Avient Corp (AVNT) 2012 Q2 法說會逐字稿

Good morning ladies and gentlemen, and welcome to the PolyOne Corporation second quarter 2012 conference call. My name is Catina, and l will be your operator for today. At this time all participants are in a 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, Catina. Good morning, and welcome to everyone joining us on the call today. Before we 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 meeting 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 are 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 second quarter of 2012 to the second quarter of 2011, unless otherwise stated.

Joining me today 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.

Well, thanks Cynthia, and thanks again to everyone who is with us on the call this morning. We welcome the opportunity to speak to our investors and analysts about the recent performance of PolyOne, and I am particularly pleased to share the second quarter results with you. We delivered all-time record quarterly adjusted EPS of $0.37, which is 19% over last year's record of $0.31 and marks our 11th consecutive quarter of double-digit EPS growth. Rich will share the details of the other records we achieved in the second quarter, including revenue, gross margin, operating margins, and operating income.

As to operating margins, two of our three platforms established new record performances with the Specialty platform at 10.6%, and Performance products and solutions at 10% return on sales. With this second quarter performance, all platforms reached or exceeded the target operating margins we set for ourselves to achieve by 2012. On a consolidated basis, PolyOne achieved an operating margin of 8.2% that is our best return on sales ever.

Recall that at the end of the first quarter, we cautioned that we had very difficult comps in the second quarter, particularly given the economic situation in Europe. And we certainly did see sluggish demand in Europe. But we were able to overcome this head wind by improving our profitability in North America and Asia. In fact, we feel the second quarter was an inflection point for us, as both specialty segments organically improved operating income. This is the first time this has been true for Engineered Materials since the European downturn, and it is one quarter ahead of the year-over-year gains we have been forecasting for this business. Bob will discuss the performance drivers of each segment later in the call, but I want to underscore how important we view this improvement in Engineered Materials to be.

Lastly, I want to share an important organizational change we made this past quarter, as we welcome Dr. Chris Murphy, Vice President of Research & Development and Chief Innovation Officer, to PolyOne Corp. Chris replaces Dr. Cecil Chappelow, who retired in May. Chris has an impressive track record of innovation and new product development at leading global specialty chemical companies, including Lubrizol, Elementis Specialties, and Nalco. Chris is already adding value, and will surely have a positive impact on our ongoing commitment to deliver value to our customers and shareholders. As you heard at our Investor Day, innovation is a cornerstone of our strategy to achieve our 2015 goals, and Chris is the right person to lead those efforts for PolyOne.

At this time, I'm going to turn the call over to Rich Diemer who will review our second quarter financial results.

Thank you Steve, and good morning. It is truly a pleasure to share our second quarter results and the many records that we achieved. For the second quarter of 2012, we reported an all-time quarterly sales record of $792 million, and adjusted net income of $33.5 million, versus sales of $768.8 million, and adjusted net income of $29.8 million for the second quarter of 2011. Adjusted EPS expanded 19% to a quarterly record of $0.37 this quarter, versus $0.31 last year.

These results where were driven by sales growth in the Specialty and Distribution platforms, and operating margin increases in all platforms. Sales increased by 3%, over prior year driven by the ColorMatrix acquisition and [gainings] in Asia, more than offsetting the demand challenges we experienced in Europe, and the foreign exchange head wind which had an unfavorable impact of 2.2% compared to last year.

From an end market perspective, we experienced strong growth in Healthcare and Packaging. As we said last quarter, we attributed the success to our recent investments in commercial resources over the last two years. Solid growth from new product introductions and the successful integration of ColorMatrix, which continues to progress even better than planned. The prespecial tax rate in the second quarter was 35%, versus 34% in the second quarter of 2011, with the increase principally due to income mix, impacted by lower European income. The tax rate for the first six months of 2012 was 34.6%. Special items in the quarter resulted in an after tax charge of $8 million, or $0.09 per share.

In addition to environmental charges other special item charges included specific actions to reduce costs primarily in Europe, due to our view that the European recovery is likely to be prolonged. These activities impacted about 100 employees across nine manufactures sites, including the closure of a manufacturing facility in Sweden. We expect the pay back on the restructuring costs to be just over one year.

We ended the quarter with $209 million of cash, and liquidity of $403 million. Our net debt to EBITDA ratio based on trailing 12-months pro forma for ColorMatrix was 1.8 times at the end of the second quarter. Working capital continued to be a focus at PolyOne, with net working capital for the second quarter at 9.7% of sales. We are comfortable that we have ample flexibility to fund organic growth initiatives, pursue strategic M&A activities, and return cash to shareholders through dividends and share repurchases.

During the quarter, we repurchased 1.1 million PolyOne shares on the open market, at an average cost of $13.21 per share. Year-to-date, this puts us slightly ahead of the pace needed to both offset dilution of share issuance from benefit programs, and reduce net shares outstanding on average by approximately 1 million shares per year. This is consistent with our objectives on share repurchase discussed at our Investor Day in May.

Before I hand off to Bob, I would just like to reiterate how pleased I am to be part of the PolyOne team. As I approach five months with PolyOne, I can say that I have more conviction than ever in our ability to realize our transformation to be a specialty company. It was terrific to see many of you at our Investor Day in May, as well as numerous other investor meetings I have recently attended.

With that, I will now turn the call over to Bob.

Thanks Rich, and good morning. I am very pleased with our second quarter performance, and would like to reiterate Steve's observation that we are ahead of schedule in our recovery of the Specialty platform, as both EM and Color delivered year-over-year organic operating income growth, despite the lower demand in Europe. Specialty revenues increased by 13% over prior year to $331 million, driven by the ColorMatrix acquisition, higher selling prices as a result of raw material inflation, and new product introductions. Operating income for the Specialty platform in the quarter increased to a record level of $34.9 million, a 38% increase over last year, resulting in a return on sales of 10.6%, a 200 basis point improvement over last year, and a record for the platform. This performance reaches the target operating margin ranges that we established for ourselves for 2012.

I will remind you, however that traditionally the second quarter is our strongest quarter based on seasonality, and we do expect that to be true again in 2012. Breaking down the Specialty platform into its two segments, Specialty Engineered Materials sales declined 6% versus the prior year, to $139 million in the quarter, due to lower demand in Europe. However, with the positive effects of our mix improvement strategy, Engineered Materials delivered operating income of $12.8 million. This helped drive return on sales of 9.2%, which is a 60 basis point improvement over the prior year. We achieved the year-over-year improvement in Engineered Materials earnings one quarter ahead of our expectations, and we see this as a very positive indication that our strategy continues to be effective.

Global Color Additives and Inks revenue increased by 31% to $192 million, due to the ColorMatrix acquisition, the strong performance in North America and Asia, offset by a decline in European demand. Organically operating income grew 5% and combined with ColorMatrix, operating income for Global Color reached $22.1 million, a new record for this segment and representing a 75% increase over the prior year second quarter. This resulted in a record return on sales of 11.5%, an improvement of 290 basis points over last year. Another highlight for this segment is that all regions contributed to a 56% increase in Healthcare revenues compared to the prior year, even including Europe, where our revenue in the Healthcare segment grew by 30%.

Our distribution platform delivered an all-time record quarterly revenue of $271 million, led by gains in Transportation and Appliance end markets. As a result of these gains and coupled with margin expansion, operating income increased 9% over prior year, to $16.7 million for the quarter, and return on sales was 6.2%, well beyond our 2012 target range. Performance products and solutions revenues declined by 8% in the quarter versus last year, as a result of our customers increasing inventory balances in 2011 in the US building and construction end markets to a greater extent than occurred during 2012.

In addition, we suspect that due to unseasonably warm weather in the first quarter of this year, some construction related demand was pulled forward. However, and despite lower revenues, PP&S increased operating income compared by 5% compared with last year, to $22.3 million. This resulted in a 10% return on sales, which is a 120 basis point improvement over the second quarter of last year. This quarterly performance achieves the high end of the target range for operating margins set in 2007, that we aspired to reach by this year.

For each of our segments there is more detailed information in our 10-Q filed earlier this morning on the volume, price and mix and FX impacts for your reference. I would next like to move beyond the performance numbers for just a moment and address some of the recent key strategic initiatives, and other investments that will continue to fuel future growth, along with highlighting a few recent innovations.

In June, we cut the ribbon on a new Innovation Center in Shanghai, it doubled the size of our prior facility, and added new capabilities that we will use with our customers to innovate and rapidly bring their new products to market. Having led our Asia strategy for the last year and a half, I can tell you this expanded resource is coming at a great time. Our brand in China is stronger than ever, and customer satisfaction and loyalty is growing. In fact, more than 100 attendees participated in the Grand Opening, including many customers and suppliers.

During the second quarter, we announced that we have invested in a new healthcare focused distribution center in Costa Rica, in an area that was recently ranked by a world bank study as the top high-tech exporter in Latin America. The medical industry in Costa Rica is expanding, with over 30 medical device companies manufacturing locally. This distribution point through our local sales presence will allow us to service our customers more timely in that region, facilitating their growth and enabling ours.

And tomorrow, in Cape Town, South Africa, we will celebrate the Grand Opening of our new facility which we announced in June. Leveraging newly acquired ColorMatrix technology, PolyOne will initially supply liquid colorants, additives, and proprietary dosing equipment, which are used by customers who manufacture products such as PET containers for the beverage and personal care markets. The facility provides services such as sales, technical support, and rapid color development, through the onsite color laboratory.

When we acquired ColorMatrix last year, we committed to a global invest to grow strategy, that would add value to our customers and our shareholders. Our new facility in South Africa illustrates our commitment to this strategy. While our operations will initially focus on ColorMatrix products and services, this affords us an excellent foothold to leverage other PolyOne businesses and services throughout the region in the future. We are often asked about the progress of the integration of ColorMatrix, and it continues to go very, very well. Our cross-selling program has grown substantially over the past several months. We have selected several ColorMatrix innovation programs that we believe can be accelerated through additional investment, and we have made the commitment to do just that.

As to innovation, I would like to highlight a few recent commercial introductions, to give you a better flavor of where our specialization efforts are focused. For example, in April at the Chinaplas Trade Show in Shanghai, we unveiled new Therma-Tech thermally conducted solutions for LED lighting applications. By replacing metal heat sinks with these new materials, our solutions enable parts consolidation, longer LED lifetimes, reduce part weights, and lower manufacturing costs for our customers.

In May we introduced solutions to automotive manufacturers which allowed them to switch from painted plastic parts, such as decorative trims and lateral sidings, to molded in-color versions using our on color FX Smartbatch concentrate technology. Through our efforts in working with a major automotive OEM, they estimate that by eliminating painting of plastic car parts, the total cost of the part can be reduced by as much as 30%. Therefore, this solution offers tremendous cost savings for our customers, along with alleviating environmental health and safety challenges.

Finally, I want to comment briefly on our existing commercial activity. In my new role, I have made it a point to spend as much time with customers and our sales force as possible. I have personally visited more than 100 customers in North America, Europe, and Asia. While each region and each customer has its differences, I found two consistent and important themes as they pertain to PolyOne. First, we have indeed moved away from selling volume into selling value. Our sellers and customers understand and appreciate this.

Second, a huge opportunity exists to accelerate our growth even further through increased sales force efficiency and effectiveness, and cross business unit collaboration. In Asia and most recently in Europe, we have seen measurable results generated through accelerated cross-selling, aimed at helping our customers grow faster. Along the way, our sales force gains invaluable hands on training, related to our other business unit capabilities, giving them more tools to be successful in the future. Seeing initiatives like these come to fruition and deliver returns gives me confidence that we can and we will win more new business, and drive sales growth regardless of what happens to the economy.

This concludes my prepared remarks on the second quarter, and I will now turn the call back to Steve.

Thanks, Bob. I am very pleased with the results that Rich and Bob just reviewed with you, as well as the investments that we are making to enable us to reach our longer term goals. And I want to take a moment to thank those of you that attended our Investor Day in May, as well as these who listened to the webcast.

We view our record-breaking second quarter as evidence that we can continue to set high aspirations and execute on our plans to achieve them, despite challenges that we face in the market and the economy. We overcame substantial European weakness in the second quarter, to deliver our 11th consecutive quarter of double-digit year-over-year adjusted EPS growth. Our second quarter performance positions us well to achieve the very aggressive 2012 targets that we set for ourselves back in 2007.

Looking forward, in view of the global economic uncertainty at this time, we will continue to both manage our spending in a prudent manner, and focus on growth and mix improvements in all regions with the goal and expectation of continuing to deliver quarter-over-quarter double-digit adjusted EPS growth. We remain committed to the execution of our four pillar strategy in delivering earnings expansion. With the proven track record of our employees, innovative new product launches, and the further strengthened leadership team, I am more confident than ever in our ability to execute and deliver on these expectations.

So this concludes our prepared remarks, and now I would like to turn the call back to Catina, who is going to open up the lines for your questions.

Thank you. Your first question comes from the line of Saul Ludwig representing Northcoast Research. Please proceed.

Good morning guys, and congratulations on a terrific performance there.

Thank you, Saul. Good morning.

A couple questions. Was there any FIFO benefit in the quarter? And talk about the trends in declining raw material costs, and what effect that might have on your pricing and your gross margins, as we look to the third quarter and the balance of the year?

Yes, Saul, this is Bob. A couple of observations on that. First, we did have a FIFO benefit in the first quarter, in our distribution benefit or distribution segment, which was a little greater than $2 million. We did not see that repeat in the second quarter. However, we did have some benefit in our PP&S platform as a result of raw material changes, and certain contracts which are index priced. I would estimate that to be about $3 million in the second quarter. And generally speaking, those benefits don't replicate over time. So as you think about the second half of the year, I wouldn't think that would continue.

Now with prices still coming down, how is that working with your own selling prices across your different product platforms?

Well, as you know, we have very little of our product is priced on an index basis. It is a percentage of the PP&S platform really, and then otherwise, our products are based on the value of the service offering that we provide to those customers. And they are separately negotiated based on those factors. And so obviously in a declining price environment, there are always pressures to reduce price, and we have to demonstrate the value of our service offering to offset that.

And just finally --

Saul, let me follow up on that, it's Steve. If you don't mind, we didn't see as much decline in the quarter as you might think. Relative to on average, we saw raw material prices decrease in low-single digits compared to Q1, and that was more like a 1% to 2% comp to Q1. And they actually increased relative to the same prior year quarter around 5% to 7%. So we got some benefit, and we were able to maintain that, but generally we are not seeing as much of a pullback as you might expect in some of the raws that we are putting in, and as Bob has mentioned, we are pricing for the value that we create, which includes the service offing we provide, so I think we are managing it relatively well. I don't expect major downturns that will benefit us in this quarter from raws.

And then just finally, from looking at the data in the Q, the ColorMatrix operating margin, just from ColorMatrix, was much higher in the second quarter than it was in the first quarter. Were there things you were doing that caused that to happen, and are we now at a normal equilibrium for it on ColorMatrix profitability, or is that likely to change in the second half of the year?

I think the single greatest influence is mix and seasonality, where they do see their strongest quarter being the second, and a heavier weighting towards additives for PET consumption during the warmer months. That is how I would describe that. We are obviously very pleased with how well the integration is going, but I would assign most of that to the seasonality in the quarter than anything else.

Thank you very much, guys.

The next question comes from the line of Frank Mitsch representing Wells Fargo. Please proceed.

Good morning gentlemen, and Cynthia.

Hi Frank.

Hello.

Really looking forward to the upcoming analyst visit to check out the exciting opportunities in Costa Rica, I am thinking January or February may work out well.

(laughter). Thank you Frank, we are under expense constraints right now.

Okay. Listen, I quickly looked at the Q, and looked at some of these volume numbers, and I mean obviously your results in the quarter were very strong, but the volume numbers looked pretty frightening on the color side, and certainly on the PP&S side. Can you give a little more hand-holding as to why we should not be overly concerned about those volume declines?

I will take those in reverse order if I may. On PP&S, it is really driven by the phenomenon we saw last year where I would say there was almost a euphoric expectation of improving housing starts in 2011 that ultimately didn't materialize, so construction related customers were really buying in advance of that in the first and second quarter of last year. And we saw that reverse in the second half.

So this year, we are seeing I think more moderate expectations of what is going to happen in housing, and as a result, purchasing is down. We also saw some pull forward of demand into the first quarter from the second quarter. And I would say that largely explains the volume declines that we saw in PP&S.

With respect to Color, I would say that it is a continuation of our pruning strategy, and our elimination of lower margin accounts that is really driving the preponderance of that, as well as a decline in European business, which I would describe more as same store sales than anything else. Those are the two key factors in Color, and we obviously recognize those results, and we have taken actions to improve profitability as a result, and don't believe there is any cause for further concern.

I'll just pile on to that, Frank, Europe was, it was a tough quarter in Europe. And that was for both EM, as well as Color. And frankly, we are out selling a lot of new business, but we didn't turn enough new business in fast enough to offset the same store sales declines there, is just simply put. So we have work to do to continue to grow faster in new revenue business, and to try to weather this storm that could be protracted in Europe. And that is exactly what we attempted to do in the quarter.

Great. As you sit here today, what would be your expectations for the outlook for Europe? Are we close to a bottom, or is there more to go? I know you are taking Company-specific actions to offset that, but broadly speaking, what is your sense there? On the PP&S side, Bob I hear what you are saying, and if I just took what you said, I would not have expected your earnings to actually be up, so obviously there was something very positive that you guys were doing in PP&S to offset that volume decline, can you elaborate a little bit on that?

Yes, I am just going to reference the comment I made to Saul about a benefit related to raw material price in the second quarter, which I estimate added $3 million to benefits. So I think that is explaining, Frank, the improvement in operating income relative to the decline in sales and PP&S. I would point out that on a normalized basis that puts the operating margin for PP&S, though, at 8.7%, which is still very good relative to historical performance. So it is improving. Hopefully that explains your question on PP&S.

Yes.

Let me tackle the Europe piece. We are bracing for a rather protracted trend to continue in Europe. I think the good news is we are going to start in the third quarter, start lapping some of that downturn. So same store sales will remain low, but optically it won't look as --optically, it won't look like such a fall from the base. For us, we have got to offset that growth, in North America, Asia, Latin America, as well as gain new business in Europe.

I think our team in Europe is very focused on selling new business, their prospecting activity is at an all-time high. They have recently had a new business sales campaign that kicked off, and generated a lot of new business in their sales funnel. So they have to grow their way out of this, they have got to offset the losses and grow the business not so much in existing accounts but grow through new business acquisitions. That is the only way we are going to get Europe on its feet again. And the reason that we took these actions, we take it very seriously, when we have to close a plant, even if it is a small plant, but we felt there could be some, we need to right-size that business for what is probably for a while the normal flow of existing base business. And that is exactly what we have done.

Thank you so much.

The next question comes from the line of Mike Sison, KeyBanc Capital Markets.

Hey, good morning, great quarter.

Thanks, Mike.

In terms of the Specialty businesses, you talked about new product introductions, and the ability to grow organically there on an earnings basis, and you also gave us some data on price mix. How much of that price mix is really mix, and I guess if we can get a feel for that number, that should be sustainable as we head into the second half of the year?

Well, first of all, we don't split out price and mix, so what you see in the Q is a combination of those two things. But I would overweight the mix effect versus price effect in that business, and believe that you should continue to see favorable comps in the second half of this year that exceed what we delivered in the second quarter.

Okay. And then when you think about ColorMatrix, in terms of that business growth as we head into the second half of the year, into 2013, clearly looking better than we thought in the second quarter, can you comment on the level of year-over-year growth you would expect in that business as we head into the second half?

Yes. I think our primary concern is European weakness. Outside of that, ColorMatrix continues to do very well and even doing so in Europe. So I think that, if I were to just generalize our expectations for ColorMatrix for the full year, our EPS accretion estimate previously was $0.04 to $0.06, and I think we will be at the high end of that range if not just a little over.

Great, and last question, Steve, you commented that you felt pretty comfortable on double-digit growth in the release for 2012 versus 2011, the first half and the second quarter was pretty strong. Given that you have a lot of these things under your control, the mix positives, would you expect that the growth rate in the second half would maybe mirror the first half in terms of growth?

As you know, Mike, we don't really give guidance, and that would be pretty close to giving guidance. So I would just say to you we will stick by our guns, which is we expect quarterly to have double-digit, I know that is a wide number. It could be 10%, it could be 99%, and that is an awfully big range, but at this time to get much more specific in that would be something we wouldn't be comfortable doing.

Okay, great, thank you.

The next question comes from the line of Dmitry Silversteyn representing Longbow Research.

Good morning guys. Congratulations on another strong quarter.

Thank you, Dmitry.

A couple of questions, if I may. First of all in ColorMatrix, can you give me an idea of what year-over-year growth was in sales and operating profit for that business?

Yes. Year-over-year increase in sales was low single digits, and that really is a result of an increase in base business offset by a weaker Euro, so I think the growth would have been a little bit higher as a result of that. And then from an operating income perspective, it was just a little bit below where it was last year, primarily related to mix where we saw lower sales in additives in Europe than we did anywhere else in the world.

And coupled with some investment that we are making in the business.

So it sounds like despite what Saul noted was a very strong margin in the quarter, last year they did even better?

Yes. They did, but I would point out that there is about $0.75 million of additional investment that has been put into that business since the end of last year and that we did have some mix changes, just as a result where that revenue is derived on a global basis.

They had for a variety of different reasons we won't get into, an extremely, exceptionally strong Q2 last year as a comp, and I am confident that the comps for the second half of this year with ColorMatrix will show a much greater growth rate.

Got it, thank you. I was also interested in hearing you talk about Engineered Materials passing through an inflection point in the quarter. Can you expand on that a little bit? What is on the other side of the inflection point, and sort of what gives you the confidence to say that you have passed it?

If you just recall from last year, during the third quarter that was the first time in years where we had actually reported a year-over-year decline in operating income, and that really was a result of three factors, one being a decline in demand for our high end wire and cable business in Europe related to solar applications, the second being a general decline in demand for Europe, and the third being some pullback and demand decline for high margin products in the consumer end space which we aligned to some of the headlines related to consumer customers like Proctor and Gamble, et cetera. And that was really in the third quarter which was in the August-September timeframe, when there was just a general concern about what was going on in the economy. And what we said all along was that we expect our comparables to begin to improve, really towards the second half of this year, as a result of those things improving as well as new business gains. And we are just a little bit ahead of that with our operating income improvement in the second quarter. So that is really what we were referencing about being just a little bit ahead of schedule.

Dmitry, I think the other thing that gives us great confidence in the EM is the flow of new business, particularly in Europe. We are taking a beating in -- automotive production, as you probably know is substantially dune in Europe, and that is the bad guy for us, but we are having really good success in penetrating some of the new business applications. So we are feeling better and better about EM's near term, and of course long term future.

Got it, okay. You have mentioned several times weakness in Europe, and obviously you aren't the only ones, the automotive market sounds like it continues to be weak for you, which is a comment with one of your peers, with a big exposure in the European auto market as well. What is the consumer market looking like for you, and are there other bad guys in Europe in terms of market segments? And are there any segments that are actually holding up fairly well or even growing in this environment?

I would say that in Europe, you can pretty much with the exception of healthcare, you can pretty much broad brush it as just a general overall slowing, across all markets, across all segments. And I think healthcare has always been a little more resistant to the downturns. In addition to that, I think our efforts and our resources that have been allocated to that market in Europe have been bearing some fruit. But I think just overall, it is a very sluggish economy, with a lot of conservatism in the buyers' minds and in terms of inventory placement, in terms of demand and consumption.

Okay, but it sounds like you are lapping even that and the second half of the year may not see as big of a (inaudible)?

Yes, I think it started during the third quarter. I can't say that we had it for all of the third quarter, certainly Q4 we will have a full year of overlap. But we did certainly start to see this slowdown in Europe in the third quarter of last year. Q3 in Europe as you know is always low, because there are a lot of shut downs and extended vacations, et cetera. But that is just, on a year-over-year basis that is when we began to see the downturn, and I would say it was probably starting more the last two-thirds of the quarter than the first third.

Got it. Okay, and the last question on Asia, you mentioned a couple of times with a number of your segments that you have seen good Asian growth that has helped you offset some of the weakness in Europe, along with growth in North America on ColorMatrix. Asian economy has been slowing down as well, particularly the Chinese economy, and yet most of the stuff you said in the call was pretty positive about the region. Can you reconcile those for us? What are you seeing in Asia right now, and if it is different from a slowing growth that everybody else is seeing, why the difference?

So let me take a shot and then I will give it to Bob because he spends a lot more time in Asia than I do. First of all, I think that the reason that we are optimistic in showing a better than normal result there is we are excelling extremely well right now in Asia. We have made some investments, we have made some changes that were done over a year ago. They have been working hard, and I think they are paying off. So I think it is more to do, has more to do with our own execution than it has to do with the general backdrop of the market. Bob?

And related to Steve's execution comment, and if this wasn't clear in the call, then let me try to do so right now. We have had the most noticeable growth at the operating income level, so as a result of execution, leadership changes, et cetera, we have improved the profitability of that region. And that is really the primary statement that we were trying to make about Asia, rather than a macroeconomic type observation.

Okay, so Bob, with that is that your way of saying that you are seeing the economic conditions there beginning to slow down at least, if not decline?

Yes, that is a fair observation. We are seeing, I mean across the emerging markets in general we do think there has been some deceleration of growth. Keep in mind, in China that is still very high relative to anywhere else in the world. But I think it is fair to say that it has slowed. We had a lot of opportunity for improvement in our own business, and that is what we are focused on, and that is how we are getting the operating income growth.

Okay, got it, thank you very much.

Your next question comes from the line of Mike Ritzenthaler representing Piper Jaffray.

Good morning everybody.

Hi, Mike.

I guess I just want to add my question onto the previous ones on ColorMatrix from a little bit different angle. So it seems like, I guess the spirit of the question is what was the performance like in the base business? If you take out the ColorMatrix and look at organic growth, the story is not quite as robust. I was wondering if you could add a little bit of color to that?

Well, it is delineated in the Q hopefully, if not then let us know. But we did have organic improvement in the color segment at the operating income level, and that was as a result of mix improvements largely. We obviously delineated that on an organic basis we did see volume declines, which were principally related to previously undertaken pruning actions, as well as demand declines in Europe.

We were very happy with the results, given the head winds in Europe, to have operating income improve on an organic basis, so I think that was a good guy for us. And I think ColorMatrix is also a good guy for us. While their own comparables year-over-year were down slightly on the operating income level, it was really more a matter of mix, driven in Europe for their higher margin additives products, than anything else that we don't think is a long term trend or cause for concern.

ColorMatrix does have a fair bit of exposure in Europe, but they are managing it, and as I mentioned earlier I am extremely confident that we will see an expansion and acceleration of their growth in the second half of the year. It truly was a very anomalous quarter for them in Q2 of last year, and they had some pull forward from Q3, and just a really strong quarter to comp. But we are not the least bit concerned about ColorMatrix. We are highly encouraged and excited about the current and future growth prospects.

Okay, outstanding. And then the $8.7 million charge for cost reductions in Europe, I think it would be helpful to get a little bit more clarity on what that all entails? If there's anything else that is left that you have to do there in terms of charges? And then maybe what the, I am assuming that the plant in Sweden focused on auto end parts primarily?

This is Rich. Hi, Mike. What I would tell you is this, for the total charge it was about three-quarters in Europe, and there was ten sites involved, principally in and around manufacturing. So that we think is right-sizing our footprint there for the long term. I think overall there was a little bit that we did in Asia, and a little bit that we did in South America, so that is the remainder of the charge. Again, small footprint type actions that are there. So it was a relatively small plant in Sweden, but we are going to do that business out of elsewhere on the continent, and we just think it was the right thing to do given our, I guess I would say, somewhat Euro-skeptical outlook on how quickly things will rebound there.

Another observation I would make on that, Mike, is that we still have a presence in Sweden with a sales force and a commercial organization. This really was just a relocation of manufacturing activities to other locations in Europe, to support that business. So we haven't exited Sweden or conducting business there, it was really just the manufacturing activities.

And I guess just to follow up on that, no other charge is expected?

Well, Mike, this is Rich, when you do things like this, some of the things you can take on a charge, and some are more period costs. But those are relatively small.

Okay. Got it, and then it looks like SG&A is substantially higher even though despite, even though they are record revenues. So you would expect some sort of SG&A uptick, but it seems like the leverage maybe wasn't quite there this quarter? Is that a fair observation?

Your question was SG&A was up or down verses what period, I'm sorry?

I was just comparing year-over-year.

ColorMatrix is the biggest part of that increase year-over-year.

Okay, all right.

They have a more intensive service model and therefore their SG&A costs as a percent of sales are higher than the normal PolyOne mix as well, just to point out.

Of course, that makes sense. I guess just one last one, in terms of the bio-based resins, and maybe this links up with the personnel announcement that, Steve, you had made earlier in the call. Is there any sense you can give us on maybe projects or something that the R&D folks are working on for whether Specialty additives for Bio polymers is something that can happen in the next couple years? Is there anything in particular you are excited about on that front?

There are quite a few things going on in that space, and we have been investing here now for about five years and we have got a very strong position. It is not a market that you can really push. You have to get some pull from, and we are seeing evidence of it. I would say the US is lagging a little bit in terms of demand, but we are in a really strong position here. We have got some products that have come out recently that are doing well. We have our reFlex 100 Bioplasticizer. It is a renewable plant based feedstock, and that was something we developed in collaboration with Archer Daniels Midland. We think it is a great alternative to conventional plasticizers, and there has been a lot of regulatory pressure for plasticizers, and regulatory is what drives these kinds of growth in the US, unless there is some economic advantage. And there generally isn't a big economic advantage, until you get oil prices and that around $100 or so. So that is roughly the tipping point. It can be between $85 and $125 or so depending on the application.

I don't know what else you would like me to comment on there, I think we have got a strong position in bio-derived and bio-degradable products. And what is interesting, as we are learning how to formulate better with these products, how to create additional performance attributes and characteristics, for example, the ability to withstand greater temperature, that is a huge step as you begin to use different cornerstone raw materials. If you want to use these products in value-added application, we aren't talking about garbage bags here, we aren't in those applications. If you want to put this under a hood of a vehicle, you have got to make this work under intense conditions, and we are progressing very rapidly on that front.

Okay, great. Have a great day, everyone.

Thanks.

Your next question comes from the line of Rosemarie Morbelli representing Gabelli and Company.

Thank you. Good morning, all.

Hi Rosemarie.

Just following up on Europe, can you talk about the trend during the quarter? Did you actually see a deterioration between March and June, and is that deterioration continuing into July?

I think that it was, the headlines continue to be fairly oppressive, and they didn't get any better through the course of the quarter. It might be more accurate to say that things didn't get any better than they got worse. But certainly things have slowed down some in the summer months. And I am not entirely certain whether or not that is just in anticipation of a seasonally slow third quarter, or if there is something else behind that.

Do you hear from your customers, I mean we know that 90% of Europe shuts down in August, -- well, now they share it between July and August. But do you see that they are extending their plant shutdowns versus what they did last year? Or is it more or less at the same level, taking advantage of the summer vacation to close for a longer period of time?

We actually saw some of that last year, Rosemarie. And that's what was the trigger point for us in understanding that this was a very serious downturn, that ultimately has been extrapolated now for really four quarters. So the phenomena is probably pretty steady this year with what we saw last year, but we actually, starting August of last year, saw people take plants down for an extra two to four weeks beyond what we had seen in other historical seasonality comparables.

Okay, so similar this year, not adding another week?

So far, but I mean it is the season, and it would not surprise me to learn that people that were shutting, businesses that were shutting down for the month of August, decide to extend that out into mid-September, I wouldn't be surprised to see a little bit of that go on. And again, I think for us, we are going to deal with the macro economics that we are dealt, and we are going to mitigate those by selling more new applications, and growing new business faster. And I think we are in a nice position to do that now in Europe.

Okay, and still in Europe, regarding the restructuring, what are your expectations in savings? Did I understand Rich properly, and you will more or less save $8.8 million of -- that was the cost of restructuring over a period of one year? Is that the statement?

That is correct, Rosemarie. But as I said earlier, about three-quarters of that restructuring was in the manufacturing area. So that comes in over time with higher margins, and we think this is the right-sizing our manufacturing footprint given the longer term outlook there.

And you really think that you have done everything that you need to do? You don't think that should go ahead of the curve, and do a little more, and still be able to operate and grow as the economies recover in the region?

PolyOne did significant restructuring a couple of years ago, and we think we are always ahead of the curve. We try to be ahead of the curve as much as we can be.

Okay, and regarding cross-selling where you are making progress as I understand it, could you quantify how much cross-selling you have been experiencing?

I mean the recent, the gains that we had this year, and the observations we have had around progress in certain processes we have had in Europe and Asia, generated about $18 million of sales leads as a result of those two activities, which we view as very positive. It was directed towards cross-selling as well as prospecting, but that gives you a little bit of flavor for what we have done in the current period.

About 20% of our new business, which is at a record high right now, is a result of cross-selling. So it is a nice increment. I would like it to be higher, but we are certainly headed in the right direction there. I would also mention, this is a metric that I look at a lot, and I know Bob does as well, is the new prospecting. So that is what kind of activity you have going out to gather a new business, and that is at an all-time high for the quarter. So we are pretty enthusiastic about the new business gains we are seeing and the future of the same.

Okay, and If we could look --

That is the only way we can get out of this European challenge. Automotive for example, automotive sales in Europe were down 26.5% for the quarter. And we have a fairly decent degree of penetration in that marketplace in Europe. Now Asia grew faster than that, but we don't have the same degree or anywhere near the same degree of penetration in automotive in Asia. So the only way to get through these downturns like this is to sell your way out of them, minimize your expenses, right-size the organization, and then getting more new business back in the house.

Steve, do you have any exposure to the North American automotive market?

Yes, we have pretty good penetration and that business was, had a decent high-single digit production rate increase in the quarter.

And so you saw the same kind of growth in Europe, products, product lines going into that?

Yes, we had an improvement in US auto, that is right. Rosemarie, we have to move on, we have got time for one more call if we can, Catina.

Your next question comes from the line of Steve Schwartz representing First Analysis, please proceed.

Good morning everyone. And thanks, Bob, for letting me get in on here. Rich, I didn't hear you say anything about CapEx, I didn't see anything in the Q, can you guys give us an update on what you are spending plans for the year are?

Sure, Steve. I think we've have kind of underspent compared to our guidance in the first half, but we just had a review the other day, and I would still range it at $50 million to $55 million for the year, and my money would be on closer to $50 million than $55 million.

Okay. I think at the last conference call, you guys were talking more $55 million to $60 million, does that sound right to you, and why is it lower?

We may have been, but I think we have gone through the projects and that is where we stand right now.

Okay. And then just lastly, can you give us an update on Latin America expansions? I know you have been spending some capital, and planning on expanding that business there?

Yes, we are continuing to look at organic initiatives including the addition of TPE capabilities, which is our GLS business line, as well as our high capability wiring cable products under the ECCOH brand name. Those two initiatives are moving forward with manufacturing to begin hopefully at the end of this year. And then as always, we are looking for M&A opportunities to supplement what we have in that region.

Okay, sounds good, thank you.

Thanks, Steve.

Thanks Steve. Well, I think it is time to conclude our second quarter 2012 conference call. I want to thank you all for your continued interest in PolyOne, and for joining us today, and we are really looking forward to updating you on our progress for the third quarter, and that is scheduled for late October. Thank you all very much, have a great day.

Ladies and gentlemen, thank you for your participation in today's conference, this concludes the presentation. You may now disconnect. Good day.