Avient Corp (AVNT) 2012 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the PolyOne Corporation's third-quarter 2012 conference call. My name is Emily 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, the conference is being recorded for replay purposes.

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

Thank you, Emily. 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 are based on management's expectation 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 is in today's press release.

During the discussions 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.

I would also like to remind everyone that there are slides posted to the PolyOne website regarding the Spartech acquisition. Operating results referenced during today's call will be comparing the third quarter of 2012 to the third 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 joining us on the call this morning. We appreciate that you adjusted your schedules at the last minute to participate.

We've got some great exciting news to share with our investors today, first, as it relates to our strong third-quarter performance; and second, we are especially excited to discuss the announcement of our latest bolt-on acquisition, Spartech. I'll begin with third-quarter results and then we'll discuss Spartech and, of course, leave some extra time today for your questions.

I am very pleased to share the third-quarter results with you as we delivered record third-quarter adjusted EPS of $0.33, a 27% increase over last year's $0.26, which marks our 12th consecutive quarter of double-digit EPS growth. The $0.07 EPS expansion is broadly comprised of $0.04 from organic improvements; $0.02 from reduced share count; and $0.01 from ColorMatrix, demonstrating acceleration of organic improvements compared to prior quarters.

Rich and Bob will share more color on the financial performance and the segment details, but overall our results show continued strong performance in line with our 2012 goals. Each of our four segments improved both operating margins and profits over last year's third quarter. On a consolidated basis, PolyOne achieved an operating margin of 7.9%, a 150 basis point improvement over last year and a third quarter record.

As has been the case throughout 2012 and well documented, as you've heard in the media, sluggish demand in Europe continues to be a challenge for companies. Our results reflect our effectiveness in moderating year-over-year declines in European business, improved specialty mix, and curtailed pruning in Global Color and Additives.

I just mentioned the importance of the organic component to our third-quarter EPS expansion, and I want to highlight just how powerful our mix improvement strategy has been and will continue to be to our results. So let me give you a case in point to try and illustrate.

In our Global Color, Additives and Inks segment, we have a long-term multi-million-dollar customer whose volume purchases with us are down over 30% this year compared to last year. However -- and here is the real story -- gross profit dollars have nearly quadrupled, all due to mix improvement.

We demonstrated how their perceived low-priced products were also low-value products, limiting their ability to grow their business. We shifted this customer to higher-value solutions that enabled them to differentiate themselves in the marketplace and reduced their working capital investment in inventory.

This example is indicative of how our mix improvement strategy is driving our performance. But our success is also being enabled by our commitment to ongoing operational excellence.

And you know, while accolades from third parties aren't what drive us at PolyOne, it was really nice to see our Company for the first time ever on Industry Week's top 50 manufacturing companies in their recently published list for 2012. Their ranking system consisted of six key financial metrics over a three-year period, so it's especially rewarding that we were recognized for our performance over a longer time horizon.

Those were important years in our transformation, ones in which the execution of our strategy really began to show. Late in 2008 we made a critical decision as a Company to invest in and launch the PolyOne Lean Six Sigma program, and this decision has paid huge dividends for all of our stakeholders and that will surely continue in the future.

The level of achievement from this initiative has been extensively recognized externally, with the Industry Week recognition being the most recent. Our performance based on Industry Week's ranking places us in select company, amongst the likes of Apple, Microsoft, Colgate-Palmolive, PepsiCo, Dell, and Intel, just to name a few.

While we are very pleased by the recognition, we're even more excited about what it means for our customers. They now have a clear, defined leader in our industry when it comes to providing innovative solutions and supply-chain performance that they can count on time and time again, to be there when they need us the most.

When people think about Lean Six Sigma they often think about manufacturing, supply chain, throughput, debottlenecking, and all these different issues. While these are ripe for waste elimination, at PolyOne LSS is a lot more than that. We are increasing our focus with LSS on commercial projects, with a bias towards sales growth, working diligently to improve our ability to capture the voice of the customer, further developing our expertise in translating this into innovative solutions, all while improving the cycle time and the success rate of our product development efforts. This enhances our customers' ability to capture value, increasing their competitiveness in their markets.

We are focused on business erosion management as well, understanding the root causes behind business losses, and working collaboratively with our customers to solve the issues, improving our customer retention while building overall satisfaction with PolyOne. Our operational excellence efforts have delivered significant value to the organization, to our customers, and to our shareholders. However, we are nowhere near finished, and we expect to drive 50 to 100 basis points of gross margin contribution per year from these efforts.

As you can see again from our performance in the third quarter, our four-pillar strategy continues to deliver results. We are earning respect and credibility by doing what we say we are going to do.

While we are very pleased with our performance, we are not resting on our laurels. There is plenty of opportunity for continuous improvement and to grow this Company now and in the future. I am now going to turn the call over to Rich Diemer, who will review our third-quarter financial results. Rich?

Thank you, Steve, and good morning. It's truly a pleasure to share our third-quarter results and the many records that we achieved.

We reported third-quarter sales of $740.2 million and adjusted net income of $29.4 million, versus sales of $735.8 million and adjusted net income of $24.4 million for the third quarter of 2011. Adjusted EPS expanded 27% to a third-quarter record of $0.33 versus $0.26 last year.

These results were driven by operating margin improvements in all platforms, including benefits from the ColorMatrix acquisition. Sales increased 1% over prior year, with the ColorMatrix acquisition and Specialty price and mix offsetting the European demand challenges and foreign exchange, which had an unfavorable impact of 3% compared to prior year.

From an end-market perspective, we experienced strong growth in electronics, packaging, appliance, and healthcare, outweighed by softness in automotive and consumer. As we said last quarter we attribute this success to our investments in commercial resources, solid growth from new product introductions, and the successful integration of ColorMatrix, which continues to progress very well.

As for taxes, the pre-special tax rate in the third quarter was 35.8% versus 35.9% in the third quarter of 2011. Special items in the quarter were principally related to environmental charges and resulted in an after-tax charge of $5.3 million or $0.06 a share.

As a result of our continued focus and success in working capital management, we ended the quarter with $249 million of cash and liquidity of $428 million. And in addition to the Industry Week magazine recognition Steve mentioned, CFO Magazine together with REL Consulting recently ranked PolyOne's working capital performance as the best in industry, along with just two other companies in the entire chemical sector.

This is the second consecutive year that PolyOne's performance in working capital management has been recognized, and working capital for the third quarter continues to be world-class at 10.5% of sales. I'll remind you that we don't manage working capital at these levels at the expense of our customers. In the third quarter, we achieved record on-time delivery to our customers, as measured by their original requested date, of 96%.

Our net debt to EBITDA ratio based on trailing 12 months pro forma for ColorMatrix was 1.6 times at the end of the third quarter. 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, although we will be temporarily on the sidelines based on SEC rules until we close our deal that we announced today.

We did not repurchase any shares in the third quarter. However, during the first half of 2012, we purchased 1.2 million shares at an average price of $13.24 per share.

It's been my pleasure in the three quarters that I have been with PolyOne to share such great financial results with you, as well as to meet many of you over the past few quarters. I'm really excited about our opportunities ahead. With that, I will now turn the call over to Bob Patterson.

Thanks, Rich, and good morning. Once again we were able to overcome the challenges in Europe to deliver operating income and operating margin growth in all platforms.

Specialty revenues increased by 8% over the prior year to $309 million, driven by the ColorMatrix acquisition, price and mix improvement, and new product introductions, offset partially by European demand weakness and a weaker euro. Operating income for the Specialty platform increased to a third-quarter record of $29.6 million, a 35% increase over last year, and resulting in a return on sales of 9.6%, a 200 basis point improvement over last year and a record third-quarter performance for the platform.

As you know, our Specialty platform has two segments, Global Specialty Engineered Materials, and Global Color and Additives and Inks. We break the performance out for each.

Starting with Global Specialty Engineered Materials, sales declined 7% versus the prior year to $137 million due to lower demand in Europe and the weakness of the euro. However, with the positive effects of our mix improvement strategy, EM delivered operating income of $13.1 million, a 19% improvement over the prior year.

This helped drive return on sales of 9.6%, which is a 220 basis point improvement over the prior year and the best operating margin in Engineered Materials since the third quarter of 2010. In fact, within EM, the GLS business unit, which make thermoplastic elastomers, had an all-time record quarter for the third quarter in terms of revenue, operating profit, and operating margins.

You may recall that just a year ago, in the third quarter of 2011, we experienced weakness in EM due to declines in consumer demand for applications utilizing the GLS soft touch materials in consumer markets, and our ECCOH wire and cable business associated with solar applications. We said then that we were focused on capturing new business opportunities, and we have done just that.

Our other Specialty segment, Global Color, Additives and Inks, increased revenue by 25% to $173 million due to the ColorMatrix acquisition, sales growth in Asia, lapping most of the significant pruning actions, and strong price and mix, offset partially by a decline in European demand. Operating income for Global Color reached $16.5 million, a third-quarter record for this segment, representing a 50% increase over the prior-year third quarter. This resulted in a record third-quarter return on sales of 9.6%, an improvement of 160 basis points over last year.

Our highlight for this segment is that all regions, including Europe, contributed to a 41% increase in healthcare revenues compared to the prior year. And for PolyOne as a whole, healthcare sales now account for 12.1% of revenues.

Shifting to our Distribution platform, POD reported revenues of $254 million. Volume in this segment increased 3%, with price declines leading to flat revenues over prior year. The most significant growth occurred in the appliance and electronics end markets, offset partially by weakness in consumer and industrial.

Despite flat revenues, margin expansion through mix improvement enabled an operating income increase of 16% over the prior year to $16.4 million for the quarter. Return on sales was 6.4%, a quarterly record well beyond our 2012 target range and to a level within our 2015 target range.

Finally, our third platform, Performance Products and Solutions, demonstrated the importance of execution to deliver operating income growth as revenue declined by 8% in the quarter versus the year-ago period. Much of this decrease was attributable to lower selling prices, reflecting lower raw material costs over the same period last year, as volumes were only down slightly by 1%.

Despite the lower revenues, PP&S increased operating income by 25% compared with last year to $20.8 million. This resulted in a 10% return on sales, 210 basis points over the third quarter of 2011, and a third-quarter record.

Margins expanded in PP&S due to raw material dynamics. This operating margin performance is at the high end of the business's announced 2012 target range for operating margins and is already at the low end of the 2015 target range.

We are locked in on those 2015 targets, which we announced at our Investor Day earlier this year, and we are aggressively pursuing them. In the interest of time, I will now turn the call back to Steve, as we will focus the remainder of our remarks this morning on the announcement of our agreement to acquire Spartech.

All right. Thank you, Bob, and now for the really exciting news that we just announced this morning. We are thrilled to have an opportunity to talk about our latest bolt-on acquisition, Spartech Corporation, how it's financially and strategically compelling, and how it will further drive PolyOne's growth in the near term and the long term. And, most importantly, how it can provide greater financial returns to our shareholders.

But to fully understand why the Spartech deal is great for the new PolyOne, it's important to first take a step back and remember the old PolyOne. Our longer-term shareholders and those who have covered us for several years now know the PolyOne transformation story very well -- how we have evolved from a primarily commodity player to a strong and growing specialty company, and how much shareholder value our Company has delivered as a result.

As we evaluated the Spartech opportunity, it quickly became clear that Spartech currently resembles PolyOne in the early stages of our transformation. That is, with strong positions in several growth segments but underappreciated in the specialty space. You know that at PolyOne we successfully transformed our legacy business into what has now become the foundation of our growing specialty company. What we see in Spartech is that same opportunity, where we are poised, excited, and fully prepared to perform an even more successful and value-generating turnaround.

During our diligence we developed a strong appreciation for Spartech's businesses and product portfolio, the predominance of which is in technologies adjacent to PolyOne's Specialty positions. In doing so, we confirmed that Spartech possesses characteristics we must see in defining a company as specialty, and here is what they are -- differentiated and innovative offerings with a high degree of engineered complexity; strong customer relationships through application know-how; capacity for leading levels of service and profit potential; and the opportunity to provide comprehensive solutions, not just products.

Our diligence also confirmed that Spartech's footprint in North America is solid, generating 94% of its revenue. And it has market-leading positions in roughly 60% of its businesses.

Spartech utilizes many technologies that serve specialty markets such as aerospace, security, and specialized packaging, just to name a few. Again, a major point of strength for the company.

They also recognize the importance of leading innovation. Spartech's new state-of-the-art technology center is a prime example that the company has been taking the right steps to invest in this critical area.

But despite all these positive aspects, Spartech doesn't achieve the commensurate value and return -- again something very reminiscent of PolyOne in the early days of our transformation. And while the transformation at Spartech is in its early phases, this acquisition allows us to help the Spartech team accelerate their performance improvements and make an immediate impact.

Improvements will initially come in the form of traditional cost synergies such as aligning the manufacturing footprint with the voice of the customer; reducing redundant public company costs; leveraging our Color and Additive solutions within their sheet and packaging business; and raw material savings, just to name a few.

So we see an even greater opportunity to leverage the full spectrum of our four-pillar strategy to really deliver on the significant potential that is pent up within Spartech. Specialization, globalization, operational and commercial excellence, the strategy that led our transformation and continues to propel PolyOne's growth today, will be the same strategy that improves and grows Spartech by unleashing the value in its currently latent specialty value drivers.

In terms of specialization, we will drive a philosophy that thrives on selling value, not volume, something you've watched us do successfully at PolyOne. There will be a comprehensive shift through the organization, in particular within sales and marketing, and will entail strengthening their commercial and technology processes and resources, as was done effectively during PolyOne's transition.

We will increase the value of Spartech's existing strong portfolio by improving salesforce efficiency and effectiveness. You know that by executing PolyOne's commercial excellence pillar that we have in turn develop the most expansive and talented salesforce in the industry.

We have done this by providing the tools, training, technology, service, and experience to sell value effectively by putting our customers first. As Spartech joins our team, they will now have the same level of support and incentives to reach significantly higher levels of effectiveness.

Within operational excellence, we will deploy our award-winning Lean Six Sigma processes and other initiatives that earned us our recent top 50 manufacturing company award from Industry Week, to both support integration and drive overall efficiency and quality improvements throughout Spartech. Specifically within the sourcing arena, we have identified opportunities for scale, efficiency, and working capital improvements.

Lastly, from a globalization standpoint we have tremendous opportunity to geographically expand all of Spartech's platforms from a predominantly North American focus to other regions of the world, growing organically with existing Spartech customers and opening new opportunities through prospecting and cross-selling, using the broader and already established global PolyOne network.

As you can see, the acquisition rationale and alignment with our proven strategy is very clear. And as you would expect, we're excited to close this deal and quickly begin integration.

Now to cover those plans and our expectations for the associated shareholder returns, I'll next ask Bob Patterson, PolyOne's Chief Operating Officer, to provide an overview. Bob?

Thanks, Steve. I would like to remind everyone that we have posted a comprehensive slide deck on our Investor Relations page on PolyOne.com that provides even more color on Spartech's clear fit within our proven strategy, as well as some of the information that I will now share.

Our preliminary estimate of pretax annualized synergies is $65 million in operating income by year three. By way of comparison, during the last six years of PolyOne, we delivered approximately $60 million of organic operating income growth on just our legacy Specialty businesses, so that is excluding acquisitions.

Also recognize that as PolyOne started its transformation, our 2006 Specialty revenue was $877 million. With Spartech our base is significantly larger at $1.2 billion, so you can see the inherent potential to deliver significant results. We're confident, based on our analysis of Spartech, we can achieve a similar level of operating income performance, but do it in half the time; and here is why.

Spartech recognizes the need for transformation and has taken steps to begin. The management team that Steve has assembled over the last six years at PolyOne and our supporting cast of exceptional associates around the world is now in place.

It's a leadership group that has earned its credibility by delivering to shareholders and customers, while transforming our Company in line with our strategy. Our team is now ready and fully capable to apply what we have accomplished within PolyOne to a new opportunity, and that opportunity is Spartech, a natural bolt-on candidate poised for PolyOne, our strategy, and our disciplined execution.

We know how to do this. We have done it before. And we are eager to do it all over again.

The integration will be conducted by a team of our most talented and experienced associates. Tom Kedrowski, who has run both commercial and operational programs and has been the driving force behind our operational excellence pillar at PolyOne, will lead the integration team. He is a perfect fit for this assignment, and I have no doubt that he and the rest of our team will deliver on all aspects of the integration.

We expect the acquisition of Spartech will be immediately accretive in the first full year after acquisition and ultimately add $0.50 of EPS accretion, once our estimated $65 million of synergies are realized. In summary, there are three key takeaways to remember about our acquisition of Spartech.

First and most importantly is that financially this is a very compelling deal that will return extraordinary value to shareholders. The purchase price, coupled with the operational synergies and opportunities to strengthen the commercial functions, will drive the performance. But what's more, we will do it even better and much faster than it took us to deliver the strong returns our shareholders have enjoyed during our transformative years.

Second, this bolt-on acquisition is a clear and key component to our specialization strategy. Though a different opportunity than past acquisitions, Spartech -- like the others -- will no doubt expand our Specialty platform alongside Global Specialty Engineered Materials and Global Color, Additives and Inks.

And third, this entire management team and our Board of Directors fully support this acquisition. Our leadership is aligned and committed to making this acquisition as successful as we know it can be, and we are eager to get started on our journey of doing what we do best -- execute and deliver.

With that I will now turn the call over to Rich Diemer, who will discuss acquisition timing, regulatory filings, related financing, and our expanded share repurchase program.

Thanks, Bob. Under the terms of the purchase agreement for $8.00 per share, Spartech's shareholders will receive approximately one-third in cash and two-thirds in PolyOne stock. The total transaction value represents approximately $393 million, including the assumption of Spartech's debt.

As compelling as the strategic rationale is for this acquisition, I am equally pleased with how we intend to financially structure the deal. It will be done through a combination of cash on hand, long-term debt, and PolyOne shares that will be issued to Spartech's shareholders. We have committed financing in place for $250 million in new debt and will upsize our asset-backed revolver to include Spartech's working capital assets. With Spartech assets included, we anticipate our revolver to upsize to approximately $450 million, all of which will be undrawn at the date of acquisition.

Our pro forma net debt should be approximately 2.1 times LTM EBITDA at the close.

In addition to the cash portion of the consideration, PolyOne will issue promptly approximately 10 million shares of PolyOne stock to Spartech's shareholders. We expect to buy back all the shares issued in conjunction with this transaction and complete the repurchase within 12 to 18 months after the close. Over time, this will essentially result in a total financial impact to the Company as if the deal were structured with 100% cash.

PolyOne's Board of Directors have increased the Company's share repurchase authorization to 20 million shares to accommodate our future buyback plans. As you would expect, both the Company and the Board remain committed to maintaining a strong credit profile and the current annual dividend of $0.20 per share.

We expect to close this transaction in Q1 of 2013. It is subject to HSR antitrust clearance and other government approvals and must meet customary closing conditions. We will file a Form S-4 with the SEC to register the PolyOne shares to be issued upon close.

Spartech will file proxy materials and seek shareholder approval, which is required to complete the deal. More explanation is available in our news release, and I will be happy to answer any questions during the Q&A segment that will commence in just a moment.

I would like to turn the call back over to Steve Newlin for some closing comments. Steve?

Well, thank you, Rich. I hope you can tell we're extremely excited about how Spartech expands our Specialty portfolio and will accelerate the value we deliver as a Company.

In closing I would like to address some of the other constituents who may be listening today. To the Spartech associates, I want to welcome you to the PolyOne family and I look forward to meeting you in the future. Until then, I want to assure you that as we go through the integration process we will do so with open and honest communications.

In the meantime, we invite you to learn as much as you can about PolyOne and how we go to market. The four pillars strategy you heard about today is the basis for all that we do, and it will soon be your foundation as well.

The journey will no doubt include changes along the way. But in the end, your business and customers will be stronger and better served as a result. You'll soon become an integral part of our winning organization, and we are really looking forward to that.

And to the Spartech customers joining us today, I speak for our entire team in conveying our commitment to do everything we can to help your business thrive. It will come in the form of new and specialized solutions, proactive collaboration throughout the supply chain, accelerated innovation processes, industry-leading service levels, and ultimately increased value to you and to your customers.

With that, we have some time for questions and look forward to discussing both our strong third-quarter performance and/or the Spartech acquisition.

(Operator Instructions) Frank Mitsch, Wells Fargo Securities.

Good morning. This is Sabina in for Frank. Nice way to keep us excited in the morning.

So, just as you embark on applying PolyOne's Specialty transformation skills to Spartech's business, can you just help us discriminate between what the low-hanging fruit could be and maybe what initiatives could be a little more challenging, given Spartech's current operations? I mean, I would imagine it would be more difficult to upgrade some parts of its business versus leveraging other aspects.

Yes, Sabina, this is Bob. I guess I would characterize the low-hanging fruit as things that you would probably expect, which would be that we are both public companies and as a result of the acquisition we can expect that we won't have to continue to maintain redundant corporate governance and overhead costs. So I would say those are probably the things that we view as near-term synergy opportunities.

Over the longer term, we see the opportunity to align manufacturing facilities with the voice of the customer and really go through the same steps of our four-pillar strategy with Spartech that we have with PolyOne, and wouldn't see any specific challenges to doing that in this acquisition than we have with our legacy businesses. In fact we feel more confident about our ability to deliver now, given that Spartech is already embarked on their own transformation and we are really just accelerating that with our leadership team.

I would also mention, Vicki Holt, the CEO of Spartech, has that team started on a transformation. They are heading the right way, but we have learned so much over the last five, six years in this process that we know that we can be a catalyst for this and accelerate it. Because we are up a learning -- experienced the learning curve.

So we are excited to get going, and we think we are going to find opportunities beyond what we have seen on the cursory review that we have had at this point in the process.

Okay. Then at closing it looks like your pro forma net debt to EBITDA level goes to about 2.1 times. I think in the past you mentioned being pretty comfortable at that sort of level.

But given the uncertain macroeconomic backdrop here, do you have a new target? And if so, how long do you think it will take to get there?

Sabina, this is Rich. We are comfortable at that level. We were back at that level just a couple quarters ago and have seen it come down with the performance of the Company.

We don't have a new target. We think we actually have some scope to do more acquisitions if they present themselves by the end of the year. Certainly not of this size, but more bolt-on smaller deals, maybe ones that there is some incentive to get closed by the end of the year for us and for others.

So we are comfortable, to answer your question; and that leverage does get paid down relatively quickly over time in the model we have.

All right, thank you.

Lucy Watson, Jefferies and Co.

Good morning. A question on the quarter. What was the volume trend for Europe overall in the quarter? And which end markets have been the most troublesome?

Yes, I will take volume first of all with respect to Europe. It is down about 4%.

What's really encouraging about that is that the year-over-year volume comparisons have improved sequentially from about the third or fourth quarter of last year, with those comparisons improving. So that is really the answer to volume on Europe.

Then your second question was with respect to, I think, end markets, if I am not mistaken. In Europe we did see auto sales being down most for the quarter, about 8%. But I would point out that healthcare was a good guy for us across both of our businesses in Europe, up double digits.

Okay. As a quick follow-up, what is happening in Europe to give you confidence that things have finally bottomed out?

Well, for us, I think that -- and maybe just appropriately characterize how we feel about Europe right now is to say that things don't seem to be getting any worse. It is difficult to point to specific things that would say that it is getting better, but it appears to be flattening out.

For us, that really has been influenced by our improvement in healthcare, which has been offsetting some of the weakness that we have seen in auto in Europe. Then geographically in some of the more challenged locations like Spain, we have seen year-over-year sales actually flatten out. So we view that as a positive, that it's not getting any worse.

And, Lucy, I think you framed your question appropriately. We are seeing it flattening out more than any -- we are not seeing any evidence of a recovery. But I think we saw enough of a downturn fourth quarter of last year that we are not seeing a progressive step backwards from this point, at this early point in the quarter.

Thank you.

Mike Sison, KeyBanc.

Hey, good morning, guys. Nice transaction here with Spartech. You know, I've covered Spartech for quite some time, and there was certainly a time where profitability was much better. The Packaging Technologies business, which you are picking up, is pretty much where you want it.

The trouble areas are Custom Sheet and Color and Specialty. Steve, what did you see in Custom Sheet and Color and Specialty that gets you excited that you can get it back to the levels it used to be?

Well, I think there are a lot of attributes that we characterized as having the legs that we like to see in a Specialty business. First of all, a lot of custom development, custom formulating and production. That is always an attribute that says you are close to your customers, they rely on you, they need you.

Next, in adjacent spaces, in some of the same markets that we serve, a lot of interesting and attractive markets that are right where we are today. And some where we have been wanting to get you for a long time, for example, aerospace. It's a very long sales cycle, a high spec-in business. Some of this business they have in security is we think very attractive and a growth area as well.

So those are, I think, some of the key attributes that we saw up front. I think it starts with what kind of customers you have, and what are you providing them, and how differentiated is it or can it become. And then what markets are you serving? Do you know anything about them?

We know a lot about many of their markets. We have a broader offering to provide those customers. At the same time, we get to propel ourselves into some new markets that we have been working on developing for some time now.

Okay. Then, Bob or Rich, when you think about the accretion in year one, my estimate publicly is $0.30 for Spartech next year; consensus at $0.39. Can you give us a little bit of help, what type of improvement you expect for the base from their business, into '13? And how much synergy kicks in next year?

Yes, I am going to do this really off of what I would say is an acquired EBIT level of about $22 million, $20 million, and then with what we assume for interest costs associated with the new financing, and then subsequently associated with share buybacks. Into the first full year we would say that interest is nearly offsetting the acquire EBIT, less amortization that we assume as a result of stepping up the asset values.

So let's call that a net zero on a broader share base next year. Means that in the first full year we need to get about $11 million of synergies to break even, which we believe that we will be able to accomplish next year, and see line of sight to the first full-year EPS accretion modestly in the $0.02 range. And we will know more about that, candidly, when we get closer to closing the deal.

Got it. Thank you and congrats again.

Kevin Hocevar, Northcoast Research.

Hi, good morning, guys. So, with the -- looks like the target for Spartech in terms of the margin is 8% to 10% over the next couple years, and I believe this will all be included in the Specialty platform. Does that change your 12% to 16% target margins in 2015?

Bob, I know you mentioned that you are locked in on these, your 2015 goals. So I am just wondering if that changes at all.

Well, first of all, with respect to our existing businesses, we are not changing anything for our 2015 targets. Clearly by adding in Spartech to the Specialty platform, that will weigh down on the platform's margin potential. But still see line of sight to actually getting inside of that range. But would say that we have some time here to think about those goals, but I wouldn't see anything changing significantly.

Okay.

I think, Kevin, we will need a little more time to see specifically how quickly we can get to those levels of return on sales. But we think ultimately this business has the same kind of attributes that has allowed us to make our progress.

And we would end up -- it may take a little bit longer to get to the 12% or 16% because the starting point is lower, but directionally that is where this is headed. And we will sort of segregate this from our other specialty business as we evaluate ourselves and hold ourselves accountable to those targets that are out there.

Okay. Then, Rich, this is a question more for you. What was the thought with doing the share -- issuing shares to help pay for the transaction, instead of maybe issuing more debt? Because I believe you would be able to get a lower interest rate than you currently have.

So was the thought there -- I know you didn't want to raise net debt to EBITDA above 3 times. I don't know if you would have issued all debt, if it would have rose it above that level. But just wanted to get some color on the thought with doing the -- issuing the shares.

Sure, Kevin. What I would tell you is I think that a prime motivation here to get the deal done was the attractive attractiveness of PolyOne's shares and the ability of the existing shareholders of Spartech to share in the rewards of the go-forward integration and synergies to the extent they wanted to do that. So, as you can see, over the relatively medium term we are going to make this into a more all-cash deal. But in the meantime, this is what it took to get the deal done, and we are happy to do it in that way.

Okay, great. Thank you very much.

Dmitry Silversteyn, Longbow Research.

Thank you. Good morning and congratulations on the quarter and this deal.

It looks like it is sort of you're taking a step back here to take several steps forward, in a sense that both GLS and ColorMatrix acquisitions sort of added more value or more specialness to your portfolio, where Spartech is a little bit more of a -- I don't want to say a fixer-upper, but it's certainly more of a business in a [calm]. So you are -- obviously you have gotten a lot of confidence that you can get this done given the transformation you did internally already.

As you look at Spartech, do you think that the improvement that you can bring to the table is more on the commercialization and engaging with customers and the marketing part of the business? Or is there still work to be done on the manufacturing and rightsizing the footprint and some of the things that sort of derailed Spartech a couple of years ago, when they try to execute this?

Yes, I think you have made an important distinction between this type of an acquisition versus ColorMatrix or GLS. They are very, very different.

Those businesses had the deep-seated Specialty attributes and financial returns already embedded and were more like what we were bringing PolyOne to become, where this is a lot like where we were. I think the answer to your question lies on all fronts.

You know -- and you have watched us a long time, Dmitry. We know how to run a great Lean Six Sigma process to improve efficiency on the manufacturing side, on the working capital side, on the quality side. We know we can add a lot of value there.

But we also believe that the commercial opportunities from the learnings that we have gained over the years, the experience that we have, some of the tools that are proprietary that we have, that we can apply to the commercial side of this business are certainly there as well. I mean, Vicki and her team are just very early in the early phases in some of the business of starting Lean Six Sigma.

We can accelerate that. We have 41% of our employees well trained in this. For them it is a tiny percentage.

So we think there is great opportunity on all fronts. In addition to that, for a company of this size and this size of a market cap, the public company costs are not cheap. It costs a lot of money to be a public company, and it takes a lot of time. And we think that is a quick area that we can immediately make some gains in.

Then finally, again on the sourcing side, we see volume and scale is financially beneficial. In addition to that I think our financial position, which is stronger, gives some increased flexibility on many fronts, including investing in some areas where they have some attractive growth opportunities but haven't really had all the opportunity to invest to the full degree you would if you didn't have some constraints on you.

So I think we are -- I would love to just put this into one arena and say we are most excited about this part; but really it is across-the-board on all the fronts that you mentioned.

Okay. Then just a little bit of maybe a bookkeeping question for the purposes of combining the companies and reporting your results going forward. Are you going to split out the Color and Additives and the Engineered Materials into your existing divisions and then just have the Sheet and Rollstock as a third business unit within Specialty? Have you given any thought about how you will be accounting for these segments?

I think that is pretty close, Dmitry. This is Bob. With one minor exception being that there is some contract manufacturing within the Color and Specialty compounds business that may fit most appropriately with our like business, which is in PP&S. But largely, the company will go into the Specialty platform the way you just described.

Okay. That actually brings me to my last question, Bob. Are there any businesses within Spartech that you have less interest in, let's say, going forward?

No, not at this time.

Okay, thank you.

Mike Ritzenthaler, Piper Jaffray.

Good morning. I would like to go into the technology adjacencies a little bit more. Are there any that you are particularly excited about?

You mentioned the product adjacencies, and some of the commentary on the slides look like they are more focused on end markets and products. But I was wondering if there is anything specific about their technology.

Well, I mean -- this is Bob. First of all, the technologies as we just described them are in an adjacent space largely to where we are today. There is some overlap with respect to Color and Specialty compounds, which are more closely aligned with our Color and Engineered Materials businesses, Mike.

But when you look at the Sheet and then the Packaging segments they really are very different from what we have today, and view all of those as attractive. Steve mentioned some end market positions that we are picking up that we like a lot. And I would point out that Spartech does have number-one market-leading positions in sheet, rigid barrier packaging, and cell cast acrylics, as three that we are interested in. Focused really on those end markets you mentioned, specifically aerospace and security, to name a few.

And the technologies, you know, barrier films, acrylics, additives we think there is a tremendous opportunity for ColorMatrix, for pull from ColorMatrix by putting additives into some of their sheet products that will create a lot of value for customers. So I think it's -- we have to get into that level of detail yet when we can with ColorMatrix. But we really like the approach of putting -- building more into the value and the offering to the customer, and making the formulation in the sheet have greater attributes and characteristics and functionality.

Okay, that's helpful. Then on ROIC, could you discuss ROIC targets to the extent that you discuss them internally in the next couple of years? In the past you have been in the 30%s, which has been one of the real calling cards for PolyOne, and have been more in the teens recently since picking up on the M&A front.

So I guess the spear of the question is around management compensation on ROIC. Have you had to change the compensation metrics to adjust for the near-term effects of the M&A?

mike, this is Rich. I think I will take the first part of that and then let Steve do the second part. What I would tell you is that our targets for ROIC that we stated in our Analyst Day earlier this year are still the targets we have. If you look specifically at this deal it's got very, very attractive ROIC if you look out into the future as we realize the synergies, somewhere in the range of 20%-plus, which is significantly over our weighted average cost of capital. So this is a very attractive acquisition and we are going to go and deliver it. I'll then hand it over --

Yes, let me tackle the question about changing our incentives around ROIC. We don't have any plans to do that. We think ROIC is a meaningful and important metric; and we measure it; and we discuss it in people's performance assessments.

But I believe in simplicity and easy measurability in compensation for people, and I believe in as direct of alignment as we can have with shareholders. And I think that our compensation plan as it stands today in PolyOne is the appropriate one.

I think it is certainly hard to argue that it isn't driving performance. So we don't have any plans to use ROIC as a bonus reward incentive metric.

Okay. Just one last one for me then. On the -- what was the qualitative composition of organic growth? I mean Bob had gone into some of the detail; this is more of a question on the quarter. Packaging, healthcare, consumer products, if you could just give a little bit more color around which one of those were particularly attractive from an organic standpoint.

And if the organic improvement was $0.04, as you had mentioned, what was the top-line revenue organically on a percentage basis?

Yes, I am going to start with, first of all, as you looked at the -- you already talked about the $0.04 of EPS year-over-year, which is the most significant addition that we have had organically quarter-over-quarter, with the remainder of $0.02 coming from share repurchases and then $0.01 from ColorMatrix accretion.

And the market segments in which we experienced the greatest growth were packaging, appliance, electronics, and then healthcare. And as I mentioned earlier in our remarks, healthcare is now actually 12.1% of our sales, which was an all-time record for us.

I think the softest areas for us for the quarter were automotive and consumer. And automotive, a lot of that was due to Europe; the builds were down 8%, and we are hooked into that space in Europe. So that gives you some sense of the growth rates.

Okay. Then I guess the other part of the question was the top-line revenue growth organically. Was there a breakdown there?

Do you have that?

Yes. This is Rich. What I would tell you is that the walk there is plus 7% on acquisitions; minus 1.5% on volume; minus 2.3% call it on price mix; and minus 2.5% on FX.

What I would also amplify there is that the preponderance of the price mix was in PolyOne Distribution and in PP&S, where there were some input cost decreases. So I think you look more closely at the margin improvements there as being indicative. In the Specialty businesses, price mix was a positive 3.5%.

POD had price declines of 3%, and that is pretty much a direct pass-through in that business. So that is a $1 billion base that had a 3% lower raw material pricing.

Okay, great. Thanks and congrats, guys.

Christopher Butler, Sidoti and Company.

Hi, good morning, everyone. As I look at this deal, and look at what Spartech is doing and what the synergies that you expect from it, we are still getting EBITDA margins only to about 10%, as was touched on earlier. Could you talk to other factors like global cross-selling opportunities that may help bridge the gap, that may not actually find its way into operating margins?

And similarly, what kind of negative sales synergies might you expect as you reduce some of the lower-margin sales here?

I'm going to take this first and just say with respect to our EBIT expectations, where we had in the slide deck of getting the acquired businesses to 8% to 10% over time, that should translate itself to a higher actual EBITDA return by adding another 2 points, let's say. But much in the same way that we set targets for ourselves, even going back to 2007, for what we set in 2012, and then we have subsequently updated those through 2015, we really view those as interim goals. And that is not the end game. So that is where we think we will get to inside of three years, but believe that we can get beyond that.

With respect to cross-selling opportunities, Steve already mentioned the opportunities with respect to additives from our Global Color, Additives and Inks portfolio, which could align with their products. Then I would also say the same thing about our colorants as well in addition to the additives.

We also have a global footprint, and we haven't talked that much about globalization but view that as a significant opportunity. 94% of Spartech's sales are in the US, and we see the ability to take those globally.

It's actually 94% in North America. But nevertheless, the opportunity to expand this globally is huge.

I don't think -- what we don't know yet and we haven't factored in are -- what are some of the other ways that we can use PolyOne resources and Spartech resources combined to sell more complex packages? We haven't even factored that into this.

I will tell you in our modeling we did expect to have some pruning in the business. We won't tell you the amount of that, but we did certainly model some attrited business as a result of repositioning the portfolio and making sure that when we are working with customers we have something of great value to offer them.

With the revaluation of assets, could you give us a sense on where you expect depreciation to be?

We're going to take that -- we are basically going to add about $2.5 million to the existing run rate. So, there is about 32 plus 2, call it 34.

I appreciate your time.

Steve Schwartz, First Analysis.

Good morning, everyone. I guess the first question, and it ties into what a lot of people have asked, but I will ask it in a slightly different way. Of the $65 million in synergies, how do you expect that to split out between corporate savings and operations restructuring?

At this time we are not giving any additional details on the carveout of the $65 million. There may be a point in time where that becomes more appropriate for us to outline that when we get closer to the close date.

But as Steve mentioned in a previous remark, we do see those synergies taking place on several fronts, one being reduction of corporate governance costs and things associated with being a public company. The next two categories really would be the implementation of our Lean Six Sigma program, aligning manufacturing assets with the voice of the customer, and then finally on the commercial side with respect to an improving salesforce training, efficiency, and effectiveness.

But at this point we are not assigning values to either one of those, but would say that we might be able to do that here in short order.

Okay. One of the reasons I asked is, have you formulated any thoughts about their packaging Tech Center and so forth? Spartech has done a lot to consolidate all their technical resources into a new Tech Center in St. Louis, and I am wondering if you will dare to upset that and maybe move all of that to Avon Lake, and how that might affect the opportunities within that business.

Well, first of all, you know that we love innovation at PolyOne and that is one of the things that has driven our profitability improvement in our transformation. So we have zero plans or intentions to shut down their exciting new innovation center in St. Louis.

Could we change that? I guess we could. But our belief is that is a very valuable asset that will help drive this transformation and really create value for the customers and, in turn, the shareholders.

So we are excited about it. It is just not on our radar screen to think about closing a facility like that. It's a nice asset.

They made a tough -- they have made tough choices. They have had limited opportunities, limited funds and resources. And I am really pleased that they chose to invest in innovation and in R&D, because that is what is driving our -- has driven our transformation. It is one of the key drivers, and it certainly will be very helpful going forward.

Okay, thanks, Steve. Then just as a follow-up if I could, Bob, within the $65 million, given their relatively low gross margin level to your own, I am going to presume you're going to look at closing a lot of facilities, what have you, consolidating. Typically that requires a certain amount of cap spending. Have you factored that into the $65 million that you guys are talking about at this point?

The cash cost -- there is an estimate of cash costs included in the slide deck on the website at about $60 million.

$60 million? Okay, that's great. Thank you.

All factored in.

We have got time for one more question.

Rosemarie Morbelli, Gabelli & Company.

Good morning, all, and thank you for taking my question. I thought it was not going to make it.

Talking about CapEx, your estimate is around $52 million for PolyOne. Where do you think that particular level will be including Spartech? Particularly since you mentioned that they didn't have the financial means to do -- to take certain steps.

Yes, Rosemarie, this is Rich. What I would tell you is the way we have modeled it, it is approximately $25 million of CapEx per year. And I would say about 40% of that, $10 million, is safety and maintenance CapEx.

Certainly if there are opportunities with great paybacks, we have the flexibility to increase that. And we will obviously know more about that as we get closer to the business.

Yes, and I think to emphasize Rich's -- the last element of his answer, which is if we see great opportunities, we have the funds to make investments. We will make judgment calls. We will want to understand the markets and the returns. But if they are there, we are going to invest and play this out as a long-term game.

Okay. So if I understood properly, you'll have your own CapEx and you add about $25 million for Spartech.

More or less, yes.

Right.

Okay. Could you give us a feel for the existing size of Spartech's specialty products? Because while I know very little about the company my perception was that it was mostly commodities.

We would say that we don't believe it is mostly commodities, by any means. You might conclude that, looking at some of the returns. But I will tell you when you get inside and see what they are doing for their customers, and see how customized a lot of these applications are, and see the value that it brings to their end customers, we would categorize this entire batch of business as Specialty, as we categorized it at PolyOne six years ago, where we took Color, Additives and Inks and we took our Engineered Materials. Even though there were components of those businesses, Rosemarie, that were commoditized, that didn't have as much value-add, they were still in the markets and had a customer base that could benefit from value-added application know-how, service, etc.

So we would say that all of this with the exception of some contract manufacturing, a little sliver of the overall $1.2 billion in sales, would be categorized for us in the Specialty camp. And remember, when we declared those businesses of PolyOne Specialty, they didn't have the profitability attributes. But we put them in that segment because we believed in the longer-term end-market development and the uniqueness that we could bring to customers.

Okay. That is helpful. Could you, Steve, talk a little bit about -- I mean, I know you said you would not give a number. But currently Spartech has $1.1 billion, $1.2 billion in revenues.

Could we anticipate about a 10% pruning? Does that -- eliminating those particular product lines or customers with whom you just want to be able to get Specialty type of margins?

You know, I really -- I am not trying to be coy here, but we can't possibly even assess that at this point. I think that will be evolving with time, and I think that while we factored something into our plans just to be safe and conservative, we can't at this point have discussions about customers and margins etc. We are just not allowed to go that deep when you get into these kind of conversations.

So that is something we will work very closely with the outstanding management team that we have down there, and Spartech will help us get through this, and we will work on it together. As you raise the bar, you begin to quickly understand where your customers value you and where you are just another me-too player. So that is what we will be going through together with them as we get our arms around this deal.

Thank you. Then on the PolyOne side, have you experienced any benefits yet from what appears to be a housing recovery? Or is that still another couple of quarters away?

We will answer that and then we will have to sign off, Rosemarie. But I think as far as you have heard a little bit of improvement in housing starts; and the US consensus forecast now for 2012 is 750,000 units. So far for 2013, it is 910,000 units. So if you believe those numbers it is a step in the right direction.

I think PP&S is benefiting from some increased activity in the North American housing market. We see some growth in applications like pipefittings, appliances, and wire and cable. So about 30% of that business is directly tied to housing.

It is way down from what it was a few years ago, about half what it was a few years ago. But that is what we would say in response to your question.

I thank you very much, and I think with that we have to conclude our third-quarter 2012 conference call. We want to thank you all for your continued interest in PolyOne and for joining us, again, on short notice on our call today.

We are excited about what happened in the third quarter and very excited about our future. So we appreciate your help and your support and your interest. Thank you very much. This concludes our call.

Thank you for joining today's conference. This concludes the presentation. You may now disconnect and have a good day.