Avient Corp (AVNT) 2012 Q4 法說會逐字稿

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

Thanks, Cynthia. And thanks, again, to everyone who is joining us on the call this morning. We always welcome the opportunity to speak with our investors and analysts about PolyOne's recent performance. I'm very pleased to share our fourth-quarter results with you, as it caps off another record year for PolyOne on many fronts. We delivered fourth-quarter record adjusted EPS of $0.21. And that's a 17% increase over last year. Which marks our 13th consecutive quarter of double-digit year-over-year adjusted EPS growth. Each of our four segments improved organic operating profits over last year's fourth quarter.

As has been the case throughout the year, and well documented in the media, extremely 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, improving Specialty mix, and curtailing pruning of lower-margin business. For the full year 2012, sales totaled $3 billion, as we delivered record adjusted EPS of $1.20 a share. That's an 18% increase over our prior record set in 2011. These full-year results are particularly encouraging, as they were generated by record-breaking performances in each of our three strategic platforms, despite the previously referenced European headwinds.

In 2012, 40% of the Specialty Platform earnings were generated in Europe, compared to 52% in 2011 on a pro forma basis. Nevertheless, all three platforms delivered record earnings and operating margins. Both our Distribution and the Specialty Platforms achieved record annual revenues. As evidence of our mix improvement success during 2012, gross margins expanded from 16.6% to 19.5%. Healthcare continues to be one of our best-performing areas of growth. And it now represents 12% of total Company revenues, or $350 million in 2012.

For those analysts and investors who know us well, you know we don't rest on our laurels, and there's no complacency here at PolyOne. We hit our targets but we don't do so at the expense of our long-term strategic position. And while we delivered many record performances in 2012, we also accomplished several other achievements, including the successful integration of ColorMatrix, completion of the Glasforms acquisition, and the agreement to acquire Spartech.

The first, with respect to Spartech, we anticipate a first-quarter close for this deal. Pending shareholder approval, we are still, of course, somewhat limited in the discussions that we can have with the Spartech team. However, based on the interactions that we have had, and the planning meetings that have taken place, we are increasingly excited about the opportunity before us. More than ever we are convinced the Spartech solutions portfolio provides an impactful complement to PolyOne's leading specialty presence in the industry. And we will apply the same four-pillar strategy that transformed our Specialty businesses to the Spartech business. And we're going to do this swiftly and with great success. We remain very confident in our synergy capture projection of $65 million run rate by the end of year three.

In addition to synergies related to manufacturing alignment and the elimination of duplicate public company costs, we believe significant technology and cross-selling synergies exist. Our initial review of the Spartech technology and product lines confirmed that these opportunities our abundant. For example, PolyOne's low-smoke and halogen-free technology used in our ECCOH and Geon product lines has very interesting application in some of Spartech's sheet and laminate applications. We also believe there are exciting developments that can occur by leveraging our ColorMatrix barrier technology to drive further innovation, to create additional value in Spartech's packaging business.

In December, we further strengthened our Specialty Platform through the acquisition of Glasforms, a leading manufacturer of glass and carbon-reinforced polymers and advanced composite technology. This acquisition marks PolyOne's entry into advanced composites, a high-growth specialty arena, consistent with our proven strategy of providing specialty solutions that deliver high value to customers. This is really an exciting company. They utilize new processes, materials and technology that fits perfectly with our expertise in offering metal replacement and light-weighting alternatives. Just a few example applications are, wind turbine stiffening components, earthquake-proof bridge decking, commercial truck floors, application for endoscopy wands, and specialty rods used in oil and gas production. So Glasforms clearly broadens our portfolio of solutions to offer our customers. And nicely complements our existing global specialty-engineered materials offering.

We're pleased with our financial performance for the year and the quarter. And with the exciting acquisition news we shared during the fourth quarter. Rich Diemer and Bob Patterson will discuss the details regarding our financial performance and other 2012 accomplishments. So with that, I'm going to turn the call over to Rich Diemer.

Thank you, Steve, and good morning. It is my pleasure to provide more detail on our fourth-quarter results and the many records that we achieved. We reported fourth-quarter sales of $679.4 million and adjusted net income of $18.8 million versus sales of $640.4 million and adjusted net income of $16.7 million for the fourth quarter of 2011. Adjusted EPS expanded 17% to a fourth-quarter record of $0.21, versus $0.18 last year. These results are driven by earnings and operating margin improvements in all platforms. In fact, we achieved fourth-quarter operating profit records in all three platforms.

Sales increased 6% over prior year with the ColorMatrix acquisition and Specialty price and mix offsetting the European demand challenges. Foreign exchange had an unfavorable impact of 1% compared to the prior year. From an end market perspective, we experienced strong growth in healthcare, wire and cable, appliance, packaging, and packaging end markets, offsetting softness in European automotive and electronics. We continue to attribute the success to our investments in commercial resources, solid growth from new technology launches, and the successful integration of ColorMatrix, which continues to progress well.

Regarding taxes, the pre-special tax rate in the quarter was 39.4%, compared to 30.7% in the fourth quarter of 2011, with the differential largely due to geographic mix and earnings. Also, in accordance with accounting rules, we did not recognize the 2012 R&D tax credit that was enacted in early January of this year, which would have favorably impacted EPS by a little over $0.01. Special items in the quarter resulted in an after-tax charge of $16.3 million, or $0.18 per share, and included an unfavorable mark-to-market pension charge, an increased year-over-year estimated earnout from the sale of SunBelt, environmental charges and acquisition-related expenses. During the first quarter of 2011, we changed our pension accounting policy to the mark-to-market method. Under this approach, we recognize actuarial gains and losses on pension obligations annually in the fourth quarter, as opposed to the previous method of determining and amortizing these gains and losses over future periods. As a result of lower discount rates, there was a pension charge of $42 million that we recognized in our fourth quarter.

Our asset performance in our US pension plans registered a 15% gain this year and we contributed over $65 million during the year to boost our funding levels in our qualified plans to the 75% mark at year end. As a reminder, the Company's qualified and non-qualified US pension plans are closed to new participants, and frozen with respect to grandfathered employees. And we expect the pension contributions and remaining obligations to decline over time. With post-retiree healthcare expense increases next year, the $0.13 per share headwind in 2013 we mentioned in our press release is non-cash, and is associated with a benefit plan curtailment action in 2009.

We also recorded our estimate of the second year earnout of $23 million from the sale of our equity interest in SunBelt. Recall that we sold our ownership interest in SunBelt to Olin in February of 2011 for an up-front purchase price of $175 million, plus a three-year earnout. We received our first-year earnout of $18.5 million in March of 2012, and we expect to receive the proceeds of the second earnout during the first quarter of 2013.

As a result of our continued focus and success in managing working capital, which averaged 9.9% of sales for the year, we ended the quarter with $210 million of cash, and liquidity of $381 million. This included fourth-quarter cash outlays of $34 million for the Glasforms acquisition, and $40 million of pension funding. Capital investment in the fourth quarter was $24.4 million, bringing our total annual CapEx to $57.4 million. The largest projects in the fourth quarter were driven by continued globalization of our Specialty Platform, including investment in our joint venture in Saudi Arabia, where we expect to begin production of Specialty products in April, expansion of GLS capacity in North America, and further investment in Brazil.

Our net debt to EBITDA ratio at year end was 1.7 times. We're comfortable that we continue to have ample flexibility to fund organic growth initiatives, pursue additional strategic M&A activities, and return cash to shareholders through dividends and opportunistic share repurchases. We did not repurchase any shares in the fourth quarter due to the pending close of the Spartech transaction, and the associated planned issuance of approximately 10 million shares. During the full year 2012, we repurchased 1.2 million shares at an average price of $13.24 over a 40% discount to yesterday's closing price. With regards to the Spartech acquisition, Steve mentioned the transaction is still on track for a late first quarter close. We have filed our S-4 and will update the filing with the date of the shareholder vote, when that is established. We also plan to issue new long-term debt prior to the closing of the Spartech transaction.

As you can tell, we have a lot of terrific things going on, and I look forward to reporting on them in the coming year. -At this time I will turn the call over to Bob.

Thanks, Rich, and good morning. I am very pleased with our fourth-quarter performance, both with respect to our financial results and our progress in broadening our Specialty Platform offerings. In the fourth quarter, Specialty revenues increased by 14% over the prior year to $282 million, driven by the ColorMatrix acquisition, price and mix improvement, new product launches, offset partially by European demand weakness and adverse foreign exchange. Adjusted operating income for the Specialty Platform increased to a record fourth-quarter level of $20.2 million, which is a 20% increase over last year. And, as you know, our Specialty Platform has two segments, Global Specialty Engineered Materials, and Global Color Additives and Inks and we break out the performance for each.

Starting with Engineered Materials, sales declined 2% versus prior year to $126 million in the quarter, due to lower demand in Europe and the weakness of the euro. However, with the positive effects of our mix improvement strategy, Engineered Materials delivered adjusted operating income of $9.3 million, a 13% improvement over last year. Global Color Additives and Inks increased revenue by 30% to $156 million, due to organic growth in Asia and the ColorMatrix acquisition, but also offset partially by a decline in European demand. Adjusted operating income for Color reached $10.9 million, a fourth-quarter record for this segment and representing a 25% increase over last year. A highlight for this segment is that all regions, including Europe, contributed to a 33% increase in organic healthcare revenues compared to last year.

Shifting to our Distribution platform, volume increases of 9%, offset partially by lower prices associated with raw material price declines, resulted in increased revenues of 6% over the prior year same quarter, to $242 million. The most significant growth occurred in the healthcare and appliance end markets. Revenue growth and margin expansion through mix improvement resulted in an adjusted operating income increase of 36% over the prior year, to a fourth-quarter record of $16.2 million for the quarter. Return on sales was 6.7%, a 150 basis point expansion over last year, and also a fourth-quarter record.

And finally, Performance Products and Solutions demonstrated the importance of execution by delivering adjusted operating income growth of nearly 40%, even as revenue declined by 3% in the quarter versus the year-ago period. The revenue decrease was attributable to lower selling prices, reflecting lower raw material costs over the same period last year, as volumes increased modestly. The increase in PP&S operating income to $14 million was also a fourth-quarter record. This resulted in yet another record return on sales of 7.6%, 230 basis points over the fourth quarter of 2011. Margins expanded in PP&S due to pricing and raw material dynamics, and improved plant efficiencies.

These fourth-quarter results culminated in record annual performances for all three strategic platforms. And as we look back at 2012, we remember it as yet another year of delivering on our commitments. We successfully integrated ColorMatrix, investing nearly $3 million in commercial resources and geographic expansion. Organically, operating profits increased by over 50% in 2012 in Asia, reflecting a better mix of products and operational improvements. We began construction on our Specialty production capabilities in Saudi Arabia, to better serve our customers in the Middle East. We expanded our global footprint at the request of our customers in both South Africa and Costa Rica. We announced our agreement to acquire Spartech. And we acquired Glasforms to expand and grow our Specialty Platform.

In addition, we maintain our focus on innovation. And I would like to highlight a couple of specific examples that occurred last year through close customer collaboration. DENSO Corporation of Japan, a $38 billion in revenue leading supplier of automotive systems for all major global automakers, selected one of our Engineered Materials products, GLS OnFlex Thermoplastic Elastomer for use in the HVA system in a new car model. We worked closely with DENSO to develop a solution that reduced their total system cost by eliminating a production step, improving their cycle time and reducing scrap rates, while meeting their stringent and consistent global supply requirements. This is a great example of how we provide value far beyond just the polymer.

One of the recent ColorMatrix innovations is Excelite, which utilizes our patent-pending liquid foaming agent technology, engineered to lightweight extruded plastics, by reducing material density without compromising aesthetic quality. This solution enables customers to dramatically reduce product density, resulting in lighter weight end products, and lowering their total overall cost. Additionally, because Excelite can be added at the extruder feed throat later in the customer's process, this solution increases their productivity through improving the flexibility of their manufacturing operations. The accuracy of the ColorMatrix liquid-dosing technology also reduces waste for the customer and improves efficiency.

These are just two examples. But what is more important in the few we are able to discuss on this call, is that our innovation pipeline is robust, and our associates are constantly engaged with our customers and other collaborative partners to see that it stays that way. We are an innovation company and solutions like these offer just a glimpse into the work we are doing and the benefits we are delivering to our customers.

But, of course, we are not only relying on acquisitions and innovation alone to drive our continued mix improvement strategy. In 2012 we made great strides in cross business unit collaboration, resulting in 20% of our new business gains generated from a number of cross-selling initiatives we implemented. For example, one of those leads turned into a multi-million dollar new business close for GLS, Color and Distribution for a major consumer brand product. Our sales force is now more efficient and effective than at any time in the history of the Company.

I'd now like to turn the call back to Steve for some closing comments.

Okay, thanks, Bob. As you heard, it was another good quarter to end another record year for PolyOne, demonstrating solid execution of what we believe is a well-developed strategy. And although we've moved on to our 2015 targets, which we announced at our Investor Day last May, since 2012 has concluded, I did want to spend just a few moments reflecting on the goals we set back in 2007.

First of all, operating margins. Our distribution platform exceeded our target range of 4% to 5%, and achieved 6.4% operating margins for the year. PP&S delivered 9% operating margins, nailing the target range of 8% to 10%, without the help of housing start assumptions that in 2007 were much higher than reality. The Specialty Platform achieved 9.1% return on sales, nearly tripling to almost a 600 basis point improvement over 2007, although just slightly shy of the target. Secondly, in 2012 we generated 45% of our operating income for the Specialty Platform. A dramatic improvement from 2007, and if you go back a little bit farther, where it was about 2%, it's a substantial amount of progress. Third, we drove our Specialty vitality index to 51%, up from 21% in 2007. And that's well above our target range of 35% to 40%. What's really important about this is what it means is over 50% of our Specialty Platform revenues -- over 50% -- were generated from products introduced in the past five years. And we think that's something to be exceptionally proud of and creates great value for our customers and shareholders. Fourth, we improved our pretax return on invested capital to 17% from 11% in 2007, exceeding our target of 15%.

So, all-in, we are pleased with our performance against these targets, especially considering the economic situation in Europe and the US economy and housing. Housing and auto markets are still yet to make a full recovery, not even close. But like I said, we've already raised the bar and are aggressively in pursuit of our expectations for 2015. Our track record of performance is solid. But I think what's even more impressive is what's driving the numbers, now and in the future. Unprecedented levels of innovative new products continue to drive mix improvement. And this, coupled with the globalization of existing offerings, and expansion into new markets -- high-growth markets like composites, sheet -- have positioned our organization exceptionally well to focus on profitable revenue growth. Much of the pruning we've discussed in the past is behind us, enabling profitable top-line growth to now be a key priority. In fact, we've introduced profitable revenue growth as a significant component of our annual incentive, beginning this year.

We've never been in a stronger position at PolyOne. We've made thoughtful investments. Our Specialty product portfolio has been largely transformed to value-added solutions. Our customer relationships are rooted in collaboration like never before. Our innovation pipeline is extremely robust and recent and pending acquisitions create additional exciting opportunities. I'd also add that we have some strong and growing key end markets, such as housing, auto and healthcare. Particularly in North America, these markets are growing.

Undoubtedly we are going to continue to face challenges in 2013. And we're targeting double-digit EPS growth for the year, which means we have to overcome the $0.13 per share headwind from the retiree healthcare increase, and still incrementally grow double-digits. But challenges have never stopped us in the past, and they're not going to stop us as we move forward. And that's what makes me so proud of this Company and this team. PolyOne's approach to business is what makes my confidence grow in terms of all that we can do, and we are doing, to take this Company to even greater heights.

So, with that, I think we have time for questions.

(Operator Instructions)

Frank Mitsch, Wells Fargo Securities.

Good morning, gentlemen and Cynthia, and congrats on a nice 2012. Steve, you mentioned that 40% of your profits came from Europe in the Specialty's region that's down from where it was a year ago. That can be a function of a couple of things. One is much stronger growth outside of the European region, as well as disappointing performance within the European region. So can you give us your spin or your take on what's going on in Europe in your specialties business right now? And how has January trended for you there?

Yes, I'll talk about Specialty, really globally, if you will, Frank, to try and answer your question. I think it's a great question. First of all, I'm going to talk about Asia because our Specialty business in Asia is doing very well. Next, North America, the business is doing well. We have stronger markets here. We see auto continuing to improve, housing improving, medical improving. And our penetration into healthcare improving, as well. So, some really good activities.

I was in Europe a week ago and I spent -- it was one of those trips that you plan on and you know you're walking into a difficult environment. So, I was braced for a Debbie Downer type of trip. And I got to tell you, I came away really energized with what our people are doing in Europe. In context, the economy is in rough shape. Auto in Europe is in tough shape. And I think it's going to continue for some period of time. But what I am excited about is where our people are pursuing new business. We are in some long-term sales cycles and we're making outstanding progress working in this collaborative approach that we have. I mean, a lot of high-level calls. And these were calls that were high, wide and deep where we're talking with the right people. Not just down in the bowels of purchasing, but we're having strategic discussions about innovation and about how we are progressing on formulating and joint development agreements that we have in place and working.

So, I would say this about Europe. I continue to see difficult straits for Europe, for the economy, at least through the first half of this year. I expect some rebound the second half of the year. But despite that, I'm really happy with our position and the way we're working on new applications. These kinds of challenges create lots of opportunities, as you well know, and lightweighting is one of them. Chances for new technology and new innovation -- the auto industry specifically is looking very quickly, looking to respond more quickly than ever to innovation. So these aren't these stodgy, you have to run years and years of trials to get it now. They're looking to us to work with them and establish applications in a very different manner than we have in the past.

So, I was excited. I came back, I was really fired up about the trip. I feel like the economy itself is one thing we can't control but how we participate in it is very positive. I think it came at us faster than we thought, and has been deeper than we thought. And it takes a bit of time to reorient your sales force, and to get them out there and get them focused on new business. And that's how you grow out of a problem economy. Our same-store sales are going to be sluggish. So, I think that's how we would view the issue with regard to the markets in Europe, as well as the rest of the world. And I think the way you framed your question, Frank, I think both are happening. We are having difficult times with same-store sales in Europe, but we are growing in these other markets. So it's a combination of both. When you see a flip of that much of a percentage of your income from a region in such a short period of time, I think it generally implies both of the elements that you suggested.

All right, that's very helpful. I was also struck -- sticking with Specialties -- I was also struck that the vitality index went up to 51%. It was 46% in the third quarter. That's a very large number. Typically, as you're getting new products, you would anticipate higher margins and so forth. Would you envision 2013 being a year where you get to the Specialty margin goals that you guys fell just shy of here in 2012?

We're not making -- this is Bob -- we're not making any specific comments about 2013 from a guidance standpoint, outside of our guidance we provided in the press release on double-digit EPS expansion. But we do believe that a big contributor to that expansion will be improving margins in all of our platforms.

I'll take that as a definitive yes. Thank you, Bob. And then lastly, Rich, you alluded to the fact that geographic trends led to a spike in your tax rate. Where specifically were you seeing that movement? And what expectations do you have for 2013 along those lines? 39.5% is something that you don't typically see out of PolyOne or anybody.

There is no doubt about that, Frank. I think we saw an elevated tax rate as the year progressed. And it was exacerbated in the fourth quarter. Part of that is a little bit of a lot of small numbers. That is the weakest quarter for the Company and there was a distinct shift from where we had forecast our income in the quarter, and more of a domestic tilt to it in the fourth quarter. What I would tell you, as we look forward, we are giving a range of 34% to 35% for next year. And we feel it will be more balanced next year. So I think it was really a December phenomenon, and almost a fourth-quarter phenomenon, and it was exacerbated just in December. Europe always shuts down a little bit early in December, but we saw more of that this year.

Okay, great. Thanks so much.

Laurence Alexander, Jefferies.

First question, can you talk a little bit -- obviously there's still a little bit of a detached relationship from Spartech. But can you talk a little bit about how you think the two businesses compare in their ability to pass through raw material volatility?

I'll take that on first. I think there are a couple elements of this. What we had to do, Laurence, as you know, at PolyOne, there's a lot of training. This is art. There's a science of pricing, but then there's the art of execution. And that means that we are going to have to spend the same time teaching the Spartech sales force the discipline of selling price, and the art of selling price increases. It's a matter of capturing the full cost, understanding the value proposition, where the touch points are. It's pretty complex but we've got this down to a science. And I think we've been demonstrating this, as you've seen raw material increases, really, the last five years here and margin expansion through all that.

So, I think there are two elements of it. One is what's your value proposition to the customer, and how much uniqueness do you have. And they have a lot of uniqueness. These are often customized formulations that they have. But I think the mindset is something that we will want to change. We aren't about passing through. We're about, when you sell something, and you have a cost associated with it, you're supposed to in an enterprise make profit on that. That's how we view our business. So, as costs go up, while we try to be lean, while we try to purchase efficiently, we still know that over time we're going to invest in R&D, people are going to get increases in compensation. And we will continue to create value for customers that we will have to capture. So, a lot of this comes down to execution more than anything else.

I don't think there's any higher degree of sensitivity in the markets that they're serving than there are in the markets that we're serving at PolyOne. Which is a long way to answer your question. I think it's an executional matter and a discipline matter. And a lot of training is going to have to be put in place to use some of the tools that we've developed for our marketing organization, for our sales force. That even goes back up into the supply chain where we have visibility into existing and future price increases of raw materials and energy costs, et cetera. So, it sounds kind of simple but it's a pretty complex process and we are very confident. We've been able to do this in all our markets and all our businesses here at PolyOne. And we have every confidence we can do the same thing when we make the completion of the acquisition of Spartech.

And then can you talk a little bit about, as you give your profit goals for your divisions and for your managers, can you just walk through, give some flavor for how you bridge between the types of goals you give them and the fundamental or the broad EPS targets you give publicly? What I mean there is, obviously if you have a favorable tax swing in one year, I can't imagine you'd pick up the phone and tell people okay, you can breathe easy this year.

You're right about that, Laurence. First of all, with respect to that example, our businesses are incented on really a pretax basis. So, the tax affect being a corporate matter. You're right that we don't breathe easy just based on a swing in a tax rate. Every year we develop a strategic plan which looks at the current year forecast and adds on four years. And that really is well aligned with the objectives that we outlined at our Investor Day in May and aligned with the objectives that we set for 2015. Of course we have an annual budgeting process which develops interim goals to get us there. But, for our business units, those are aligned to profitable sales growth, as Steve mentioned, not tax oriented per se. What I really like about our internal communication is that it is perfectly aligned with what we tell our analysts and our investors. When you look at our goals, as we set them for 2012, they're exactly the same that we set for ourselves internally and they will be again for 2015.

I think the operative element of the compensation and the targeting for the businesses is operating income. Although, we are adding top line to that, as well. Then the third and lesser element is working capital. These are activities that are well within the domain and control of the business unit heads. So, that's how we compensate and evaluate and reward and recognize the business unit leaders and their teams. I hope we're answering your question.

That's great. Thanks.

Mike Sison, KeyBanc.

Good morning, happy new year. In terms of the outlook for '13, looking for EPS growth double digits, do you expect all your segments to grow double digits? And, if you do, can you maybe give us an idea of maybe which ones are going to lead the growth, which ones will lag the growth? Or some feel how the segments can do in '13 versus '12.

We do expect all of our segments to deliver double-digit growth. That's an internal objective that we have in our own goal-setting process. And it aligns well with Laurence's question on incentives. We're not giving specific guidance by segments, but directionally I think that's a fair statement to make. Steve made an observation in earlier remarks that we don't see recovery in Europe any time soon. It's possible we could see something towards the second half of the year. So, I would expect volume growth and then ultimately revenue growth to be driven by North America and Asia in the first half, and hopefully picking up from that in Europe in the second half.

Got it. And then I had a specific thought on Engineered Materials. The business has been a little under $50 million for the last three years in terms of op income. You've shown the double-digit growth in the second half of the year. But specifically, to grow that business, or get it back -- to broach that $50 million and really grow that business, is it really just relying on Europe? Or are there things within your control next year that could really keep the momentum that you showed in the second half of the year?

Yes, I like the question. I know Bob wants to jump in here but let me go first. As I grab the mic. First of all, we're not going to rely on Europe for anything. I can't let this Company be in the hands of some regional economy, or even global economy. It's our job to grow whatever environment that we're in. And we've been doing that. So, how do you manage that? First of all, what's going on in Europe right now is we are making unprecedented numbers of successful sales calls. I had a great trip there. Why it was exciting was who we are calling on, what the message is, the kind of dialogue we're having, and the amount of activity that we have on new technology launches that have taken place in Europe. So, those are going to come in. I can't tell you exactly when because every sales cycle is a little different. Some of these have very protracted trial processes. Others are moving quite quickly. They're reacting to challenges and I think that works in our favor. So, I'm feeling pretty darn good about our position in the context of a weak European economy.

That said, we do other things to drive our growth in EM. There's a lot of new technology and product launches globally. I would say it's unprecedented in our Engineered Materials space. There is so much work being done around lightweighting and material change out, and displacing metal and glass, and aluminum for that matter. The acquisition of Glasforms gives us unique opportunities. This is a great little company. It's down in Birmingham, Alabama and they've done a wonderful job with technology, but they don't have critical mass to market this stuff globally, or even throughout the US fully. So, we've got a handful of sellers, managing $50 million worth of business. You have all of our feet on the street out there that can enable and participate in the sales of some high value-added products that are unique, they're new, they're fresh and they're in growing markets. Like oil and gas production, for example and wind turbines, et cetera.

So, these are reasons that I feel really excited about our Specialty Engineered Materials business. I think it's the place in our Company where we can demonstrate incredible -- it's one of the places we can demonstrate incredible value-add for customers. You can very carefully and precisely document and get agreement upon how much -- quantify the value we are creating for those customers. So, sorry, Bob.

Yes. And I want to point out, also, before anybody becomes underwhelmed with Engineered Materials performance, let me just give some highlights. For the fourth quarter, operating income as a percentage of sales improved from 6.4% to 7.4%. That's a 13% increase in operating income. But when you dig into the P&L a little further, you'll see that we actually added $3.5 million of SG&A year over year. So, that operating income increase didn't come at the expense of investment. In fact, we continue to invest in this business to grow it. I think it's a very important observation about the platform and that year-over-year there's no doubt, Europe has had the single largest influence on our results in both Engineered Materials and in Color organically. But it hasn't stopped us from investing in commercial resources and you can see that in the P&L. So, when you look at those year-over-year results, I just encourage you to look at where we've made those investments, too.

I'd just say, add one final comment on this and I like Bob's point, because I think it's a good one. Every cloud has it's silver lining. I think the challenges in Europe have really gotten the attention of our management team there to develop skill sets in average players and to deal with some participants that weren't really effectively out there selling new business. We have a much more aggressive sales force. They're making the right calls on the right people. They're talking about the right things. It is very impressive and it's a dramatic change from even two years ago. So, I think our future there will be just fine.

Great. Thanks.

Kevin Hocevar, Northcoast Research.

Good morning, everyone and congrats on closing out another great year. Could you talk about ColorMatrix for a second? You've had it now for a year, so just wondering how it's gone compared your expectations. And as we head into 2013, has there been any change in your outlook there? I think a couple quarters ago you said it might get $0.12, or something like that, in terms of accretion next year. So, wondering if there is any change to that based on what you've seen.

Hi, Kevin, this is Bob. First of all, we're really pleased with how the integration of ColorMatrix has gone this year in terms of how our two businesses are working together to collaborate on new technology and product launches. We've continued to, or we've invested in the business the way that we said we would impact. In fact, we added $3 million in commercial resources and we announced expansion in South Africa. All that's really going well. I would say the one potential surprise for us this year has just been the impact on Europe. And ColorMatrix has not been immune to the recessionary conditions there.

So, when we started the year, we guided to about $0.04 to $0.06 of EPS accretion from ColorMatrix and they did just get inside of that range. The real, like I say, delta being really Europe in terms of the factors keeping us from going above that in terms of what we saw in the summer. At this point we haven't made any changes to our future estimates on the ability of ColorMatrix to deliver in the future. The only caveat I would say is that Europe continues to remain sluggish for all of our businesses and we need to do what we can to grow outside of that.

Okay. And speaking to Europe, I think there was some restructuring that you're going through, or announced maybe a quarter or two ago. How much did you save in 2012? Then, how much more incremental savings do you expect to get in 2013?

This is Rich, Kevin. I think -- we spent $9 million or $10 million. That was the plan, to get a similar amount of savings. It was substantially done earlier in the year. I think we had $1 million of spending in Q4 and we expect to get the payback that we anticipated when we launched the program.

Okay. And finally, distribution closed out the year really strong and has appeared -- it seemed to be a bit of a seasonally weaker quarter. Operating profits were in line pretty much with the other three quarters of the year. So, just wondering, was there anything incremental that happened in distribution in the fourth quarter that, say, didn't happen? Like any new business wins, mix improvements, cost savings? Anything like that, that we should expect to carry forward into 2013 and really get these high 6%, almost 7% type margins going forward?

We continue to believe that mix improvement is an important part of the distribution strategy, as well as our other platforms. So I think you can continue to expect improvement in 2013 over '12 in that regard. There isn't really -- what I've grown to learn, really, here in the business is that it can be hard to draw conclusions in terms of what happens in December in any one year. Sometimes you can see some activity happening a little faster in one year than the other, just based on what people believe prices are going to go in the next year. There may have been a little bit of that in December, but nothing I would really draw specific attention to.

Okay, thanks very much.

Dmitry Silversteyn, Longbow Research.

Congratulations on another strong year. A lot of my questions have been answered but I'd like to follow-up on the PP&S business. You talked about the volumes in that division being up modestly in the fourth quarter. But if you look at 2012 overall just on an annual basis, can you talk about how PP&S did with respect to volumes? Also, what your expectations are for 2013, given the continuing recovery in housing and automotive and appliance markets? As well as what your pricing expectations are as far as being able to pass through, or needing to pass through, lower raw material costs, if you expect raw materials to decline.

Yes, this is Bob. We did see a pretty significant improvement in margins in PP&S this year on slightly lower volume. And that really does lend itself to mix improvement in the same way that we've talked about in our other businesses. I think what's an important observation to make is that, when we are in the early stages of what we see as a housing recovery, I think we're going to continue to be selective about the types of business that we pick up versus what you might have seen PolyOne do back in 2004, 2005, or 2006, the last time housing really picked up. And so, one observation I like to make, as we get a lot of questions about housing, is that, while housing starts were up order of magnitude 25% this year, sales, as reported by the Vinyl Institute, in total were up about 7%. So it's not a one-for-one correlation on housing starts and vinyl. We still believe there's a high correlation between our businesses and starts, but just not to the extent that what we saw in '04, '05, and '06. Hopefully that helps.

Lastly, let me just make another observation. PP&S continues to do a great job with Lean Six Sigma, and executing on our Black Belt projects and delivering from a sourcing savings standpoint and being disciplined about price management. Those have been helpful from a margin perspective, as well.

That's helpful, Bob, thank you. Just a follow-up on the distribution business. You guys were, I believe, expanding in China and also in Costa Rica. Can you update us on where those expansions stand and what kind of expectations you have for those little outpost that you have. Also, broadly speaking, your expectations for pricing of the resins that you buy and sell through the distribution business?

Yes, I'll speak to the geographic expansion first. We did greenfield a distribution facility in Shanghai in July of 2011. So this year was really our full year of operations and generated about $10 million of revenue there. So, it was actually a really good first year for us. And recall that our focus was principally on serving the healthcare space for specific customers who asked us to get started in that region. Costa Rica we actually expect to follow a pretty similar pattern. Again, being pulled there by the healthcare space and customers that we already have. So, I'm expecting similar results in the first year, year-and-a-half of operations there, is what we saw in Asia.

I would just add, the question on POD has come up a couple of times. The volume for the quarter was up 9%. They had some raw material declines, which were substantially passed through but still had some margin expansion. It looks like key raw materials are going to be going up in the first quarter, especially propylene. Substantially, deep into double digits. We're getting some reductions in TiO2, but that's more of an impact on Specialty than anything else. So, there's still no steady-state when it comes to raw materials. I think you have to be nimble and adaptable and move quickly on the rise and fall of raws and I think we're really good at managing this. So good volume growth in the quarter for POD. I think that the investment in number of people that we've made for feet on the street in that business is improving. And I think our execution is improving in that space, as well.

Thank you very much, guys.

Christopher Butler, Sidoti & Company.

You just touched on my question a little bit, but in terms of raw materials for the rest of the business, could you talk to what kind of benefits you may have gotten in the fourth quarter that may go away as we see these costs come up?

We're expecting low mid single-digit type increases in 2013. As you know, in our distribution business, sometimes there can be a bit of a favorable benefit just on timing, but not much. We don't see too much of that because we also so little inventory on hand, turning about 12 times a year. It's actually really hard to pull that out in the fourth quarter because it's seasonally our weakest quarter of the year. That's true for PP&S and Distribution. So, there's nothing order of magnitude I would point to in the fourth quarter that we don't see replicating in 2013.

I'd add that, really, compared to Q3 we saw a 1% to 2% increase in raws. And it's driven by some of the large feed stocks. PVC was up 7% to 8% on average over the quarter. VCM, I think, was up high single digits over Q3 and propylene monomer was up 6% to 10%. So, I wouldn't exactly say we had benefits for the quarter. Year over year there was some declines, certainly, that we were able to capture, and we share some of this, but I think the fourth quarter saw a little different trend in the year. And I think we managed it very effectively, as evidenced by our margins.

Coming back to Europe, on the third-quarter conference call you sounded a little bit more optimistic on the environment, showing some sequential improvement. That seems to have changed in the rhetoric this time around. Is that just seasonality, not getting as clean a look with the December quarter?

I wish it was seasonality. And your observation and comment is correct, Chris. We've been pretty good at seeing challenges ahead of time. It goes back, I think, the last four or five years. We've sometimes been early observers in terms of where the economy is going in. I will tell you, we missed the call in Europe, but I think we've adjusted and handled it as well as we can. I don't think -- it's always, as Bob said, hard to segregate seasonality from reality at times. We really don't want to hang our heads on any -- we don't want to be misled to thinking it's seasonality. We are bracing for what we think is continued softness.

You look at auto builds. Auto builds are very poor in Europe and we've got a fairly auto-based business. Auto production for the quarter was down over 11% in Q4 and for the full year, 6%. So, not really any reversal of a trend. But like I said earlier, I love our position right now in Europe. I really am energized by what our people are doing to capture exciting new business opportunities. I think the raw material -- or, excuse me, the new product launches that we have just launched and are launching in Europe are spot on for the needs of this economy. So, yes, we were a little surprised that we -- we thought that Q3 and Q4 of '11 were so low, that our base was low enough that the comps would improve. What we didn't expect was a further deterioration, especially in auto in Q4. So our mission is to sell plenty of new business to offset that and still grow, and I think we're on the right track to do that.

And just, finally, with the acquisitions, can you give us a sense of CapEx and depreciation for 2013?

This is Rich. Excluding Spartech, our CapEx for next year will be in the $50 million to $55 million range and that continues to run in the two-thirds of our D&A. So, D&A is estimated between $75 million and $80 million. That's inclusive of Glasforms, exclusive of Spartech. On Spartech what I would tell you is that CapEx, we would anticipate to be in the $20 million to $25 million range. Once the deal is closed, we will give you more of a feel. We get our acquisition accounting in line, we'll give you more of a feel for D&A as it relates to Spartech.

I appreciate your time.

Okay. Hey, listen, thanks from all the questions. I'm sorry we have to cut this off. We've got a pretty tight schedule with global all-employee meetings today, and we've had our full hour here. We appreciate the interest. Thank you for your time. Thank you for joining us today. And we look forward to updating you on the first-quarter results for our call that's scheduled in early May. Thank you all very much.

Ladies and gentlemen, that concludes the presentation. Thank you for your participation. You may now disconnect. Have a great day.