the same discipline that we have in the past. And what you should think about, and this is very important around the strategic options, that we have regarding that organic activity. The first is we can continue the way we have been, where we can strengthen and extend and optimize our portfolio with the bolt-on acquisitions that typically fill capability gaps. We're replete with those opportunities, our pipeline is.

The second piece would be what we would define the scale opportunities that will broaden the scope of both color solutions and functional coatings. These will be acquisitions that are a little bit bigger than what we've been doing before. And one or two of those can really move the needle on our new remainco business. And there are a bunch of those.

And again, as always, even though we have all this other work going on, we're in constant communication. And again, we're still talking with five or six people. We still have the capacity to keep the conversations moving. The next would be -- look, at the end of the day, we've always talked about something that's more transformational.

There are bigger deals out there. Our leverage is getting better. Many of you know, there are things that are coming on into the market, maybe in the second, third, fourth quarter, that would be very, very opportunistic for us to participate in. And with a very good balance sheet, like we expect to be 1.6, 1.8 on leverage, we have the flexibility to move into those spaces and being recognized as a serious acquirer of some of those things.

The other piece is -- look, at the end of the day, we study everything, as many of you know, and there are opportunities for merger activities that may make sense. And also, like we've said in 2012, we're not afraid of a transaction. We were a very pure portfolio, listen, do the math, look at the margins, and we're very attractive. And whatever one of those opportunities creates value, we'll pursue them.

So that's kind of the essence of how we're starting the year. We have a plateful of activities. We've prioritized our people bandwidth around keeping everything in motion, and that's why you heard on the prepared remarks that we feel pretty good. We have a lot of optionality, and we're a much more attractive company with a bright future.

So we really feel good about what's going. We just have -- 2020 is a bit of a transition year. We have a lot of cleanup. But we -- in the prepared remarks, we put up a lot of math out there.

You should feel pretty good about what 2021 looks like. And if -- we've been executing the strategy for seven years. We've done everything that we said we would do, and there's no reason to believe that we're not going to continue down the path because the devil's in the detail. We have the pipelines, and everyone is executing, and we're being incented against it.

Rosemarie Morbelli -- G.research -- Analyst

Thank you. That was very helpful. Excuse me. And I am wondering if based -- I am sure you are not idle, waiting for someone to come and offer to merge or acquire you or anything like that.

What would be the likelihood of an announcement that something may happen at the time you announce the closure of the sale of the tile business?

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

No, no, no. You know we can't answer any of those. To your point -- hey, look, like I mentioned, we have fully developed concepts around every one of those strategic options I laid out. But we're in no position to have any of those types of discussions.

But thank you for asking.

Rosemarie Morbelli -- G.research -- Analyst

You're welcome. Any preference in all of your options?

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

Hey. Look, no, because we're very exciting. No whichever path we take, what's beautiful about what we've done here is if you had the luxury of looking at our plans and spreadsheets around every one of these five or six pathways, we just presented them to the board. Every one of the streams is very value creating, and we feel like we have something that's very special that's going in the right direction with a lot of innovation, a lot of technology.

And at the end of the day, I'll just give you a data point where we feel really excited about. If you look at the eight submarkets within functional coatings and color solutions, from a very high level, one of the major markets, we only have one real competitor. In five of them, we have two. And then one of them, we have like three.

So as it relates to our leadership position which by the way over 95% of our revenues coming from that, if you look at the industry structure and the competitive intensity, if you listen to what I just mentioned about those eight subsegments, nothing has more than three, and most of them are just two high-level competitors with a lot of different technology that we've put ourselves in a very unique situation to move forward. And as we're winning in those markets, we're jumping the chasm twice. And so we feel -- like automotive, for example, if you take a look at where we were two years ago versus where we are now, the industry clearly views us as a double-step leader in that technology, and we're making a lot of progress on the surface tech and electronics sides with very proprietary isolated customer relationships that where we've been in some new products over the last couple of years. We're moving into the next generation.

It's hard to displace us. We just have to get the gestation period around what that new feel is, and that's what 2020 is. But everything is in motion to move forward. We feel really good about it.

Operator

Our next question comes from the line of John McNulty with BMO Capital Markets. Please proceed.

John McNulty -- BMO Capital Markets -- Analyst

Yeah. Thanks for taking my questions. So I guess, two of them on free cash flow. I guess how should we be thinking about free cash in 2020, both with and without the restructuring costs? And then I guess given the change in the portfolio, how should we be thinking about the cash conversion of the -- I don't know, newco or the new Ferro or the higher-growth Ferro versus kind of what the past Ferro was able to accomplish there?

Ben Schlater -- Group Vice President and Chief Financial Officer

Yeah. Hey John, it's Ben. So there's a lot in there. Let me start with sort of total company for 2020 and relate that back to the 1.5 times leverage that we mentioned on the call.

So that -- the cash flow that is inherent in that leverage number for the end of the year is a combination of the remainco cash flow as well as the tile cash flow for the period that we may own tile again sometime in the second half. And so because you have those two businesses together in 2020, that doesn't create a great look for what the profile of remainco would be from a cash flow perspective. So let me go through that separately. And what we think we should expect from a cash flow profile for just remainco only.

And so overall, when we think about cash flow conversion and again, for us, that's our free cash flow all in over our EBITDA for the -- free cash flow over EBITDA. And so for remainco, that's -- we believe that that's 55% to 60%. So significantly higher than what the total company would have been. And there's a couple of pieces of that.

So there's a big benefit to working capital. Previously, you've heard us talk about total working capital as a percentage of sales in the high 20s and low 30s. With reminco, that number goes closer to 25%. capex on an ongoing basis, sort of a regular amount of capex is more in the 20% to 25% range or two to two and a quarter percentage of sales.

So again, remainco takes on a much more asset-light feel to it with respect to normal capex. That would not include capex from specific strategic initiatives, and we'll sort of get into that. So again, if we look at how much cash are we converting, and that's all in, that's not an unadjusted number, we would expect 55% to 60% of the EBITDA number. And then that would be available, right, for strategic investments and capital deployment.

So that's sort of the profile of remainco. Let me come back to 2020. We do have some incremental, what we would call, strategic capex and spending related to the optimization in 2020. And so from a capex perspective, in 2020, we would expect that capex number to be somewhere between $50 million and $55 million.

That's for the total company, and that's an elevated number because it includes some of the capex that Peter discussed with respect to optimization. It also includes some restructuring and expense related to both those optimizations as well as the completion of the tile transaction. So let me stop there John, and see if that gets you where you need to be.

John McNulty -- BMO Capital Markets -- Analyst

Yeah. No that's hugely helpful. And then I guess just one last question. So I know you -- I guess in some of your prepared remarks, you had commented on some off-cycle events that are maybe nicking the growth a little bit.

Anything as we look to 2020 in terms of kind of, I don't know how you would call it, like on-cycle events where they're not necessarily just growing with the end markets, but you've got some new applications that are kicking in that we should be thinking about?

Ben Schlater -- Group Vice President and Chief Financial Officer

Yeah. So I would say there wouldn't be anything material in the 2020 guidance. Meaning, in 2019, if you think about what happened from a sales perspective I would say on a constant-currency basis, adjusted for any of the deals year over year, half or so of the sales decline was related to what we would call off-cycle or sort of onetime events. We don't expect anything of that magnitude to happen in 2020.

However, I think what you are going to see in 2020 is a continued focus on what we refer to as the new product and the innovation pipeline and expect to see continued success there. As Peter mentioned, we're making investments there. And so we would expect incremental growth there as a result of that focus.

Operator

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

Mike Sison -- Wells Fargo Securities -- Analyst

Hey guys.

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

Hey.

Mike Sison -- Wells Fargo Securities -- Analyst

Can you reconcile your outlook for 2020, if you own tile, just so folks can kind of see what it would have been if you had tile, given where consensus numbers are out there, just so folks can understand that walk?

Ben Schlater -- Group Vice President and Chief Financial Officer

Yeah. So it's a little bit hard to do Mike, because we don't adjust sort of the tile results. Here's sort of the best way to do it. In the press release, we went through sort of where tile or discontinued ops ended in 2019 from an EBITDA perspective, right? And so we would expect I would -- some marginal growth there in 2020.

And so I think the easiest way to think about that would be to take the midpoint of our guidance for remainco for 2020 and then add to that the 2019 EBITDA from tile. And that should get you pretty close. We would expect some nominal growth in tile, nothing significant, but that ought to get you pretty close. But again, we have to be a little bit careful with that reconciliation because of what's happening in just glass.

Mike Sison -- Wells Fargo Securities -- Analyst

Understood. And then can you just sort of give us your tempo for Q1? You are looking for 2% to 3% constant currency growth for the full year. Is sales growth going to be down in Q1 because of COVID-19 and just want to see where you start the year and how you build through that as the year unfolds?

Ben Schlater -- Group Vice President and Chief Financial Officer

Yes. So let's just talk about -- Michael, let's talk about Q1 with respect to sort of the earnings distribution in terms of what may be relevant here in the next couple of months. So if you think about what we did, what we would have done in Q1 of '19, right, we did $0.22 for the total company. That same distribution should be pretty consistent in 2020 with the exception of what's happening with the coronavirus.

So that will bring that down incrementally. But that's probably the easiest way to think about Q1.

Operator

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

David Begleiter -- Deutsche Bank -- Analyst

Thank you. Ben, just going back to cash flow, can you just give us for just remainco cash flow or bridge from EBITDA to free cash flow for just the remainco portion of the business in 2020?

Ben Schlater -- Group Vice President and Chief Financial Officer

Yeah. Yeah. So again, I think the easiest way to think about this, David, is if we start with EBITDA at the midpoint, right, and then for items such as working capital, tax, interest expense, pension and sort of the normal cash flow type items, that, in total, would be about $50 million of cash flow use. And then we expect capex for remainco only of somewhere between $40 million and $45 million, and then there's another $20 million to $25 million of restructuring and transaction expense.

And so that gets you to sort of the -- that gets you to the cash flow that we used to come up with the 1.5 times. The 1.5 times is actually a little conservative. That plan will yield something less than that, somewhere between 1.3 and 1.4. We will also get the cash from the tile business for the period that we own it.

And that would approximate the EBITDA for that business over the course of the year. So hopefully, that's helpful to you.

David Begleiter -- Deutsche Bank -- Analyst

No, very helpful. And Peter, can you just talk a little bit more detail on the investments in SG&A that you're making for this year? I think you mentioned a $4 million to $5 million headwind for EBITDA. Can you give a little more detail on those items you're investing in?

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

Sure. We have a couple. I'll just do it in terms of buckets. We have a range of IT activities that we're working on to bring all of remainco together in one uniform type of a platform now that we've conditioned the organization to be what it is.

We have SG&A and some new systems and processes from an innovation and technology perspective that we're building into the organization. That would include things like some R&D type of behavior that we need to complement what we have to keep advancing to the newer levels of technology. We also have, as we move into those spaces, there are things like equipment needs that we're going to need that we haven't had before to more mimic the market leaders that we work with. So we can do -- be more -- even more service to them that we have in the past to keep putting a fence around the relationship.

And so it's a range of, David, like five or six different things like that that are in an additive nature to that level. But it's all to move the business forward and to have -- you should think of it this way. With what we're doing, with what we're trying to become, Ferro as an entity is come together in every way, shape or form as a free-standing entity.

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

Operator we have time for one last question.

Operator

All right. Our last question comes from the line of Mike Harrison with Seaport Global Securities. Please proceed.

Mike Harrison -- Seaport Global Securities -- Analyst

Hi. Good morning.

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

Hey.

Ben Schlater -- Group Vice President and Chief Financial Officer

Good morning Mike.

Mike Harrison -- Seaport Global Securities -- Analyst

Ben, I was wondering if you could help a little bit just in terms of some modeling questions to get to the EPS guidance. I think you mentioned the tax rate was going to be going up a little bit. And also, just trying to get a sense of what we should be modeling for interest expense. Does your EPS guide assume that we get that interest expense relief at a certain point? And I guess what is the interest expense assumption in there? Thanks.

Ben Schlater -- Group Vice President and Chief Financial Officer

Sure. Yeah, no problem. So the interest expense is going to be somewhere between, Mike, $20 million and $22 million or $23 million. And that obviously is a fluid number.

We've modeled that the transaction happens at some point in the third quarter. But I can't stress enough that that is fluid. And so obviously, that could move that interest expense number around. The tax rate that's inherent in the EPS guidance is 25% to 26%.

Mike Harrison -- Seaport Global Securities -- Analyst

And D&A of the remainco business, is that like $40 million, $45 million for the full year?

Ben Schlater -- Group Vice President and Chief Financial Officer

Yeah. So D&A for -- did you say just remainco, Mike?

Mike Harrison -- Seaport Global Securities -- Analyst

Yes.

Ben Schlater -- Group Vice President and Chief Financial Officer

Yes. Yes, $40 million to $45 million exactly.

Mike Harrison -- Seaport Global Securities -- Analyst

OK. And then a question for Peter. Just as we're kind of moving into this fifth phase obviously we have a more stable and defined business, balance sheet is going to be in better shape, less cyclical exposure, etc. Any thoughts on the dividend going forward or is the focus going to be to continue to take that capital and apply it toward organic and inorganic growth opportunities?

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

Yeah. Like we've mentioned before, that is a constant discussion that we have. It's always part of our strategic priorities. And we do have some outstanding available capacity to purchase, and it's always discussed.

And like I said, what's really important for us right now here in the first quarter, first four months of the year, is to get those four major priorities through a certain kind of a funnel and then we probably by the second quarter, we may have a more -- a little bit more perspective on providing you more guidance on what we plan to do to move the business forward. But rest assured that we always have discussions around that as well as everything else.

Ben Schlater -- Group Vice President and Chief Financial Officer

Yeah. Mike, the other thing that I would just add to that in terms of -- we've talked a lot about 2020 and just wanted to reiterate, look, our view is 2020 is a transition year for the remainco. And 2021 is really when we would start to see that enhanced profile and really the thesis behind what we've done with the portfolio start to develop more fully. I mean if we think about what we heard Peter say in his remarks at the top of the call, that's when we're going to see the full realization of the $10 million to $12 million in stranded costs.

That's both an EBITDA and an EPS benefit. In addition to that, we're going to see the full run rate of the interest benefit with the anticipated closing of the tile transaction. That's another $5 million to $7 million of EPS benefit, and then we got the optimization of $16 million to $18 million in 2021 that Peter mentioned. So if we think about what the profile of the business looks like, even pre-transition in 2019 as we laid out on the slide, that really gets enhanced over the course of the next 18 to 24 months.

And when we take that along with sort of the new cash profile of the business once that transformation phase is complete, we wanted to make sure that we're reiterating what that profile look like.

Kevin Cornelius Grant -- Director of 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: 57 minutes

Call participants:

Kevin Cornelius Grant -- Director of 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

John McNulty -- BMO Capital Markets -- Analyst

Mike Sison -- Wells Fargo Securities -- Analyst

David Begleiter -- Deutsche Bank -- Analyst

Mike Harrison -- Seaport Global Securities -- Analyst

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