Avient Corp (AVNT) 2012 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the PolyOne Corporation first-quarter 2012 conference call. My name is Chantillay and I will be your operator for today. At this time all participants are in listen-only mode. We will have a question-and-answer session at the end of the conference. As a reminder, this conference is being recorded for replay purposes.

At this time, I would like to turn the call over to Cynthia Tomasch, Vice President of Planning and Investor Relations. Please proceed.

Thank you, Chantillay. Good morning and welcome to everyone joining us on the call today.

Before beginning, we would like to remind you that statements made during this conference call which are not historical facts may be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements will give current expectations or forecasts of future events and are not guarantees of future performance. They're based on Management's expectations and involve a number of business risks and uncertainties, any of which could cause actual results to differ materially from those expressed in or implied by the forward-looking statements. Some of these risks and uncertainties can be found in the Company's filings with the Securities and Exchange Commission, as well as in today's press release.

During the discussion today, the Company will use both GAAP and non-GAAP financial measures. Please refer to the earnings release posted on the PolyOne website where the Company describes the non-GAAP measures and provides a reconciliation of them to the most comparable GAAP financial measures.

Operating results referenced during today's call will be comparing the first quarter of 2012 to the first quarter of 2011, unless otherwise stated.

Joining me on the call is our Chairman, President, and Chief Executive Officer, Steve Newlin; Executive Vice President and Chief Operating Officer, Bob Patterson; and Senior Vice President and Chief Financial Officer, Rich Diemer. Now I will turn the call over to Steve Newlin.

Okay. Thanks, Cynthia, and thanks again to everyone who's joining us on the call this morning. We always welcome the opportunity to speak to our investors and analysts about the performance of PolyOne.

We're going to change things up just a little bit today. I know you're all anxious to hear about our first-quarter results. But I'm going to begin my comments by sharing some important organizational changes that took place during the quarter.

As you probably know, in mid-March we announced Bob Patterson's promotion from Chief Financial Officer to his current position of Executive Vice President and Chief Operating Officer. In this role, Bob has primary responsibility for developing and executing PolyOne's annual operating plans as well as our strategic plans to drive growth in revenue, gross margin, and operating income. He has accountability for the performance of the operating segments and the four division presidents now report to Bob. I am very happy to have Bob in his new role as COO and I believe that in this new capacity he'll continue to have an extremely positive impact on PolyOne.

Now in conjunction with Bob's promotion, we also announced the appointment of Rich Diemer to Senior Vice President and Chief Financial Officer. Rich joins PolyOne with more than 30 years of experience in global business leadership, and he's held CFO roles at several global specialty companies, including Styron, Albemarle, and Honeywell's specialty chemicals business segment. In fact, I understand that many of you already know Rich from past dealings with him, so you can understand why we're thrilled to have Rich as a part of our executive team, as his skills and experience with large global specialty organizations make him uniquely qualified to help us accelerate our transformation.

Another organizational change we made to drive growth is Mark Crist, Vice President of Key Accounts, relocated from North America to Shanghai and now has the additional opportunity to have oversight for Asia. With Mark being based in China, we believe he will be more strongly positioned to lead the execution of our strategy in Asia.

Now we're often asked how we can continue to expand our margins to meet and exceed our long-term goals. And one of the ways is further penetration of our strategy across all regions. By combining Mark's regional oversight in Asia with his responsibility for key accounts globally, we believe we can quickly translate our success in the US and Europe, while also accelerating our growth with global OEMs in the fastest growing region in the world.

With respect to our aspirations, it's been 4.5 years since we announced our targets for 2012 and we'll either exceed, achieve, or be extremely close to reaching each and every one of those goals this year. Given our track record of success and our confidence, we're prepared to raise the bar higher and we've been hard at work setting our new financial objectives. So we hope you'll all be able to join us on May 16th as we unveil our new targets at our Investor Day in New York. During this event you'll hear from our division presidents and functional leaders as we outline our strategy for continuing to drive growth and deliver market-beating shareholder returns.

At this time I'm going to turn the call over to Rich, who will review our first-quarter results. Rich?

Thank you, Steve, and good morning. I'd like to begin with a few words about how pleased I am to have joined PolyOne. As Steve mentioned, I have spent a significant portion of my career with successful specialty chemicals and materials companies. Having watched PolyOne's transformation over the past few years as an outsider, I am delighted to have the opportunity to join this exceptional management team and to be a part of leading this company to even greater heights.

And greater heights were indeed achieved in our first quarter as we delivered a 10th consecutive quarter of double-digit-adjusted EPS expansion over the prior year. For the first quarter of 2012 we reported an all-time quarterly sales record of $781 million and adjusted income of $26.4 million versus sales of $718.5 million and adjusted income of $25.2 million in the first quarter of 2011. This resulted in a 12% expansion in adjusted EPS to a first-quarter record of $0.29 this year versus $0.26 last year.

These results were driven by sales and gross margin expansion in every platform, with the Global Color, Additives and Inks segment leading the way. Bob will discuss both the performance of the business platforms and the ColorMatrix integration in detail shortly.

Geographically and as a result of improved business performance in Asia and North America, we were able to overcome the demand challenges in Europe and unfavorable foreign exchange to deliver 9% sales growth and record first-quarter EPS. From an end market perspective, these results were driven by growth in healthcare, packaging, and wire and cable. We attribute the success to our recent and continued investments in commercial resources over the last two years, solid growth from new product applications, and the successful integration of ColorMatrix, which is progressing even better than planned.

Our sales and technology teams are working in conjunction with marketing to drive growth in targeted end markets and, even in my short time with the Company, I can clearly tell this approach is working. We continued making commercial investments in the first quarter as we hosted our first-ever Global Sales Conference and prepared for the National Plastics Exposition that occurs once every three years and which was held in Orlando in early April. PolyOne's decision to continue investing in such important initiatives underpins our past and future financial success.

The pre-special tax rate in the first quarter was 34% versus 33% in the first quarter of 2011, with the increase principally due to income mix and some small but favorable US state tax refunds in 2011 that did not recur in 2012. Special items and related tax adjustments in the quarter netted to a charge of $6.1 million, or $0.07 per share, of expense. The largest special item relates to expense in the fair market value step-up of acquired ColorMatrix inventory.

As a result of our continued focus and success in working capital management, we ended the quarter with $186 million of cash and liquidity of $342 million. Our net debt-to-EBITDA ratio based on trailing 12-months pro forma for ColorMatrix was 1.9x at the end of the first quarter.

We are comfortable that we have ample flexibility to fund organic growth initiatives, pursue strategic M&A, and return cash to shareholders through dividends and share repurchases. To that end we announced a 25% increase to our quarterly dividend to a total of $0.05 a share. And also during the quarter, we repurchased 100,000 PolyOne shares on the open market at an average cost of $13.67 per share. We intend to opportunistically repurchase PolyOne shares to, at a minimum, offset dilution due to share issuance under benefit programs.

Before I hand off to Bob, I would just like to reiterate how great it is to be a part of this exceptional leadership team at PolyOne and the transformational journey that we are on. I look forward to meeting and talking with all of you at our Investor Day in New York on May 16th.

I now will turn the call over to our Executive Vice President and Chief Operating Officer, Bob Patterson.

Thanks, Rich, and good morning to everyone. Let me begin by saying how much I am looking forward to my new opportunities as Chief Operating Officer, which is allowing me to spend more time with our customers and work closely with our division presidents to accelerate growth and margin expansion. Rich discussed the total Company's first-quarter results, so I will now review the performance of each of our platforms in more detail.

Our Distribution platform increased revenues by 6% in the first quarter versus prior year, setting a first-quarter record of $263 million. Distribution also delivered an all-time record quarter in both operating income and return on sales, led by gains in the healthcare and industrial end markets. As a result of these gains, coupled with margin expansion, operating income increased 14% over prior year to $16.7 million for the quarter. At a 6.4% return on sales, this marks the first time in history this segment has surpassed 6% and it is substantially exceeding our 2012 target of 4% to 5%,

Price inflation and inventory pre-buys helped us modestly. We estimate this to be approximately $2 million of operating income benefit in the first quarter of 2012 versus $1 million of benefit in the first quarter of 2011.

Turning to Performance Products and Solutions, revenues in this platform increased 7% in the quarter versus last year due to gains in appliance, packaging, and wire and cable end markets, as well as from higher pricing due to raw material inflation. PP&S increased operating income by 24% over the prior year to $17.8 million, resulting in a return on sales of 8%, a 110 basis point improvement over the first quarter of last year.

Specialty Platform revenues increased by 11% over prior year to $325 million, driven by the ColorMatrix acquisition and higher selling prices as a result of raw material inflation. Operating income in the quarter increased to a record level of $29.1 million, a 15% increase over last year, resulting in return on sales of 9%, a 40 basis point improvement over last year and a record first-quarter result.

Breaking the Specialty Platform down into its segments, Global Specialty Engineered Materials sales declined over prior year by 7% to $142 million in the quarter, predominantly due to lower demand in Europe. We also saw continued softness in demand for solar and nuclear applications. This resulted in operating income of $11.8 million, a 16% decrease compared to prior year and return on sales of 8%. As you know, these unfavorable market forces are not new and have lingered from the second half of 2011. We continue to focus on winning new business and developing new applications to counter the softness in overall demand.

Global Color, Additives and Inks grew revenue by 30% to $183 million due to the ColorMatrix acquisition, offset partially by a decline in European demand. Operating income in Global Color of $17.3 million was a new record for the segment and was up 54% over prior-year first quarter. This resulted in a record return on sales of 9.4%, an improvement of 150 basis points over last year.

As Rich said, the ColorMatrix integration is going better than planned. Our priority is to focus on supporting growth initiatives through this acquisition. With that in mind, during the first quarter the ColorMatrix sales team participated in our Global Sales Conference, where our sellers from around the world build relationships, train, and develop plans to execute cross-selling initiatives across our customer bases.

In addition, we hosted technology reviews focused on identifying opportunities to accelerate innovation synergies spanning markets, geographies, and product lines. We are exploring opportunities to translate existing technology between organizations to fill gaps in each other's technology portfolio.

Broadly speaking, we are actively qualifying opportunities in flame retardant, gas barrier and surface energy additives. We are discovering the value of the networking that is occurring in these early stages of integration. From our internal relationship building, we are already uncovering opportunities and leveraging our collective footprint in emerging markets. While we have nothing specific to announce today, this may lead to future investment in high growth markets like India, South Africa, and Brazil.

Successfully integrating ColorMatrix is a critical imperative for us this year, no doubt. And we are off to a great start. But equally important, we must accelerate profitable growth in Asia. With operating margins about half that of the Specialty Platform, there is much room for improvement. With our new leadership in place there and proven four pillar strategy, we are confident we will be accelerating our growth in this region soon.

And we must overcome weakness in Europe. And we are doing this. With a global addressable market of way over $30 billion, there's no shortage of opportunities we can capture through cross selling and improvements in sales force effectiveness.

This concludes my prepared remarks on the first quarter, and I'll now turn the call back over to Steve.

Thanks, Bob.

I'm very pleased with the results of the first quarter that Rich and Bob just reviewed with you. I think to overcome the downdraft in Europe, where much of our Specialty business resides, yet still grow earnings double digits, is an accomplishment.

As evidence that our strategy is working, I'd like to highlight a specific milestone that we delivered in the first quarter. We're very pleased to report that 10% of our total first-quarter revenues were in the healthcare industry, further evidence that our focused efforts to grow in healthcare are working. Six years ago we didn't even measure our sales to this market. And by year end we anticipate sales of over $300 million to the healthcare industry.

Before closing, I'd like to share with you a few of my observations about two important industry events in which PolyOne participated in the month of April. The National Plastics Exposition, or NPE, in Orlando, and Chinaplas in Shanghai. As you know, we've invested significantly in innovation over the past several years and those efforts are beginning to yield some exciting new commercial launches.

Solutions we showcased at these events included our new reFlex 100 bioplasticizer, which provides a bio-based plasticizer alternative to traditional oil-based products for customers who are looking for more sustainable solutions. This bioplasticizer was recently awarded recognition by the USDA BioPreferred program which granted reFlex 100 a 94% biobased label. What this means is it enables our customers to grow by expanding their offerings of products with bio content. This particular product is the result of a joint development agreement that we have with Archer Daniels Midland, and I think it's a great example of innovating to meet the changing needs of our customers.

Some of the other innovations that we showcased included a TPE, or Thermoplastic Elastomer solution that we developed specifically in collaboration with KOR Water to improve the performance of their high-end Delta Hydration Vessel. Also, a solution for Jaguar Land Rover that enhanced their production efficiencies while improving the aesthetic appeal and harmonization of the interior of their new 2012 Range Rover Evoque. And a solution for a pulmonary device manufacturer that allowed them to increase their bottom line by doubling their productivity and reducing their scrap rate by 50%.

We found it encouraging that attendance was up 22% at NPE this year compared to the last show held in 2009, and up 17% at Chinaplas over last year. I interpret this as further evidence that the economy appears to have picked up in most regions, with the exception of Europe. We overcame European weakness and lower demand in some higher value product lines in the first quarter and delivered our 10th consecutive quarter of double-digit year-over-year earnings growth.

We remain committed to the execution of our four-pillar strategy and delivering earnings expansion. With the proven track record of our employees, innovative new product launches, and the further strengthened leadership team here at PolyOne, I am more confident than ever at our ability to execute and deliver on those expectations.

So that concludes our prepared remarks today and now I'd like to turn the call back to Chantillay who will open up the lines for your questions.

(Operator Instructions) Frank Mitsch; Wells Fargo Securities.

Hey, I wanted you -- if you could take some time, to talk about ColorMatrix, talk about how did ColorMatrix do year over year in the first quarter, and if you could talk about the specific contributions. I guess GCAI was up, what, 30% sales and 53% on profits. What was the ColorMatrix contribution there? That would be very helpful.

Yes, Frank. This is Bob. First of all, ColorMatrix sales were up 7% year over year to just under $52 million. And operating income expanded about 4% to $6.5 million. So that gives you a better perspective on relative contribution to the Color segment, hopefully.

Okay, great. Thank you. And, Steve, you talked obviously that GSEM was a bit disappointing, primarily due to the weakness in Europe. Could you expand upon what you're seeing there and talk about the monthly trends, if you can -- January, February, March and April, if you have any color on that?

Yes. I can -- probably not get into April, but I mean the trends in Europe, this really started late -- or mid-third-quarter of last year, Frank, as you know. And it's continued. We are not seeing a rebound in Europe. We're not holding our breath and we're not going to wait for things to happen. What it's done for us is it's caused us -- given us an opportunity and a catalyst to sort of redirect some of our activities there.

But Europe is in difficult shape right now. There's a lot of, I think, consumer pause, concern about the overall economic backdrop. And that's, I think, causing delays in major purchases, whether that's appliances or automotive. Certainly automobile production is down fairly substantially in Europe right now. I think even consumers are being a little more prudent in their choice of higher-end products. You see that somewhat in our packaging and consumer products applications.

So it's a very challenging environment and we are -- again, we're redirecting our efforts to get more focused. And we haven't done a great job up to this point in our healthcare expansion in Europe. And that's one of the areas that we're working on with, I think, great diligence. So I think it's a great opportunity for us, but we're going to suffer along with everybody else in this European backdrop. And we're not anticipating any kind of major turn in the near term in Europe.

Okay. That's very helpful. Just previewing your Investor Day in a couple weeks and you're going to talk about the new targets. My sense is that you're probably going to raise your healthcare margin targets since -- I'm sorry, your distribution margin targets I guess due in part to healthcare, given how strong that is. So I'll look forward to seeing you guys in a couple weeks there.

Yes, we'll look forward to it as well, Frank.

Saul Ludwig; Northcoast Research.

Steve, anybody that's done anything with your company understands the importance of innovation. And I think in the past you've talked about a vitality index of 40% or thereabouts. Just if you could, is it possible to highlight, let's just say in the first quarter of this year and maybe in other quarters as you go through the year, how many dollars of sales of products are you getting this year that you didn't have last year from products that were introduced subsequent to the end of the first quarter of last year, or to give a little more granularity to the innovation emphasis and results?

Well, thank you for the question, Saul. I'm not sure I can give you a year-over-year number. I know we have it and we track it, but I didn't prepare for that because it's not something that we commonly talk about. We tend to talk more about this 5-year trend. And as you know, every year a percentage of those products fall off and new ones are introduced.

And what we can tell you is that our vitality index continues to expand. And in fact, in the first quarter we exceeded more than 40%. It was actually 41.8%. Now, ColorMatrix helped with that. And if you extract ColorMatrix from that number it was 38.7%. These are very robust, very attractive numbers. I think when we established that goal of getting that 35%, sort of 40% max target out there we were ambitious. And so it's working and it's working very well. But I can't tell you specifically what it is year over year.

Here's a way to look at it, though. As that number continues to grow and our sales base continues to grow, obviously we're having to bring in more sales dollars that are from this category of vitality index, or 5 years or newer product. So I think it's a statement about the launches. We have internal metrics around every single new product that's been rolled out and the launch versus our expectations. We don't share those publicly but rest assured we track very carefully how we're doing on every product. And many times we exceed our expectations and our ambitions, and occasionally we fall a little bit short of what we thought we'd sell. But we track those for a 5-year period as well.

Okay. And in your full-year forecast where you've said that you expect to have double-digit growth in earnings per share, how are you handicapping the European component in that outlook?

I mean, I think it's basically, Saul, as I suggested. We are not counting on, we're not banking on, progress or recovery in Europe this year. We hope for that, of course. We hope for more houses being built. We hope for more autos being built. But we're not banking on that. I think we're trying to have our organization prepared for the most challenging conditions and if we do better, so much the better for us. But we have to keep our organization mobilized around the current state that we know, while somewhat anticipating the future.

For us, we may not hit double-digit EPS growth every single quarter of this year, but we certainly expect to deliver it for the year. Second-quarter comps, as you know, for us are very difficult. And I would not expect, during the second quarter at least, any uptick in European demand. When we have the greater opportunity for lower comps in Q3 and Q4, well, we'll see what happens by then. Q3 is notoriously soft in Europe due to vacations and just sort of the culture and the way business is conducted there. So year over year, comps will be a lot easier. But we're not calling any kind of turn in Europe at this point.

Great. And then just finally, corporate expense, Rich, was -- backing out the specials was $10 million. Was only $7.5 million last year. Why the increase and how should we think about the corporate expense in the remaining quarters?

Thanks, Saul. So almost the entire increase year over year is in the kind of the incentives, variable bonuses, that type thing, based on our view of the year. So we accrue based on that. So year over year I guess we're a little bit more optimistic of the full year now than we were about the full year in the first quarter last year, is the way I would put it.

And just for in terms of modeling it, what I would say is you should model it at probably $1 million or $2 million more in Q2, 3, and 4 than what we had in Q1, just based on how we're kind of forecasting the year.

Great. Thank you very much, guys.

Mike Sison; KeyBanc.

Nice start to the year. Bob, you noted that ColorMatrix was coming in a little bit better in terms of the integration. Can you give us a little bit more maybe color to what's come in better? And would you expect the earnings growth to sort of accelerate year over year for that business as the year unfolds?

Well, initially I think the results for the first quarter for ColorMatrix largely are a result of actions that that team had put in place even before we came on the scene. So largely I'd say that my positive comments about the integration relate to longer-term opportunities where we can drive growth from a sales synergy standpoint.

And specifically we're looking at how to utilize their barrier technology for our product line and leverage our global scale to help them drive their products further into different regions. I mentioned on the call some specific potential investments in the future, such as India, South Africa, and Brazil. Those are three ideas that we have generated recently.

Okay, great. And then for GSEM, I was encouraged to see margins improve sequentially from the fourth and third quarter to the 8% level. Steve, what do you think needs to happen, or what are the other things you're doing to maybe continue to improve that business over the next couple quarters, given that Europe is going to still be weak?

Yes. Mike, as an organization we can't throw in the towel on Europe and we're not going to. We have to get after better quality new business, a little more recession resilient -- not recession-proof, but a little less cyclical business. We still have a fairly high preponderance of SEM business in Europe that is very much tied to automotive. And while we love auto and we like it globally, it puts us in a difficult strait in Europe.

And we haven't, frankly, done the kind of job that I expect in terms of specializing our business in Europe yet. And we're working on that. We have a new leader of our SEM business there, [Ogal Kronovitz] who's been around a long time, does a great job. And he's spending a lot of time with customers and prospects. What I like the best about his new leadership activities, he is getting the sales force into different markets than we've been in in the past. And certainly even within the markets in different applications that are more unique and do, I think, put us in a position of having a competitive advantage and being able to take advantage of that opportunity and not have to bang head to head so much with the competition in a very challenging environment over there.

So I think we're -- I personally believe we're doing all the right things in Europe. I think the challenge that we have in Global SEM -- and I'll just sort of say this for the benefit of everyone here -- this is consistent with what we said for a long time. In Color, Additives and Inks we have a very short sales cycle. We can make things happen and we can make them happen fairly quickly, because product life cycles and changes in the cosmetic and aesthetic appeal of products happen very rapidly. And they can change on the whim of a seasonal advertising campaign.

SEM -- this is the good news, the bad news -- there are a lot more barriers around SEM. These are usually spec'd in accounts. The sales cycle we've said is generally 24 or 30, to 36 months. It can be even longer. We have been making calls to develop specs. We've been winning additional specifications. But it's just a slower to move animal. And the good news is once you're in and embedded there's quite a bit of barrier against someone else taking that business away from you.

But it's going to take us a while to -- and we've been working on this. But we're going to continue to have to invest some time to redirect our efforts into continually higher value-added applications and to win specifications. And I like our odds. I like what we've accomplished. But it's just not something that can move nearly as quickly.

So happy with our direction there. Not particularly pleased with the past few years of the performance that we've had in terms of getting the wins that are absolutely piling up in sales dollars right now. But it's coming. I think it's just a latent effect of the activity.

Right. And just one quick one -- looks like ColorMatrix is turning out to be a nice acquisition for you. How's the hopper for other potential ColorMatrixes out there? Are there any exciting technologies that you're targeting particularly after MTE? You probably saw a lot of businesses to look at.

Yes. Hey, Mike, this is Bob. We had a very robust pipeline of opportunities we were looking at all through the course of last year. Obviously we focused our attention on ColorMatrix towards the second half of the year. But still would make the same remarks about the types of opportunities we see available to us today. As you can appreciate, we can't speak to anything specifically. But there is some exciting technology opportunities out there. And as you know, that's where our M&A focus is, is trying to bring us new technology or advance our presence in attractive markets like healthcare.

Yes. Let me just add a little color to that. I think Bob has summed it up perfectly, with one add. There are not a lot of ColorMatrix around out there. I mean, this was a unique property. If we find them we will go after them, but it's not going to be commonplace to find a business that has that kind of scale with that degree of uniqueness and differentiation in intellectual property.

If we're going to find that degree of innovation, it's most likely going to be a much smaller opportunity for us that we could, in fact, leverage. But we're out there and we're kicking around the bushes and we've got a lot of stuff in the hopper. And it would include some businesses that are more in what I would call a fix-it category. I think we've demonstrated the ability to take businesses that hadn't performed well and turn them into very attractive functioning businesses. So we won't shy away from those opportunities. But our first priority clearly is technology, innovation, opportunities to acquire businesses that we can accelerate the growth through the whole PolyOne infrastructure.

Right. Thank you.

Mike Ritzenthaler; Piper Jaffray.

On the healthcare milestone, 10% of revenues in the first quarter, obviously the margin is probably a little higher from that end market. But I guess the spirit of my question is, would you say it's easier on a relative basis to achieve value and use pricing in the healthcare end markets versus other end markets? And I guess maybe just help us understand a little bit more why you're so excited about that particular metric.

Well, I think there are a lot of reasons. I mean, it is a more profitable, more profitable than the norm segment for us. The situation with healthcare is such that they are a more risk adverse set of users and buyers. And so they want quality. They want a premier company, a company that's going to be around, a company with a global brand. They want innovation.

But more than anything else they want to mitigate their risk. They have an aversion to risk. You're in an environment that lots of difficult, challenging things can happen. And whether it's reducing the opportunity for nosocomial infections in hospitals or making sure that that lifeline to a human being through a very precise chemical pump is going to function properly, those are the kinds of critical applications that we are striving for. I mean, that's our wheelhouse and we're getting really good at this.

And I think the marketplace and our customer base there understands this. And so our reputation has improved substantially in the space. And I think that's creating -- that and our internal energy around this and our focus on it is creating a lot of energy and a lot of excitement and the consequent growth that comes along with it.

So it's really more about the kind of marketplace that we're dealing with here. You know, every market has some degree of price sensitivity, but they're very intelligent about the tradeoffs. They don't want to take a lot of risk. This is not a toy or something that is a durable good that's -- a nondurable that's not going to be utilized repeatedly or stressed that we're talking. We're talking here about a very sophisticated, in many cases, applications when a customer base does not want to take risk and increase their litigation exposure.

Yes, that all makes sense. And thanks for the color.

Gross margins showed nice progression in the quarter, operating margins were a little lighter. Can you help us understand the dynamics within the operating expenses that sort of drove the wedge between the two? Is it that sales of the specialty products come at a higher expense from an SG&A standpoint since you kind of have to go after -- you have to go out and get the price increases or something like that?

We're probably all eager to chime in here. Let me start and then I'll ask Bob and Rich to make some remarks. I think one thing you should add into the mix here is we have a long-term strategy. We have never tried to run this business on a quarterly basis. We added 61 commercial additions in 2011 and there is carryover of those. We added another 11 in quarter 1, so a little slower pace. But those are incremental costs of fairly talented, fairly high priced people that we will stay the course with.

I mean, we believe slow and steady wins the race and that's what we're doing. And we're not going to gyrate. While we might moderate a little bit our investment, we have such confidence and belief in our long-term strategy we're going to continue to make sound decisions on that front. So there was an element of that in the first quarter.

Also, in Europe, where we had in our first quarter last year -- more than half of our operating income for Specialty was in Europe in the first quarter of last year. When you have a volume decline like we saw with our same-store sales, you're going to have some reverse economies of scale that enter into the fray as well. So there's some of that going on. And we will react but we will react very, I think, thoughtfully. Bob?

I would make only one add to that. And that was just to reiterate what Rich said specifically to answer an earlier question, which was that corporate costs were up and that was principally due to higher incentive accruals. So I think with the combination of Steve's answer and that, that's summarizing mostly what you see at -- explaining the delta between gross margins and operating margins.

Okay, perfect. Thanks, guys, for the color and congrats.

Dmitry Silversteyn; Longbow Research.

Rich, welcome aboard. Couple of questions -- if I strip out the ColorMatrix acquisition from your results, it looks like both the Specialty -- or the Engineered Materials and the Color, Additives and Inks were both down about 6% to 7%. Is that all Europe-related or have there been issues with any product lines? I know in the past, in the second half of last year, you talked about some of the TPE business being a little bit soft in the consumer segment. Can you talk about kind of beyond Europe what are some of the challenges you're seeing that's offsetting the growth that you're seeing in healthcare and appliances and wire and cable and all the things you highlighted as positives?

Yes, Dmitry, this is Bob. It is predominantly Europe. And we did make some observations in the second half last year of some softness around higher-end, premium priced products in the consumer market. That hasn't picked up like we would have liked it to in the first quarter of this year. So on a comp versus year over year that's still part of it, but nothing compared to what the Europe effect is. And on balance, we had revenue gains in North America and Asia. So we're really happy, actually, with our growth rates outside of Europe. We just have one challenging region right now.

Okay. Speaking of Europe, can you give us an idea sort of by the Specialty sub business as far as Engineered Materials versus Color, Additives and Inks, what your sales into Europe are?

Yes. Color is about 46% and EM's about 34%. And on balance all in, Specialty's 41% for sales.

Okay, and overall 41%. Okay, that's great. Thank you very much. If you look at the sort of margins of the Engineered Materials business, excluding again the -- well, the ColorMatrix is not part of Engineered Materials. So if you just look at the margins there, they're down year over year. Was that just a function of volume loss in Europe? Or are you a little bit behind on your pricing versus raw materials? Can you give us little bit of an idea what's going on with margins there?

I missed the very first part of that. Margins were down where, I'm sorry?

In Engineered Materials.

Oh, in Engineered Materials. Yes, I think principally this is a mix story more than anything else. It's not a pricing issue. In fact, we did get pricing year over year. And it's primarily associated with lower demand for our high-end wire and cable business in Europe. And two end markets they serve are solar and nuclear applications. And so that's not recovered and you know why that's down year over year, as well as the premium priced products in the consumer market that our TPE businesses serve. So more than anything it's really a mix-driven effect, not a pricing effect as we have been getting pricing over [raws].

Great. Bob, thank you very much for that color. Your Performance Products and Solutions business obviously has gotten off to a good year, given all the excitement about housing and whatnot. Is that sort of the new run rate we should be thinking about as far as margins in this business? Or is there something going on in terms of your ability to get pricing and the raw material price directions that things can get better in the second half of the year?

Well, I think as our end markets recover we're going to continue to see improving margin profile in this business. So I would say, yes, from a run rate standpoint. And we would expect that continue to improve.

As you know, in this business it is the one where we're most challenged from a pricing standpoint. And we can have pricing lags based on indexed pricing. So in any one quarter I would say that you could see an anomalous result as a result of the pricing lag. But on a general basis in trending I would expect margins to continue to improve the way they have.

Okay. And I'm assuming utilization rates in that business and everything is picking up and you're continuing to see good demand?

Yes.

Okay. Final question -- on the corporate expense line, the $10 million that you reported, is that sort of the new run rate we should be thinking about with respect to the addition of ColorMatrix?

Dmitry, this is Rich. You probably didn't hear the earlier question from Saul. So what I said is, in terms of run rate year over year it was because of incentives. And our view of the rest of the year this year compared to what it must have been last year in the first quarter, I guess we're a little bit more optimistic about earning those incentives. So I would tell you the run rate is -- I would put in for your model $11 million or $12 million a quarter for the rest of the year for that line item and we shouldn't be far off from that.

Got it, Rich. Thank you very much and I apologize for asking the question again. Have a good one.

Steve Schwartz; First Analysis.

Can you talk a little bit about your pricing in the segments? Bob, you did mention pricing was higher in, I think, PP&S and in Distribution. Can you share with us the numbers?

Yes, we had pricing gains in all of our businesses, Steve. And if you looked at -- for the Company as a whole, for example, we had 9% revenue growth, 7% attributable to ColorMatrix with price and mix being about a 6.5% offsetting, so 4%, 4.5% volume. So that helps to explain really the year-over-year change in revenue growth for the Company as a whole. And we had pricing and mix gains across all of the businesses.

Okay. And with respect to CapEx, it looks like it was flat year over year despite bringing in ColorMatrix. I think in the Q you mentioned you funded the Juffali JV in March. So what's going on with CapEx there? What should we model going forward this year?

Yes. So, Steve, this is Rich. I think what we've said up to this point is a range of $55 million to $60 million. We did get off to a little bit of a slow start, so I guess I would say we're probably closer to the lower end of that $55 million to $60 million right now. But we just haven't got off to a quick start. We'll catch up to that kind of guidance as the year progresses is my sense.

Okay, that's great.

One other point of clarification on that, too. We do call out the funding of Juffali but that was just a fragment of the investment. So more to come in the balance of the year.

Oh, I see. Okay, great. Thanks, guys.

I think we have time for one more call, Operator.

Christopher Butler; Sidoti & Company.

Looking at the PP&S segment, could you give us what your outlook is for the US housing and auto markets for 2012? And was there any pull-forward from the second quarter here due to the warm winter?

We may have some pull-forward. There are some who believe we do have -- it's very difficult, Chris, for us to know with any degree of certainty about that. But we certainly know that in places where usually there's not a lot of building going on due to weather we had an extremely warm first quarter. And there may well have been some pull into Q1. I think you'd put us -- and certainly me -- in the camp of skeptical yet about a housing recovery, but encouraged. The April forecast is 740,000 units. It's less than half of the 50-year norm. But, hey, it's still up 20% from prior year. So we have some reason to be encouraged about that.

I think that we're -- our belief in housing is we're not -- there's not a lot we can do to really influence it. And we're ready to capture additional volume that will occur as a result of it. But we're just not waiting for things to happen there. We're going to have PP&S continue to diversify their end markets into less cyclical operations. So housing, you're -- probably got a better view of than we do. We have always been, I would say for the past 5 years we've been on the more pessimistic side of the views that are out there. So if you say it's 740 you might have us down like 700 or so, but it's still a nice improvement over prior year. We'll see how second quarter unfolds and that'll give us the real answer to your question, did anything get pulled into Q1 from Q2.

And as we look at this segment can you give us an idea of sensitivity here, where it looks like you're going to exceed the bottom end of your 8% to 10% return target for PP&S? The 10%, what would you have needed for housing starts in order to be up at that level for this year, 900,000, 1 million starts?

Well, first of all, when we presented that case we were coming off a year -- which was laid out in '07 -- we were coming off a year of 1.8 million, 1.9 million housing starts. So I want to put it in context. So if we ever saw anywhere near that again we'd blow the top end of that range out substantially. We couldn't actually meet the demand that we would have associated with that. So I think we have to kind of set the stage for why we established those goals when we did.

We have so revamped that business and restructured that business subsequently because we saw the housing downturn as a multiyear phenomena. And we saw that we had some businesses in our mix that just didn't make a lot of sense for us where we didn't have the degree of differentiation. So I think we forever changed the landscape from our perspective. Bob?

No, I think that's right. I would say one last item or remark there, because you were leading towards it looks like we've got the 8% to 10% in the bag. And just remind you this is a seasonal business, Chris, so you do see pickup in the summer months, with the fourth quarter being down. So you've got to take that on balance when you think about where we'll end the year.

I'll just mention the projections, the industry consensus projections for 2013 are 900,000 units, so that would be a 50% uptick from '11. So don't know if they'll come in or not, but that's where the industry has it right now. And there are a lot of early signs of encouragement around housing. But we're just skeptics.

And just finally, uses of cash other than acquisitions that was discussed. You repurchased fewer shares here in the quarter, but you did lift the dividend. Could you give us your thoughts on that going forward?

Yes, sure, Chris. This is Rich. So I'd say we have multipronged uses for the cash. And we got a little bit of a late start buying back stock in the quarter. So what we're kind of committed to do during the course of this year is buy back at least as much to offset dilution. And we've kind of earmarked that as about 1 million shares a year. So I guess opportunistically I have some catching up to do based on how we got off to do that in the first quarter.

And I have a theory about dividends. I think that once you have them, you've got to keep them. And, more importantly, you like to increase them. So the good news about having a $0.04 or $0.05 a quarter dividend is that you can increase it at a nice percentage and still it's not a big drag. So in terms of the money that we're going to spend this year, it's about $17 million of cash on the dividend as announced. And we hope to continue to return money in that way to shareholders going forward. So we'll use all of those opportunities to do that.

I appreciate your time.

Okay, thank you. Chris, I appreciate that. This concludes our first-quarter 2012 conference call. I want to thank you all for your continued interest in PolyOne and for joining the call today. We look forward to seeing you at our Investor Day in New York on May 16th and to updating you about our 2012 progress during our second-quarter conference call scheduled for early August.

Thank you all. Have a great day.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a wonderful day.