Ferro Corp (FOE) Q4 2020 Earnings Call Transcript

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Ferro Corp (FOE)
Q4 2020 Earnings Call
Mar 2, 2021, 8:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning and thank you for joining the Ferro Corporation Fourth Quarter and Full Year 2020 Earnings Conference Call. An archived replay of the 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 of Investor Relations and Corporate Communications

Thank you and good morning, everyone. Welcome to Ferro's fourth quarter and full year 2020 earnings conference call. This morning we'll be reviewing Ferro's financial results for the fourth quarter ended December 31, 2020. I am pleased to be joined today by Peter Thomas, our Chairman, President and CEO; and Ben Schlater, Group Vice President and Chief Financial Officer. The earnings release and conference call presentation deck are available in the Investors section of our website.

I would like to remind everyone that some 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 T. Thomas -- President and Chief Executive Officer and Chairman of the Board of Directors

Thanks Kevin. Good morning everyone and thank you for joining us to discuss Ferro's fourth quarter and full year 2020 performance. Ferro delivered very good results for the fourth quarter. Performance was significantly stronger than the prior year quarter with increases in sales, gross profit and net income. Top line revenue and gross profit increased for the second consecutive quarter as demand for our products across the globe strengthened and the V-shaped recovery that we previously described continued. Adjusted gross margins expanded relative to the prior year quarter and third quarter of 2020. We expect this trend to continue as we bring additional innovative higher margin products to market and reduce costs at the COGS level.

Both our reporting segments Functional Coatings and Color Solutions delivered increased sales and gross profit with the strongest growth coming from our Automotive, Industrial, Construction, Electronics and Porcelain Enamel product lines. We believe that those fourth quarter performance sets the baseline for the company's performance going forward as we continue to increase the value proposition of our products and services. Full year 2020 versus 2019 comparisons are of course thrown off by the impact of the COVID-19 pandemic especially in the second quarter many parts of the global economy were temporarily shuttered in response to the pandemic.

As we previously have explained, Ferro generally continued to operate during this difficult time although at a lower level because many of our products and services were deemed essential or sold into markets considered essential. As for those markets around the world more heavily impacted by the pandemic, we stayed close to our customers, which informed our preparation as these markets began to recover. The increases in demand we saw in the third and fourth quarters and in early 2021 give us confidence that the economic recovery will continue to strengthen at least in the first half of this year. Our visibility into the second half of the year is somewhat clouded by potential risks to economic growth resulting from the continuing spread and variant strains of COVID-19 even as vaccines become more widespread.

We do recognize that we can't control what happens with COVID-19 or the vaccine, but we can stay close to our customers, understand their expectations for demand, provide excellent technology with products and services and develop innovative products aligned with the trends in their businesses. We also continue to optimize our business. With these levers even with some uncertainty about the second half of the year, we are confident that Ferro can deliver a strong 2021. Let me change gears here for a minute to say a word about the Ferro workforce. I am really proud of our teams around the world. 2020 surely was one of the most challenging years in our more than 100-year history.

As the pandemic spread across the globe disrupting economies East and West, North and South, our team responded and adapted with extraordinary dedication and professionalism. Despite all the challenges, they managed the supply chains, kept our manufacturing operations running and served our customers at a very high level and they did this while keeping the well-being of Ferro personnel paramount instituting new health and safety protocols, implementing remote working and supporting their teams through this challenging environment. We have a very talented and dedicated workforce and I am deeply grateful to them for all that they have accomplished especially in 2020.

Along with these accomplishments in 2020, we also advanced toward the completion of the sale of our Tile Coatings Systems business. The sale was completed on February 25 as we announced in our news release that day. I want to thank our Tile Coatings Associates for their many contributions to Ferro over the years and wish them every success as they enter a new chapter in their professional lives. The divestiture -- the Tile Coatings Systems business was the latest step in our strategy to transform Ferro into a leading Functional Coatings and Color Solutions company. Going forward, Ferro will have more attractive financial and operational metrics and a more focused higher margin portfolio of businesses.

As a reminder, following the sale of the Tile Coatings Systems business, Ferro has greater focus on markets with stronger underlying growth, more concentration on our industry-leading technology, innovation and services, the capacity to generate sustainably higher margins, a more balanced end market and regional mix, less exposure to cyclical markets, lower raw material consumption, a streamlined manufacturing footprint, lower capital intensity, lower working capital requirements and reduced financial leverage. Today as a leading Functional Coatings and Color Solutions company, Ferro is a technology-led innovation driven business with a profile for attractive, sustainable, profitability and value creation.

I will now turn the call over to Ben for his report on the fourth quarter and full year financial results. After Ben finishes his comments, I will discuss segment performance and Ferro's strategic priorities for the next phase of our strategy. Ben?

Benjamin Schlater -- Group Vice President and Chief Financial Officer

Thank you, Peter and good morning everyone. I would like to echo Peter's comments on how pleased we are with the company's performance in the fourth quarter and the completion of the Tile Coatings sale. The business delivered top line growth in the fourth quarter with continued gross profit expansion and lower SG&A spend. We are especially proud of Ferro associates around the world for what they accomplished in 2020. They exhibited exceptional effort to navigate the global pandemic and at the same time advance the extraordinary work necessary to complete the sale of the Tile business. I'll now discuss our consolidated financial results for continuing operations for the fourth quarter and full year 2020. Please note that the non-GAAP numbers I refer to are on an adjusted basis and growth rates mentioned are on a constant currency basis.

All comparisons are versus the fourth quarter and full year of 2019. The financial highlights and results can be reviewed on slides 3, 4 and 5 and the presentation accompanying today's call, which you can find on ferro.com in the Investors section. Turning to slide 4, in the fourth quarter net sales increased 3.5% to $260 million. Adjusted gross profit increased 3.7% to $80.6 million. Adjusted gross profit margins were 31%. Adjusted SG&A expense declined 11.6% to $45 million. Adjusted EBITDA increased 22.1% to $45.2 million or 17.4% of net sales, which is an increase of 227 basis points and adjusted EPS increased 47.1% to $0.25. Now turning to slide 5, I will go through our full year 2020 performance. Net sales declined 5.3% to $959 million.

Adjusted gross profit declined 4.6% to $300.4 million. Adjusted gross profit margin was 31.3%, an increase of 20 basis points from 31.1%. Adjusted SG&A declined 66.3% to $186.9 million. Adjusted EBITDA declined 2.7% to $153.7 million or 16% of net sales, an increase of 46 basis points, and adjusted EPS declined 2.4% to $0.81. These results reflect certain non-GAAP adjustments for the fourth quarter primarily related to legal costs associated with previously divested businesses, corporate development, and optimization activities. I'll now provide more detail on the adjustments for the fourth quarter of 2020. First, in cost of sales, we have adjustments of approximately $1.5 million primarily due to costs related to optimization initiatives.

In SG&A, we have one-time adjustments totaling $3 million in a quarter primarily consisting for up costs for legal, professional and other expenses related to certain corporate development and certain optimization initiatives including the North American manufacturing optimization and approximately $800,000 related to divested businesses and assets. Turning to restructuring and impairment there was an adjustment of approximately $5.2 million related to actions to achieve our ongoing optimization initiatives and acquisition synergies. Finally, in the quarter under other income and expense we had an adjustment of about $9.5 million. This was primarily related to pension and other post-retirement benefit mark-to-market adjustments.

Lastly, for the quarter we had an adjustment of $4.6 million for special items being tax affected at the respective statutory rate where the item originated. The fourth quarter adjusted SG&A expense was $45 million or 17.3% of net sales compared with $50.9 million or 20.2% of net sales in the prior year quarter as stated on a constant currency basis. Interest expense for the quarter was $4.6 million compared to $5 million in the prior year quarter. For the year, interest expense was $20.3 million compared to $21.4 million in the prior year. This brings me to GAAP cash flow from operating activities. I will also discuss adjusted free cash flow from operations or what we define as cash flow available for items including, but not limited to strategic investments, debt, service and shareholder returns.

We calculate this adjusted free cash flow metric by combining the following lines from our statement of cash flows: GAAP cash flow from operations, capital expenditures and cash collected under securitization programs. This information can be found on Table 11 in our press release. In the fourth quarter, GAAP cash flow from operations was an inflow of $93.3 million. Then we subtract $10.1 million of capital expenditures and add cash received on other receivables of $32.7 million to arrive at a $115.9 million of adjusted free cash flow in the fourth quarter, which reflects the earnings benefits we mentioned and changes in working capital for seasonality, but also for certain optimization initiatives.

With that, I'll turn the call back over to Peter to walk through each of the business units. Peter?

Peter T. Thomas -- President and Chief Executive Officer and Chairman of the Board of Directors

Thanks, Ben. Now, I'll take you through highlights of our fourth quarter performance and our continuing operations reporting segments. We'll begin our discussion with the Functional Coatings segment. As a reminder, our Functional Coatings business formerly was called Performance Colors and Glass and it now also includes our Porcelain Enamel business. In the fourth quarter, Functional Coatings net sales on a constant currency basis increased 2% compared to the fourth quarter of 2019. On a sequential basis net sales increased a 0.3% from the third quarter of 2020. Adjusted gross margins increased 50 basis points to 30.7% in the fourth quarter from 30.2% in the prior year quarter on a constant currency basis.

Adjusted gross profit increased 3.6% from $49.4 million to $51.2 million compared to the prior year quarter, and on a sequential basis increased 19.2% from the third quarter of 2020. Our Automotive business increased approximately 12% compared to the prior year fourth quarter. The strongest increase was in Europe where we achieved double-digit growth due to market share capture and our silver conductive paints, which performed well and are environmentally friendly. In Asia, we saw low double-digit growth and in North America and Latin America we saw high single-digit growth. In our Electronic Applications business we saw mid single-digit growth.

The catalyst here continues to be the COVID environment, which has accelerated the use of virtual work environments, digitalization and telemedicine. This has driven higher demand for our products that are incorporated into items such as consumer electronics, heater [Phonetic] elements, satellites and high-frequency communications systems. On the downside, our Decoration business declined low single-digits compared to the fourth quarter of 2019. The global circumstances of less travel and leisure spending as a result of the pandemic directly impacted our Decoration business. There were some bright spots in our Decoration business. However, in Latin America for example our Decoration business increased market share capture and the beverage industry saw some resurgence in demand due to restocking of inventories.

In addition, relative to the low point experienced by the Decoration business in the second quarter of 2020 sales in the fourth quarter increased nearly 42%. Our Industrial Materials business also declined relative to the fourth quarter 2019, but this relatively weaker performance was due to an especially strong 2019 fourth quarter in our flat glass digital printing business which made certain off cycle sales that quarter. Offsetting the relatively weaker sales was strong demand in Asia for our glass enamels that provide greater power generation efficiency in solar panels. Porcelain Enamel was another bright spot. As I mentioned in prior quarters, home appliance manufacturers have grown their backlogs in the wake of the COVID outbreak causing strong demand for our porcelain enamel products.

Our PE business grew in the fourth quarter by approximately 11% from the fourth quarter of 2019. We expect continuing strong demand for Ferro PE and other products used in home appliances. From a four-year perspective, sales for our Functional Coatings business declined 5.5% to $608.2 million compared to the prior year 2019. Adjusted gross profit declined 7.2% to $181.1 million on a constant currency basis. Adjusted gross profit margins declined 50 basis points to 29.8%. Full year 2020 weakness relative to the prior year was due to the impact of COVID on economies around the world especially earlier in the year. Now turning to our Color Solutions segment, in the fourth quarter, Color Solutions net sales on a constant currency basis were up 6.4% compared to the fourth quarter of 2019.

And on a sequential basis, net sales increased 6.2% from the 2020 third quarter. Adjusted gross profit increased 5.9% to $29.9 million. Adjusted gross margins were down slightly 10 basis points to 32.1% compared to the prior year fourth quarter on a constant currency basis. The increase in sales compared to the prior year fourth quarter mainly was attributable to higher demand for pigments used in food packaging, automotive, construction and industrial coatings. As mentioned, demand for certain Ferro products has increased as a result of changes in consumer behavior resulting from the pandemic.

In our Color Solutions business for example, we continue to see higher demand for our products that go into single-use and disposable packaging applications. We also are seeing strong demand for our surface technology products utilized in NAND memory applications, which has been driven by digitalization and 5G and the increase in work in school from home. From a full year perspective sales declined 5.1% to $350.8 million compared to the prior full year 2019, again due to the impact of COVID earlier in the year. Nevertheless, adjusted gross profit increased 2.2% to $119.6 million on a constant currency basis and adjusted gross profit margins increased 240 basis points to 34.1% from 31.7%.

So now, I'll turn the call back to Ben for his comments on 2021 guidance.

Benjamin Schlater -- Group Vice President and Chief Financial Officer

Thank you, Peter. Now I'd like to spend some time reviewing our 2021 guidance. We expect to deliver sales growth in the range of 8% to 12%, adjusted EBITDA in a range of $175 million to $185 million, which would be up 14% to 20% from 2020, adjusted EPS in a range of $0.90 to a $1, an increase of 11% to 23% from 2020. Our 2021 guidance reflects foreign exchange spot rates as of December 2020 which reflect a euro to USD exchange rate of roughly a $1.20. As a common practice we have provided FX sensitivity in the guidance section of the earnings release.

In 2020, Ferro, excluding discontinued operations generated approximately 35% to 40% of its revenues in euros and approximately 35% to 40% in US dollars. We estimate that a 1% overall change in foreign currency exchange rates weighted for the countries where we do business would impact sales by approximately $5 million to $8 million and operating profit by $700,000 to $900,000. If you isolate for sensitivity on the euro a 1% change would impact operating profit by approximately $300,000 to $500,000. We expect net leverage at the end of the year to be approximately one times EBITDA.

And with that, I will now turn the call back over to Peter to provide a few closing comments before we open it up to Q&A. Peter?

Peter T. Thomas -- President and Chief Executive Officer and Chairman of the Board of Directors

Thanks again, Ben. As we move into the next phase of our value creation strategy we are building on the transformation of our business over the year -- earlier phases. The three main strategic components of the stage of the strategy are: first, growth as a specialty materials company with niche high value, high margin products, and high growth markets. This includes broadening the use of Functional Coatings and Color Solutions products in areas such as medical equipment, high frequency communications systems, and containers for drinking water and food. We also are excited about expanding our involvement in electrification of vehicles where our applications are being designed into future prototypes.

Second, intensified emphasis on innovation bringing to market new Functional Coatings and Color Solutions products and applications. We will redouble our efforts to address customer needs with creative solutions and market-leading products and services; and lastly optimization, we will continue to advance initiatives to drive efficiency, remove stranded costs, and deliver overall margin enhancement across our global operations. We are enthusiastic about the opportunities before us in this phase of our strategy that megatrends with which we have aligned our company play to our strengths and innovation, product development, and customer service.

We are partnering with customers to develop certain products and independently developing other products. Our R&D investments have targeted applications for 5G, the Internet of Things, AVs, EVs and virtual communications. We also have invested in digital printing with organic and inorganic inks on various substrates, pigments for customized functions such as infrared reflection, anti-corrosives and pastes used in electronics, surface technologies for plastic lenses and automotive applications, healthcare apps and telemedicine and eco-friendly materials. Viewed at a higher level, we intend to participate in green and smart markets as the shift to these preferences continues.

As I mentioned earlier, Ferro also supplies Functional Coatings and Color Solutions that are in greater demand because of changes in behavior resulting from COVID. We expect many of these changes to remain as we move past the COVID era and into the next normal. So this provides a brief overview of where we see opportunity to extend our market leadership and develop new products and applications. We expect our company to grow at 1% to 2% above the relevant market with gross margins in the range of 35%.

From an optimization perspective, the initiatives that we have implemented in recent years should provide a step change contribution to profitability in 2021. Even so, we see more opportunities to remove stranded costs, consolidate manufacturing facilities, reduce sourcing and raw material costs and drive efficiencies in our logistics and supply chain. Our balance sheet in 2021 also will be substantially improved, now that we have completed the sale of the Tile Coatings business. We intend to use proceeds from the sale to reduce debt and by the end of 2021 as Ben noted expect net leverage to be at approximately one times. I look forward to sharing our continued progress with you during future updates.

And now, Ben and I will be glad to take your questions.

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

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

Questions and Answers:

Operator

Thank you. [Operator Instructions] And our first question comes from Rosemarie Morbelli with G.research. Please proceed with your question.

Rosemarie J. Morbelli -- G.research LLC -- Analyst

Thank you. Good morning everyone.

Peter T. Thomas -- President and Chief Executive Officer and Chairman of the Board of Directors

Good morning.

Rosemarie J. Morbelli -- G.research LLC -- Analyst

And congratulations for closing 2020 on a strong note and for successfully closing the sale of Tiles.

Benjamin Schlater -- Group Vice President and Chief Financial Officer

Thank you.

Peter T. Thomas -- President and Chief Executive Officer and Chairman of the Board of Directors

Thank you.

Rosemarie J. Morbelli -- G.research LLC -- Analyst

So Peter, you gave us a quick laundry list, if I can call, if I can use that term also all of the areas you are planning to grow into. I can't write that fast. So I was wondering if you could talk about new Ferro's most attractive end markets, which should touch on a lot of them. But in a more organized fashion for me to understand and the main areas of growth within those particular markets and in terms of not just descriptions of the products, but also the potential for top line growth and their profitability level?

Peter T. Thomas -- President and Chief Executive Officer and Chairman of the Board of Directors

Okay. So there are a bunch of questions in there so let me try to answer it from a high level first because we have to be very careful around some of the things that we speak of regarding our technology and innovation because we are aligned with many of the technology leaders that you may be aware of out there. And we do have a lot of confidentiality agreements in place unlike the old days. What we'll speak to is the framework looking for which we would talk about in our Investor Day. You would think of this particular portfolio as a market plus 1% to 2% historically that would be on revenue.

That means that we're looking at 4% to 5% at a minimum, which we've talked about in our prepared remarks 35%. I would think that a range if we were doing an Investor Day today would be 34%, 36% or 37% range. And of course EBITDA margins of that 20% range and of course cash and conversion of 50% to 60%. So let's leave that as a framework for us going forward starting today with the genesis of the new Ferro. Again, those numbers do not include any additional opportunities from the plethora of pipelines that we have including organic growth, inorganic growth, technology growth, with its own separate pipeline, optimization pipelines, and the like.

We have many opportunities for creating additional shareholder value of course with the type of balance sheet that we spoke of meaning adjusted for the end of the year at 1.3 or less than one times by the end of the year. You can see why we're pretty excited with the optionality that I mentioned around those pipelines of creating additional shareholder value. When we talk about the areas to focus on, I think that you have to look at where the emphasis is being placed with the business for the next three to four to five years. And I won't give you like values for a lot of reasons. What I can tell you is that our current vitality index right this second, we ended the year at 21%, which is best-in-class.

We're looking at that for this year as well as a starting point. We have an organic pipeline that would show five years sales of anywhere between $400 million to $500 million. We have an innovation pipeline of whether it's new to Ferro, newly created products with advantaged customers or those technology customers I referred to earlier. That pipeline is reasonable at this point. I don't want to get too specific with that. But what's important to note is the organic pipeline is at a gross margin of about 40%, but that innovation pipeline can be between 50% and 60% at a gross margin level.

So you can see why we feel very comfortable about discussing a range of gross margins maybe up to 37% because with a perfect storm of the vitality index from the base organic pipeline, the innovation pipeline, the optimization activities, all coming together like they are in 2021 for that which we started two or three years ago. We have another evolution of the next three years of another set of those activities. So the continuance of lifting the portfolio at the gross profit level is pretty significant. When we look at focus and what we would ask the shareholders to really think about would be the following areas and this is going to sound quite a bit different as with the old Ferro. If you go back and listen to our calls and transcripts from '13, '14, '15 and '16 versus what you've heard the last three or four quarters, there's no doubt that people would understand that there's been a significant transformation with the company.

So what we would ask everyone to focus on, our shareholders is the thought -- we would talk about the following; you should focus on digital printing across many applications, many substrates, different types of equipment, different type of printing heads and the like. We're talking about many digital inks and printer combinations on various substrate with both organic and inorganic inks and we have pigments and colorants for digital applications and we may have a side tag line going forward that Ferro will digitally color the world and you have to think about what we're doing in these areas. You know that we bought Dip-Tech that has a certain technology, certain equipment, certain heads, certain inks on our largest market segments. So we jumped the chasm twice on covering and glass for many applications.

Then you have to look at smart cars, right? We have a broader offering in very familiar end markets like sensors, lidars, a big application for us, communications, satellite applications, low frequency monitoring and measuring. Those types of activities and applications are very much in our innovation portfolio. We look at the digital Internet of Things and 5G is the third segment. We certainly have superior materials for low temperature coal-fired ceramic products for antenna fittings to 5G applications everywhere. And you can see the success that we're having with the COVID environment where that's been accelerated. We also have the fourth would be, I would say the next-generation LED lights. We have glass and ceramic materials with superior heat conduction and insulation properties.

Another big area, very important and we're gaining traction with that starting actually in the fourth quarter. Next, we all have to be concerned about environmental. I think there's a responsibility for companies to really have programs around environmental applications. We continue to look at everything in our portfolio and challenge ourselves what can we do modifying or extending our different MBUs or product lines in a way that we create a more environmentally friendly Ferro. And of course, one way we can do that quickly is with more organic colors and inks. And we have developed a whole range of next generation inorganic green chemistries that you'll be hearing about as we move through the course of the year.

And again energy efficiency, I mean another big word or market segment. And again, Ferro's portfolio lends itself nicely to that. We have materials for weight reduction and IR-reflective applications. We have enamels that absorb sunlight energy and create a mechanism for greater electrification properties. And again, this is all in the electronics side of our business. And of course, how about healthcare? We have advanced glass materials for medical applications. We have coating materials for medical devices. I mean that's the new Ferro. That's the genesis phase. So those would be the top seven areas that we are really focusing on and we mentioned it in the prepared remarks there's a redoubling of technology effort in these areas.

And if you really isolate what I've just mentioned on these seven segments and you look three to five years out you would probably see another paradigm shift in this business with our success on developing both jointly with high-tech companies and those that we can cross-fertilize with ourselves to offer those to leaders and/or create even new market opportunity. So I'm not sure if that answers everything. But understand we have to be somewhat furtive with the type of information we can communicate with everyone because of the constraints we have on secrecy agreements.

Rosemarie J. Morbelli -- G.research LLC -- Analyst

I understand. And yes, it is very helpful. And I was wondering just one additional quick question. Well, actually two. Well, first of all what would need to happen for you to reach the high end of your EBITDA range in 2021? And then could you quantify the benefit from the optimization and the stranded costs that are left to eliminate in 2021?

Peter T. Thomas -- President and Chief Executive Officer and Chairman of the Board of Directors

Yeah. And so let's start with the high end of the EBITDA. I mean what we've said is that we have pretty good visibility for the first half of the year. I can tell you and we all can tell you that our order book is pretty defined for the first half. Why do I say that? If you look at -- let's look at two important components because we separate that which is backorder and that which is lead time oriented. So with at least five of our MBUs I can tell you that with five of them there's probably an average of a couple of months of back orders and if you look forward in some cases a couple of the MBUs -- we may have orders on the books already in August and September, July and August and two to three months out. So we feel pretty good about what we're seeing for the first half of the year. As it relates to the second half of the year, I mean there are a lot of comments, everyone is saying that there's uncertainty and there is.

But I will tell you, uncertainty doesn't necessarily always be negative. Uncertainty means uncertainty either way -- so I don't -- people need to be careful using that as just a negative kind of a headwind. I'm not saying its negative. I'm not saying it's positive. What I'm saying is either way. So if we have a second-half that is really good, we may be able to hit that upper range, but at the end of the day what we've done with this is we've taken a look at our order book, we've looked at the backlogs, we feel good about the first half of the year and we feel reasonably good about what we're seeing today in a way that fits into that range. So that's kind of how we see the year. Again, uncertainty isn't always negative, but it's not always positive. It's neutral for us and what was your other question?

Operator

Our next question.

Peter T. Thomas -- President and Chief Executive Officer and Chairman of the Board of Directors

Optimization? Yeah, the optimization about -- Rosemarie you there? Oh, is she dropped? Okay.

Operator

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

Michael Sison -- Wells Fargo Securities -- Analyst

Hey guys. Nice finish to the year there.

Peter T. Thomas -- President and Chief Executive Officer and Chairman of the Board of Directors

Hi Mike. Thanks Mike.

Michael Sison -- Wells Fargo Securities -- Analyst

Hey, in terms your sales growth outlook, Ben, 8% to 12%. Can you maybe talk a little bit about seasonalities? 2Q obviously you've got an easy comp, but with the new portfolio is it similar to in the past where 2Q would be the strongest and then 3Q then the 1Q and 4Q are kind of on the outside?

Benjamin Schlater -- Group Vice President and Chief Financial Officer

Yeah. That's right. There's not a lot of change, Mike to the seasonality of the business. You're right to point out obviously 2Q is the easiest comp, but the balance of the quarters would be similar to how they would look historically.

Michael Sison -- Wells Fargo Securities -- Analyst

Right. And then in terms of your guidance, I recall you should get a good portion of cost savings in '21 to hit. And it just seems to me that you're not giving credit for sales growth or maybe there's some conservatism as you noted, Peter it's tough to really understand what's going to happen in the second half of the year. So any other sort of factors that are in the guidance for '21 that may be a negative that we're not seeing?

Benjamin Schlater -- Group Vice President and Chief Financial Officer

Yeah. Yeah. So I think that there's -- let's start with some of the positives, right? I think we expect momentum from both growth as well as the optimization as you would expect. And then we would expect some headwinds principally in the second half of the year from raw materials. And then we expect some headwinds from SG&A for two reasons, right? Year-over-year SG&A spend -- adjusted spend for us was down about $12 million. $2 million or $3 million of that was comp. And we would expect that piece to come back. So that would be part of it.

And then the balance I would say of the SG&A spend is look, we did a good job in 2020 of really getting rid of a lot of discretionary spend. A lot of that will stay out of the business. But some of that will come back and as sales growth comes back as we look to now reinvest into the higher end from a technology perspective, that sort of thing. Some of that's going to come back. But I would say those are the two things that that would create headwinds. Obviously, it doesn't outweigh the positive from both the growth and the optimization. But those are probably the pieces you're missing, Mike.

Operator

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

David Begleiter -- Deutsche Bank -- Analyst

Thank you. Good morning. Ben, can go through some of the key cash flow items we should be looking for in 2021?

Benjamin Schlater -- Group Vice President and Chief Financial Officer

Yeah. So, from a cash flow perspective, Dave, I think what we've said is, we expect to be from a net leverage perspective about one times by the end of 2021. From a capex perspective base capex would probably be around $20 million. We're not going to get into all the details relative to working capital, taxes, interest, that sort of thing. Those would be typically what you would normally expect from an interest rate perspective and from a working capital perspective. And then total capex we would expect to be somewhere around $44 million. So we've got $20 million to $25 million of project type spend for the different types of projects that we've talked about in the past, the various optimization projects, etc. And then when you boil all that up you're going to get to about 1 times by the end of the year.

David Begleiter -- Deutsche Bank -- Analyst

Very good. And Pete, just on capital allocation where does share buybacks rank in your preference for allocating some capital back to shareholders?

Benjamin Schlater -- Group Vice President and Chief Financial Officer

So, Dave, I'll start and then Peter can chime in. Look, I don't know that it's different than it's been in the past. Obviously, now the balance sheet is much stronger. And so we will obviously be looking at it at a range of opportunities. But I think we would look at that like we would look at anything else with respect to capital deployment and on a return basis. So we'll look opportunistically at share buybacks, as we will repayment of debt, as we will M&A.

Operator

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

John McNulty -- BMO Capital Markets -- Analyst

Yeah. Thanks for taking my question. Maybe a follow-up to that -- Peter you had a huge period where you did a lot of M&A and I think that was part of what helped to really kind of transform the portfolio. It seems like you're a little bit more or maybe lot more heavily on the innovation side. I mean, how should we think about your appetite for M&A as we look forward because you've certainly proven you can do it, but it also seems like maybe that's not necessarily the lead thing that you're thinking in terms of how you grow the portfolio. So I guess how should we think about the opportunities for that?

Peter T. Thomas -- President and Chief Executive Officer and Chairman of the Board of Directors

Yeah, good question. Again, the way we framework this, John, is we have three pillars of our genesis phase and again one of it is growth, next is technology, and the third is optimization. At the end of the day nothing has really changed with the M&A activity. We have so many different M&A targets, that hasn't changed and even though we were going through the sale process and closing process of Tile, that doesn't mean that we were sitting around doing nothing. Our M&A team was split between that which worked on the Tile business and that which continue to socialize acquisition targets that as soon as we closed we can jump back into at least in an incremental way starting to do what -- where we ended up which is look for innovation platforms, the bolt-on.

Remember the 20 acquisitions that we did in 4.5 years, we've always stated that they were not acquisitions of companies. We acquired over 30 different technology platforms to round out our technical base. So, right now we were looking at a handful of opportunities that we now can certainly engage. Like I said, John, we have to start the machine up. It's been going, it's been festering, it's been on a low boil until we start up and again, there are a plenty of opportunities, but we would probably start off in a way that where we ended. We look for smaller type of capability fillers. However, with the new balance sheet we've always been clear that we feel a good range for the business and everyone concerned without a leverage of about 2.5.

So, sitting there at less than one, that's something that looks good, but it may not be the best for the business. So what we would not do is go out and just for the sake of doing a big deal and blowing up the balance sheet because we're in that position, that would not be something that's prudent for anybody. We have a profile of business that's really created, John an environment where some of the bigger deals that we may have looked at in the past or maybe coming on the market or in the market or whatever -- however, you want to look at it.

If those businesses don't profile like we do in terms of growth, in terms of gross margin, in terms of cash conversion and in terms of EBITDA margins, we kind of shake them out of the funnel and have thrown them away because we don't need those types of deals any longer. There are a bunch of things that we can do around M&A. So our appetite hasn't changed at all maybe the types of targets that we're going after will be a little more scrutinized in terms of just how much we want to extend. We don't want to do anything to dilute the financial metrics of this company at this point.

John McNulty -- BMO Capital Markets -- Analyst

Got it. Makes sense. And then I guess a second question would just be on the raw material front. Just given all the changes in the portfolio can you remind us of kind of what the major raw material baskets are? And then just given all the I mean admittedly kind of crazy dynamics that we're seeing across a lot -- a host of kind of raw material slates, I guess, can you speak to whether you're seeing any supply chain disruptions or any kind of outsized inflation that we should be thinking about that rolls in, in the first half of the year?

Peter T. Thomas -- President and Chief Executive Officer and Chairman of the Board of Directors

Yeah, I think Ben hit it on his last answer on the second half, but there are a couple of very important points. I mean, the types of raw materials that put us in the disadvantaged state with the Tile Coatings Systems business to an extent have gone with them, but with us I think we've been very clear on things like cobalt, titanium, nickel, chrome, those types of things. There are announcements of raw materials; lithium is another one for the RemainCo business. So what Ben mentioned, there are some increases that are coming through.

However, what we're doing in this environment is that we're putting pricing strategies together like we always do in light of making sure that we do everything we can to cover those as quickly as possible and in this case our strategies around RemainCo be -- maybe not just covering. We try to put plans together that preserve margins and you have to look at the industry structure maybe pricing is a little more sticky but certainly we're seeing like everybody there's raw material increases and you mentioned supply chain disruptions.

I'll tell you one thing that's I think is talked about but you're not hearing maybe a lot of is the -- everybody's ability to get containers, particularly with movements back and forth with China. So that seems to be a little disruptive, securing containers, the container prices are inflated a bit and the like, but a lot of those can be passed on through cost pass-throughs and the like, but be clear that we do see a raw material increase. It does present what one would argue is a headwind, but we're doing everything we can to try to minimize the negative impact of raw materials. Ben, did you want to add more to that?

Benjamin Schlater -- Group Vice President and Chief Financial Officer

No. I think that's right. I mean, we're not really seeing anything from a supply disruption perspective. I think the team has done a nice job there to sort of keep that tack particularly in 2020. I mean, the big raw materials in terms of RemainCo are going to be some of the stuff that we talked about in the past. Cobalt, chrome, zinc, bismuth is going to be in there, boron, that sort of thing. So we're not obviously buying as much cobalt as we did when we have the Tile business, but it still remains one of the top two or three for us.

Operator

[Operator Instructions] And our next question comes from the line of Mike Harrison with Seaport Global Securities. Please proceed with your question.

Michael J. Harrison -- Seaport Global Securities LLC -- Analyst

Hi. Good morning.

Peter T. Thomas -- President and Chief Executive Officer and Chairman of the Board of Directors

Hey Mike.

Michael J. Harrison -- Seaport Global Securities LLC -- Analyst

I wanted to ask about the digital printing business. You kind of headlined the list of seven or so different areas that you're very excited about. I know you guys bought the Dip-Tech business back in 2017. But it seems like that is a business that really could be poised for significant growth given not only recovery in commercial construction, but kind of the turnover that may be going on in commercial spaces, if you will and maybe the refining that needs to happen or redesigning of some of those spaces. So can you talk about kind of the opportunity that you see for digital printing overall and maybe specific to commercial construction as you look at that market recovering in 2021?

Peter T. Thomas -- President and Chief Executive Officer and Chairman of the Board of Directors

Yeah. So I think you have to look at digital printing at a higher level. You have to look at digital printing not like you may remember in the old days with Tile where it's just colorings, organic or mostly inorganic or organic water-based on ceramics. When we talk about digital printing, it goes beyond that. It could be digital printing on -- for electronic applications that move away from whatever you used to think about digital printing with Ferro. You have to think about another digital printing kind of component could be fluorescent laser marking printing or etching with lasers. And that's all digitally applied to us. When we think of digital we think of things like that not to mention there are -- also mentioned that you have all kinds of other substrates that could be printed on, whether it's fiber board, plastics, details.

There are a whole bunch of other things that we're working on very quietly over the last couple of years. It's not like there's a single focus with that one technology on industrial glass. I mean that, that isn't what will be the future. And the future is, how do you apply everything as much as you can digitally? I mean you could look at particularly in electronics and I can tell you some very fascinating digital printing with precious metals and the like on different substrates that can be burned off. I mean, the digital printing concept for us isn't historically what you would think.

And as I mentioned on the onset because we're involved in so many different type of maybe esoteric type applications, we really can't get into. I'm not going to be able to quantify. I'm not going to -- we're not going to sit here and say that particular pipeline is X and it has certain things I can give you that like I did. It's bigger, it's emerging, it's a certain percentage of our organic already, we're already seeing traction, and the gross margin for those things are 50% to 60%. So we can framework that concept right this second because of a lot of reasons. You just cannot be real definitive other than the fact that we take all that data and we've done what we feel is good for the shareholders.

4% to 5% growth, which would be historical market plus one to two gross margins between 34% to 37%, EBITDA margins of 20% close to it and of course the cash conversion. Remember this is all asset-light heavy touch types of applications, small volumes, high margins. It's a very proprietary and in the big scheme of things on the value those products create for the end user relative to what we're doing. It isn't like the big deal. It's a question of moving the technology, jumping the chasm twice and that's what we're doing. But don't think of digital like you might think of in the old days. It's just a different type of animal.

Michael J. Harrison -- Seaport Global Securities LLC -- Analyst

Understood. And then on the Color Solutions business, you saw really nice year-over-year growth. But that margin was pretty similar to where it was last year. Could you just talk about some of the margin drivers that you saw in this quarter and maybe how to think about Color Solutions margin performance into 2021?

Benjamin Schlater -- Group Vice President and Chief Financial Officer

Sure. Yes. Hey, Mike. It's Ben. Look, I think, from a Color Solutions perspective they've benefited from the Americas optimization initiatives, probably the most significant lease so far. Functional Coatings benefited in the last half of 2020 and will benefit again more in 2021. A lot of what you're seeing from a margin perspective is really the optimization. And then obviously as the volume comes back, we get better fixed cost absorption. So I would say those are the two biggest drivers.

Operator

And there are no further questions at this time. I'll turn the call back to you for closing remarks.

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 our results with you again next quarter.

Operator

[Operator Closing Remarks]

Duration: 59 minutes

Call participants:

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

Peter T. Thomas -- President and Chief Executive Officer and Chairman of the Board of Directors

Benjamin Schlater -- Group Vice President and Chief Financial Officer

Rosemarie J. Morbelli -- G.research LLC -- Analyst

Michael Sison -- Wells Fargo Securities -- Analyst

David Begleiter -- Deutsche Bank -- Analyst

John McNulty -- BMO Capital Markets -- Analyst

Michael J. Harrison -- Seaport Global Securities LLC -- Analyst

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