Avient Corp (AVNT) 2013 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the PolyOne Corporation third quarter 2013 conference call. My name is Annette and I will be your operator for today.

(Operator Instructions)

As a reminder this conference is being recorded for replay purposes. At this time I would like to turn the call over to Isaac DeLuca, Vice President Investor Relations. Please proceed.

Thank you, Annette.

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 forecast of future events and are not guarantees of future performance.

They're 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 yesterday'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 third quarter of 2013 to the third quarter of 2012 unless otherwise stated.

Joining me on the call today is our Chairman, President, and Chief Executive Office Steve Newlin; Executive Vice President and Chief Operator Officer Bob Patterson; and Senior Vice President and Chief Financial Officer Rich Diemer.

I will now turn the call over to Steve Newlin.

Thanks, Isaac, and good morning, everyone.

It was yet another outstanding quarter at PolyOne and I am thankful you have joined us this morning to learn more about this past quarter, as well as our plans and expectations for the future. I am very pleased to report that we delivered third-quarter adjusted EPS of $0.36, which represents a 29% increase over last year. This marks another unique and significant milestone in our Company's history, and I am very proud to announce today PolyOne has now delivered 16 consecutive quarters with strong double digit year-over-year adjusted EPS growth.

Four straight years is an impressive accomplishment that not many companies and certainly none of our peers can claim. The credit goes to our global associates who have worked tirelessly to execute upon a focused, unwavering and transformational strategy.

It's easy to forget when this streak began back in 2009. The early years of PolyOne were focused on commodity offerings and equity investments where volume was king and innovation just really wasn't discussed. PolyOne struggled and as a natural result there were some who didn't believe that the Company would even survive.

But not only did we survive, we thrived. And as we have successfully moved from being a commodity company and taking giant strides toward becoming a speciality company, we have made much progress along the way. For those of you who may not be as familiar with PolyOne, I want to comment briefly on our historic success and more specifically on our four-pillar strategy.

But perhaps more importantly to all of you, I want to talk about our future and why we can continue to deliver double digit adjusted EPS growth. Our four-pillar strategy of specialization, globalization, and commercial and operational excellence is at the heart of our transformational story. Our strategy has remained unchanged since we launched it in 2007. It drives every action, every investment, every decision we make and helps us deliver the reproducible, sustainable results our stakeholders have come to expect. We're very focused.

I hear others talk about implementing a specialty strategy like ours and to us, frankly, it's flattering, but this is not easy to do. Our experience, attitude, discipline, and know-how drive our ability to deliver and differentiate ourselves from our competitors and peers. While our strategy is important, you will hear me say repeatedly that execution is even more important. For those of you who know us, we are relentless and consistent in the execution of our strategy and that, more than anything else, has delivered the past four years of accelerated growth.

Our specialization focus has changed our Company and our culture from an unsustainable, and often times unprofitable, reliance on volume to a passion for delivering clear, bottom-line value to our customers and growth for our shareholders. Within our specialty platform we measure our innovation success with a vitality index that measures the percentage of current period sales from products introduced in the last five years. At a world class vitality index of 44%, our new and unique solutions are driving the preponderance of our speciality platform profitability growth.

At nearly two-thirds of our Company's segment operating income, our speciality mix of earnings has never been stronger or more profitable. We are in markets and applications that are not only delivering now, but they're aligned with strategic mega trends that have us extremely well positioned for the future.

Healthcare is probably the best example. Healthcare represented about $100 million in sales in 2006. It is now on pace to exceed $400 million in revenue this year with improved margins. But our shift to specialty had to be properly supported as we went to market.

And that's why we executed on our commercial of excellence pillar. Not everyone may remember that coming out of the recession we invested for growth. This included creating a marketing organization where there once was none. This required investment and commitment and in 2010 we added over 150 resources in sales, technology, and marketing roles. At an annualized cost of $25 million, we created a commercial organization that is unmatched by our peers.

We have overhauled our culture to one that is deeply embedded -- has deeply embedded customer centric selling know-how and that is increasingly focused on cross selling our new and innovative solutions for our customers. This is a global skill set and it is an essential component of our strategy. Within operational excellence we have internally improved our efficiency and as a result, externally improved our delivery times, quality, and service to our customers.

Lean Six Sigma methodology has served as a blueprint for how we operate in manufacturing, functional areas, as well as the commercial arena. We have built an award winning LSS machine in the process. It is now part of who we are and who we will remain in the future. And just who we are is becoming more and more consistent within PolyOne around the world. And that's reflective of our globalization pillar, which drives our decision making as we look to expand into new strategic markets and better serve our multinational OEMs.

Our recent successes in Asia and Europe, along with our expansion efforts in Saudi Arabia and India, to name a few, serve as examples of our commitment to expand globally and better serve our customers where they need us. Our Spartech acquisition, with more than 90% of its revenue generated in North America, has temporarily reproportioned our percent of sales in the US. But yet this is another great opportunity. Once we're through the initial stages of integration, we will look to expand the DSS platform globally. We have the infrastructure and know-how to do so.

We remain committed to being a global company. But this to us means so much more than simply being present in multiple geographies. Our ability to provide our customers with peace of mind when it comes to quality, service, and product performance globally is a competitive advantage and differentiator for us. Our four-pillar strategy is well understood and our ability to consistently execute is proven. And I just wanted to reflect on that. It's a little bit ironic, because very little of what we talk about internally or with our customers is about looking back.

I focus my comments today on our strategy because it's working extremely well and will continue to serve us well as we pursue our on going goals of superior growth and performance. The same strategy that enabled these past 16 quarters of outsized double digit EPS expansion is the same strategy that frames our long term potential. We will continue to set lofty goals and we fully expect to reach them. Indeed, we are in pursuit of our 2015 targets, yet our quarterly expectations of ourselves have never been higher.

I believe, and our team expects, that the best is yet to come at PolyOne. We expect to deliver double digit growth organically, while we also expect to achieve incremental growth through the accelerated integration of our recent acquisitions, including Spartech, which Bob Paterson will elaborate on in just a few moments. First, I will now hand it over to our Chief Financial Officer Rich Diemer who will review our financials. Rich.

Thank you, Steve, and good morning.

It is my pleasure to provide more detail on our third-quarter performance, which continues the great results we saw in the first half of 2013. We reported third-quarter revenue of just over $1 billion, up $300 million and 43% from $708 million last year. Adjusted net income was $35.5 million versus adjusted net income of $24.8 million for the third quarter of 2012. Adjusted EPS expanded 29% to $0.36 versus $0.28 last year.

Top-line growth was driven by the acquisition of Spartech, as well as year-over-year improvement in organic revenue. Overall, Spartech contributed $264 million in revenue and $16.2 million in operating income or $0.04 per share of accretion. Organic revenue increased nearly 4% versus the prior year driven by gains in transportation, consumer, and appliances. As for the tax line, our pre-special tax rate in the third quarter was 35.8% down from 36.4% in the third quarter of 2012, driven principally by income mix.

Special items in the quarter were principally related to restructuring costs to support our North American manufacturing realignment announced in July and the premium we paid to repurchase approximately $45 million of our higher coupon debt, partially offset by the favorable resolution of commercial litigation in which we have an interest. Net special items totaled $10.5 million after tax or $0.11 per share to our earnings per share for tax purposes.

From a cash perspective we continue to maintain strong liquidity with an ending cash balance of $323 million. Taking into account our undrawn asset base revolver, our liquidity totals over $630 million. This financial flexibility has allowed us to employ cash in the most effective ways for our stakeholders. Specifically, we utilized our strong liquidity to accomplish the following.

First, we continued our share repurchase plan. During the quarter we repurchased 877,000 shares at an average price of $27.97. For the year, we have repurchased just under 4 million shares at an average price of $24.89. And we are 38% complete towards repurchasing the 10 million shares issued in connection with the acquisition of Spartech.

Second, as previously mentioned, we repurchased $44.7 million of par value of our debt on the open market, primarily consisting of our 2020 senior notes. We were able to take advantage of our strong liquidity to retire higher coupon debt and lower future interest expense. Even with these cash flows, our leverage remains about two times net debt to EBITDA, a very comfortable level for us. We have also again delivered world class performance as it relates to working capital.

For the third quarter working capital was 11% of sales on a trailing 12-month basis. Importantly, with our early integration successes we are beginning to see improvement in the former Spartech's working capital levels. We expect continuous improvement in that regard, as we implement operational excellence programs to improve their processes.

Finally, CapEx in the third quarter was $15 million with the largest investment supporting our specialty platform growth, including investments related to our GLS facility in McHenry, Illinois in addition to starting to fund our North American manufacturing realignment. By nearly every measure we had a great third quarter and we intend to keep the momentum going through the end of 2013 and building towards our 2015 EPS targets and beyond.

With that I'll turn the call over to our Chief Operating Officer, Bob Patterson.

Thanks, Rich, and good morning.

It was indeed a very strong quarter, and I have a number of highlights to review with our investors today, beginning with our speciality platform. During the third quarter, speciality revenue increased 82% to just under $600 million, driven by the acquisitions of Spartech and Glasforms, as well as organic growth from color and engineered materials. Global speciality engineer material sales were up 38.2% versus the prior year, primarily due to the acquisition of Spartech and Glasforms. Organically revenue increased 4%.

While revenue growth was most heavily influenced by our recent acquisitions, operating income growth was almost entirely organic. Our mixed improvement strategy continues to pay off, as operating income and engineer materials increased 20% to $15.7 million versus $13.1 million in 2012.

The performance of our engineer materials segment was not limited to one region. We delivered double digit revenue growth in North America, Europe, and Asia on gains in consumer electronics, wire and cable.

Notably, our Asia engineer material business increased revenue 15% and more than doubled operating income over the prior year, as we continue to expand our speciality offerings in the region. Our second speciality segment, global color, additives and inks, increased revenue to $219 million or 15% on strong performances by ColorMatrix, North America and Asia color, as well as the addition of Spartech. Operating income increased 54% to $28.7 million versus the prior year.

Approximately 75% of the year-over-year growth in operating income was organic and for the second quarter in a row, global color delivered return on sales greater than 13%. In fact driving these outstanding results was a very strong quarter from ColorMatrix, which not only grew revenue by 11%, but increased operating income 47% over the prior year.

Finally, our third speciality segment, design structures and solutions, delivered sales of $187.8 million and operating income of $10.9 million, as our integration efforts begin to take hold. While we didn't own DSS last year, we do track our year-over-year profitability expansion and operating income from this segment increased 82% and return on sales increased from 2.7% to 5.8%, again as our integration work gains traction. Since we acquired Spartech, we have had a keen focus on implementing and executing our four-pillar strategy. The same strategy that underpin PolyOne's own transformation.

In July we announced our North American asset realignment and these plans are well underway. While these types of actions are never easy, we are seeing positive responses from our customers who will benefit from improved quality, service, and on time delivery. One of the first opportunities we saw in implementing our four-pillar strategy at Spartech was improving product quality and safety. In addition to introducing our no surprises pledge to our new plants, associates and customers, we are also introducing several initiatives aimed at improving our internal efforts in this regard.

I am sharing this with you today because it demonstrates, first, that we take quality and service personally and it's a commitment we make to our customers. Second, it illustrates that while strategy is important, execution matters more. There are a lot of things that we do everyday to improve customer service and differentiate ourselves from our competitors. This is part of our value proposition and we are training our newest sellers from Spartech to communicate this with our customers using our proprietary EVE tool.

We can lower our customers' total cost of production through reduced product returns, lower scrap rates and/or improve throughput time on their machines, just to name a few. During the third quarter we realized $0.04 of accretion from Spartech. Just like our legacy businesses, the fourth quarter will seasonably be weaker than the third. However, we do expect them to continue to be accretive for the balance of the year. And for the full year 2013 we now assume we will deliver between $0.08 to $0.09 of accretion from Spartech, up from the $0.01 to $0.02 we originally estimated.

Our synergy capture is ahead of schedule and now we expect to deliver $65 million in synergies or profit expansion related to the acquisition in calendar year of 2015. We previously estimated we would deliver this amount by the end of year three. Assuming we buy back all the shares in connection with the deal, this will result in $0.50 of accretion to EPS in 2015.

Shifting over to distribution platform, sales increased 8% to $275 million, driven by higher raw material costs and expansion in transportation, electrical and building and construction. Due to increases in raw material costs and unfavorable mix, operating income increased only slightly from last year to $16.6 million.

Moving to PP&S. I would like to take the opportunity to welcome Michael Garratt, who joined us in August, as the new president of this segment. Michael has extensive experience in the industry, including 15 years combined with Dow and its elastomers joint venture with DuPont. Most recently he led the turn around of a Berkshire Hathaway business and these experiences make him uniquely qualified to drive continued success in this platform.

As for PP&S results, sales increased 13% versus 2012, driven by the acquisition of Spartech and year-over-year improvement in healthcare, appliance and electrical. And despite a very competitive vinyl market PP&S grew profitability 16% versus last year and delivered a return on sales of greater than 8% for the third consecutive quarter. Regionally I mentioned we saw growth in our engineered materials business in Asia, and this was true for color as well. In total PolyOne sales in Asia for the third quarter expanded 11%, driving operating income growth of 40% over the prior year.

Much of this continues to be mix improvement, as we expand our speciality offerings in the region. While sales were organically flat in Europe, operating income grew 18%. This quarter's growth is due to new business gains and improved mix and we believe there are early indications that the economic slow down there is decelerating. In fact we were very encouraged by the level of enthusiasm and engagement with customers at the K Show earlier this month. This is the plastic industry's largest trade show held in Dusseldorf, Germany.

During the show, we had the opportunity to showcase some of PolyOne's latest market leading solutions and technologies like bio-based environmentally friendly applications; materials that enable light weighting, such as for automotive applications; anti-counterfeiting technology; and ballistic protection materials to name a few. These solutions help our customers grow by addressing global trends and are geared toward multiple end use industries.

Importantly, many of these technology offerings represent speciality formulations that others simply cannot deliver to their customers. As customers consider these solutions, we will be there with the right formulations and offerings to give them an edge, not only improving their product appeal and functionality but also their profitability.

This concludes my prepared remarks on the third quarter and I will now return the call back to Steve Newlin for some closing comments.

Thank you, Bob.

It's great to look back and see how far we have come, but for me it is even more exciting to think about where we intend to go. The disciplined execution of our strategy and a long consistent track record of organic earnings growth and successful integrations have powered PolyOne to levels that some previously could not have imagined. But we certainly did, and we delivered. That's something we expect to continue doing well into the future.

As we look to the remainder of this year, I remind our investors that seasonally our fourth quarter is our slowest, but that doesn't change our expectations for double digit adjusted EPS growth over the fourth quarter of last year. We look forward to sharing those results with you in January. Our view for 2014 and beyond promises to be more of the same year-over-year strong double digit growth, as we continue to successfully March toward our aggressive 2015 goals.

And with that, we have time for questions.

(Operator Instructions)

The first question comes from Frank Mitsch of Wells Fargo Securities. Please proceed.

When you are talking about GSAM, I thought you were saying -- or GSEM, I guess more appropriately, I thought you were saying something about double-digit revenue growth in various geographies, but I thought you were referring to that organically. Was that organic growth that you were talking about where you have been able to drive sales that much or was that inclusive of, obviously, the acquisitions that you done.

Was specifically referencing Asia when I made that comment on the call.

Organic growth in Asia was up double-digits.

Right.

All right. Great. And overall it looked like pricing and mix was off a little bit. What do you attribute that to?

The primary effect of dilution to EBIT margins in the quarter really is bringing in Spartech. Organically margins improved to about 10.7% for the quarter. Organically things continue go in the right direction and we have improvements in mix and price.

Well, you do have -- okay.

But what we see is the Spartech effect coming in and overall bringing margins down.

Okay, great. So organically pricing and mix was up, but because of the inclusion of these other businesses it's trending lower. Okay. Super. Rich, the pace of share buyback slowed down here in Q3 versus Q2. How should we be thinking about that looking out?

Frank, we told the Street and we still stick with the 18 to 24 months our intention to buyback all the shares issued over that period of time. We also said we would be opportunistic. So, we are ahead of schedule for what we committed and our full intention is to keep with what we told you in terms of the buyback.

We are 38% -- Frank, this is Steve. We are 38% there and we expect to continue kind of at the pace that will get us done and we won't have to go into overtime like the Jets did this past week. (laughter)

But, still very happy about that. Thank you so much.

The next question comes from Laurence Alexander of Jefferies. Please proceed.

I guess two questions. First, could you talk a little bit about what you are seeing sequentially in your markets in Q4? And secondly, as you look out to 2014 and 2015, what are the big swing factors on your free cash flow bridge, if any, besides working capital swing?

Laurence, this is Bob. I guess what I would say first of all is that there is only so much we can say about the fourth quarter at this point. There is really nothing to report that I would say is unusual about the month of October, so potentially that's good news. As Steve mentioned in his prepared remarks, we continue to believe we'll get double-digit EPS expansion in the fourth quarter and we certainly believe that's the case.

Your second question, I believe, relates to cash flow for 2014 and 2015 and I would say probably the biggest thing to think about is that we do have to fund the North American manufacturing alignment and Rich can provide some additional details on capital expenditure expectations for 2014 and 2015.

So, Laurence, I would tell you as it relates to CapEx, this year we are actually, based on what we have forecasted or what I have talked about on CapEx, we believe now we are going to come in around $70 million. Let's call it $70 million to $75 million, which will actually preserve our normal CapEx spend. That does include some CapEx for the North American realignment, but we typically run two-thirds CapEx to D&A. If you look out to next year, we're not going to be two-third CapEx to D&A, we'll probably be close to 1 times CapEx to D&A. Let's call that $110 million, $105 million to $110 million is our current view of that.

The other big swing, though, and it is bigger than CapEx, would be as it relates to pension funding. For the last 2 years we have funded somewhere in the range of $60 million, $65 million. We will have a much lower commitment to pension funding. That means, not to be more discretionary, but literally, that drives us to something from a report point of view between [zero and 10]. So, you will have a big positive there as it relates to the future free cash flow.

I guess just to clarify on the October, I guess, are you seeing the normal pre-Christmas volume bump or when you say October is it just the sequential acceleration from September to October is normal, but September was a bit weaker?

We have seen this phenomena, I think, for four quarters running now, Laurence. The last month of each quarter has been soft and the first month has been pretty strong. We would put October in that category. But just remind you that Q4 for us -- our core legacy business, as well as in the Spartech business, is always a slower quarter. So, there won't be sequential growth in Q4 versus Q3.

Thank you.

The next line of question comes from the line of Mike Sison of KeyBanc. Please go ahead.

Hey, good morning guys. Nice quarter again.

Thanks, Mike.

In terms of Spartech you've noted that you are going to get the integration synergies sooner. Can you maybe elaborate what areas you are feeling better about, what's going better that you are going to get the EPS accretion sooner than later?

I think the first thing I would say is that we are really pleased with the Spartech associates and their willingness to embrace customer centric selling skills and how to interface with a customer. We have been very pleased really to find the level of technology that they have. It's confirmed what we believed going into the deal and that their value proposition was always stronger than what they had in the market place.

So, I would say that we're starting to realize value from those communications. Plus we're a little ahead on the schedule with respect to getting the manufacturing realignment underway and reduction of administrative costs. So, at this point we are still staying with the $65 million number, but it seems to be coming in a little earlier this year.

Then can you just maybe give us a little bit of color? I recall the way Spartech went to market over the years changed quite a bit, maybe going to market via end-market, via type of resin, a lot of different ways. Can you give us a better feel of how you are doing it sounds like it's a little bit more successful, just a little background there.

As much as we can we want to have a direct interface with our customers and that want to do so around the value based proposition. I tell you the biggest single difference I would cite is the frequent use of our EVE tool to capture the overall value proposition that we deliver. And I don't think there was a very good formulaic way for communicating that in the past and now that there is. A great example of that is that in our packaging business we provide a lot of design services to our customers that we weren't appropriately capturing value for in the past and that maybe was under appreciated.

Okay. Then one real quick one on Spartech when you think about the long-term potential. I think initially you thought 8% to 10% in terms of getting your operating margins in that range. Do you feel better about that range? Could it go higher? What is the longer term potential given things have gone so well.

Mike, this is Steve. I would say that we always establish that as a near-term goal, never an end goal. And we believe that any Speciality business, if you categorize it as such can get into the high teens or even the low 20% long-term. It doesn't even seem like that at the front end, but you are talking with people who six years ago had a color business that had negative return on sales and it is now up into the low to mid teens. It certainly can be done if you are thoughtful about your approach and successful with your execution. So, I would expect it to get well into the teens over the next 5 to 7 years.

I think what's really happened here is our pace has picked up. We haven't changed our $65 million number and we don't intend to because we see opportunities for investment. So, to the extent that we can beat that $65 million, it may well all land back in terms of investment for growth. So, in total we really have a better understanding of that. We really just have focused on accelerating the process. It has gone more quickly than we expected. I think a lot of that was due to the pre planning that was done, as well as the people that we put on this integration team and in addition the Spartech associates who have really embraced this opportunity for a fresh start and have hopped on board and things are going really rapidly and successfully there.

Great. Thank you.

Next line of question comes from Kevin Hocevar of Northcoast Research. Please go ahead.

Hey, good morning guys and congratulations on another great quarter.

Thank you, Kevin.

For ColorMatrix it sounds like you had a nice turnaround, because I believe second quarter sales and earnings, I think, were relatively (technical difficulty) year-over-year and then here in the third quarter you saw nice revenue and very strong operating income growth. So, just wondering if you could comment on what kind of changes, was it easier comps or a pickup in end markets or what led to that improvement?

From an end market demand standpoint we did see stronger performance in Europe, as you recall. I think from the second quarter we've mentioned a little bit of cooler weather than we thought drove some unseasonably low sales for that time period. We don't like to cite weather, but we believe that was a reality. I think we are also just seeing some really good traction with respect to new product introductions and how we are going to market with our services. That wasn't just contained to Europe. That was also a really good quarter from North America and in South America.

Okay. Then just in terms of the $2.50 goal for 2015, I am wondering if you could comment on how much of that is from organic growth and future acquisitions as opposed to your margin enhancement -- hitting your margin enhancement goals and from current acquisitions? So, how much is from organic growth and maybe M&A yet to come.

We don't have a specific bridge that we have publicly stated in terms of how we get to the $2.50 in 2015. But clearly the primary drivers are to get inside and/or to the high end of the margin targets that we have for all of our businesses. With the additional information that we cited today about the $65 million of synergies for Spartech that certainly helps us and gets to the higher end of that margin range for them. Those are the key drivers and underlying the EPS accretion is, of course, buying back the shares associated with Spartech and to offset future equity dilution. I mean, it is really the same key drivers, Kevin. Steve?

Organic growth, Kevin, is the preponderance of it. Of course, you know we have been very transparent with our expectations around the Spartech acquisition number. I would argue that even a portion of the Spartech acquisition, a good portion of that you have to consider at some point organic. At some point you have difficult lines of demarcation between what was acquisition and synergy and what was organic growth, because we are improving that business each and every day. Overwhelmingly, organic growth is going to drive the bridge from where we are at the end of this year to the end of 2015 with our $2.50 expectation.

Okay. Thank you guys very much.

Thank you for your question. The next line of question comes from Dmitry Silversteyn of Longbow Research.

Good morning and congratulations on another strong quarter. Just I have a couple of questions if I may. The engineered materials margin being down year-over-year that's primarily impact of Spartech, correct? Or was there some lag on raw material pass-throughs in there?

No, Dmitry, you have it absolutely right. It is fully the impact of Spartech and how that dilutes these margins because all organic margins improved.

Dmitry, this is Rich. I would just add to that. There was about $36 million of Spartech related revenue in the EM --in the EM revenue and a very, very small amount of OI. That will help you gauge it, I think.

Okay, Rich, that's very helpful. You did mention that raw materials were a problem in a distribution business, not a problem but it required some pass-throughs and impacted margins. As you look out with Europe starting to show signs of at least bottoming out -- if not climbing its way back, growth in the US is continuing, are there raw material pressures as we look forward towards the end of 2013 and getting into 2014? And how would you, if there are, how would you sort of feel about them versus the previous inflation cycles that we had over the last, let's say, 3 to 4 years?

Dmitry, I think that we're looking at flat to modest increases in Q4. It's a little less transparent when you look out to 2014. But I think that the way we view this is, in Europe, especially, these are Speciality businesses. We don't have the same challenges of getting recovery and margin on increased cost, whatever source they may come from, particularly raws, in the Speciality business because of uniqueness.

This just again shows the difference in the model, with distribution it's a little more different. You have some [cups] pricing out there and as inflation happens you are going to have a little bit of margin dilution. That's very uncharacteristic of the businesses that we have in Speciality. And it's, frankly, it's one of the reasons that we have driven so hard to improve the specialty base.

Okay. Thank you. And then on the PP&S part of the business, you brought in a new manager, the business seems to be functioning pretty good in the environment that we have at right now, what's your longer term strategy for that? Is that still probably more and more likely a source of funding than a target for growth or has that thinking changed overall with respect to either the ultimate decision or the time frame of that decision? Can you talk a little bit about the PP&S as a strategic platform for you?

We continue to believe that there is pretty significant growth opportunity in that platform and that we can actually innovate within a vinyl space, particularly in places like healthcare, and we have some pretty new and unique solutions to present to that market that we think have long-term potential. We have always talked about our connection to housing. It is not as strong as it once was, but is still part of that business and we think there is upside from it going forward. It's a business that present doesn't require a lot of additional investment to achieve that growth. Mostly it's around new product introduction. We still think quite favorably of PP&S.

I look forward to you meeting, for all of you, all the analyst who cover us meeting Michael. He is an impressive gentleman. He's been in the space a long time and he's got some, I think, some ambitious and creative goals for that business as well. We were really happy to be able to attract him and fill the big shoes that Rob has left behind. So, we think that there is a lot of opportunity that goes beyond just the housing recovery in that space. But we will say that the limits on the return on sales are lower than we'll find in our Speciality business.

Right, right. But I mean if you look at the return on investment capital and return metrics of that nature, I am assuming they're still would be very attractive in that business.

Yes, sir.

Okay. Just a final follow-up again with the strategy in PP&S it sounds like you are a little bit more engaged with having this business as a longer term part of the portfolio. You mentioned that globalization opportunity for Spartech once the integration is completed. Are you looking at globalization of PP&S as well or is that going to stay primarily a North American business?

I think the only exception to moving outside North America are very specific well defined markets in China. Honestly, there are other opportunities but they're not as attractive as what we find in Speciality and they're not going to provide as good of a long-term return. So, when you have to pick and choose your investments we think we are being wise to choose to put those more in the Speciality arena. That's not to say that we couldn't succeed, but I don't think to the same degree that we have and will continue to with our Speciality investments.

Thank you very much. That's very helpful.

Thank you.

Thank you for your question. The next line of question is from Mike Ritzenthaler of Piper Jaffray. Please go ahead.

With regard to the plant closures and the migrations capacity to other locations, do you have a sense of how many products will have to be tolled? And is there a measurable drag on operating margins as that tolling increases?

With respect I am assuming you are talking about the manufacturing realignment we announced back in July.

Yes.

The intention there is that we are not tolling that business. We are requalifying it at existing PolyOne facilities or other legacy Spartech facilities. I don't know the total number of products impacted off hand, but the intention is to not to take that outside from a tolling stand point.

Tolling will actually go down, Mike. I think that the concern that you -- the implicit concern about margin erosion due to that, I think that you have to kind of look at our history here. We are margin expansion oriented. We have done that now for 6 years in a row. We have no intentions of changing that. That's a great opportunity for us. And it has to do with innovation, manufacturing efficiency, appropriate pricing and competing where you have advantage and can win. Those are some of the elements that will drive margin expansion.

I think you just have to -- I am going to use this opportunity not just with you, Mike, with everyone to reiterate when you bolt on $1 billion worth of revenue to a company that has much, it has much lower margins than ours have been, there is a dilutive effect, but we will fix that with time and all of our core businesses have increased -- all of our core specialty business have increased gross margins and operating margins.

Okay. That makes sense. I think as a follow-up is there any sense as to how much more might need to be done on the rationalization side at this point kind of 6, 7 months into the acquisition?

We believe that the actions that we have underway right now are the right ones to do from a right sizing perspective and to improve quality and service. At this point we don't have any expectations of others, but that could happen in the future. So, at this point we think what we have announced is appropriate and what will allow us to deliver $65 million in 2015.

I think we shouldn't lose sight, Mike, of the fact that we are consolidating for efficiency purposes and that doesn't just mean cost savings. We are going to be improving and already have started improving quality, we are improving delivery times, safety. So, there is a lot of reasons for us to make these changes and it isn't only on the cost side.

That makes sense. And congrats on a great quarter guys.

Thank you.

Thank you for your question. The next line of question comes from Rosemarie Morbelli from Gabelli & Company. Please go ahead.

Congratulations. I was wondering regarding the housing, you are usually towards the end of a new building or a new house. Have you seen already an impact or is it too early and then you could have a big bump in 2014?

Well, I'll certainly take the first effort at this Rosemarie. One is that always point out that while housing starts are up 20% the vinyl industry reports that those sales are up roughly 4% to 5%. And in fact it's an interesting dynamic this year in that certain segments of the vinyl market in terms of window profiles, frames, et cetera are actually down. That indicates that new construction is in fact consuming less of those materials that we have historically participated in and that may be as a result of an increase in multi family home construction versus single family home construction.

And I think that's what's really taking place this year. Despite that our PP&S segment continues to improve its margins and had an over 8% return on sales. I think we are participating selectively where we think that we should, but we remain overall very optimistic about the housing market for the next few years and perhaps beyond and that we'll be able to participate in that uptick.

A lot of our applications are sort of late cycle in the construction cycle of a home. For example, window profiles would be one example. The wire and cable and electrical boxes go a little bit earlier, but still after framing. And then of course you have decorative trim, which is one of our applications as well. But I think overall there are changes in the composition of new construction starts.

I think that you will find that there is more multi-family being done and when you have multi-family you don't have as many windows and window profile, et cetera. We are focused more on profitability and profitability growth in the business and the things that we can control. Of course we would like a housing pick up to continue, but I think we are in good position to grow our business irrespective of what goes on in that end market.

Okay. That is helpful. Thank you. Looking at another industry, which is electronics, are you seeing any change in the markets?

So, we had pretty good performance in both electrical and electronics for the quarter. So, those were up organically. They were up mid to high single-digits depending on which one you segment. And we see some pretty solid performance in that arena.

Is that because of the new products you are introducing or is it because the demand in the market place is actually growing?

I think it's our participation in the market in selecting areas where we have better chances to compete. Global personal computer shipments declined 8.6% in the quarter. That's six quarters in a row that those shipments have declined, yet our business is growing. It says something about where we are going, what applications the Speciality applications that we're pursuing. Same thing with printing. Printing hardware is in decline. That's an area in the past we have participated in. This is not an area that we are focused in right now.

I would add that the area where we have seen the greatest growth from a segment stand point is within Global Speciality Engineer Materials and that is new product driven.

These are things like tablets and smart phones and applications there and moving more into those and away from PCs and printers. Our teams are working to capitalize on these trends and they diversify our offerings to these applications and that's, I think, what's driving our growth.

Okay. Thank you. If I may ask two quick question. Regarding the K Fair in Germany, did you place any orders? How long does it take before you actually see a pick up. And then lastly the $2.50 for 2015, do you need any help from an economic recovery versus what it is today in order to get there.

First with respect to the K show. I'd say we had great interaction with customers. One of the best things about those shows is just the opportunity to showcase our new product introductions, as well as spend time with those customers with a number of people from our different businesses. So, certainly we identified orders for closure. I couldn't give you order of magnitude on that right now. But we did see a lot of really good signs for new business. I think the most important part coming out of that show was just the overall level of enthusiasm, encouragement that we have from our customers in Europe.

And then lastly with respect to the $2.50. When we announced that in 2012 we did say that we needed to have mid to high single-digit type revenue growth and that, that comes partially from some level of uptick in the economy. For example, we assumed that housing starts would get back to 85%, their medium levels. So, we do need some benefit from an economic standpoint, but nowhere near as much as just margin expansion will get us.

Okay. Thank you.

We have time for one more question.

We got a couple more. Let's go.

Or two.

Okay. Thank you. The next line of question comes from Saul Ludwig, Saul Ludwig Consulting. Please go ahead.

You touched on Vitality Index and you have done that many times and that's moving in the right direction. Either in current business or what happened at the K Show is there any one or two products that really jump out in terms of customer excitement that are beginning to have traction that is at a standout from the ongoing product evolution process. But any particular product that really made a difference?

Saul, there are several. We have ColorMatrix has introduced a product called Excelite. It's a liquid foaming solution for vinyl building and extrusion applications. That was rolled out at the K Show. This helps customers reduce density and that means they can reduce total system cost without compromising any of the mechanical properties or any surface aesthetics. That's an example of one.

Versaflex, which is a consumer electronics application. These are Thermoplastic Elastomers that enable the OEMs to differentiate their devices through design and performance and market driven aesthetics. It is very important in a fast paced environment like this. This new TPE technology takes on several of the challenges that today's designers have, including feedback and they can pursue high-end phone and tablet cases and they have vibration dampening properties to improve device performance and comfort. A lot going on, on that front.

And in another area that we are excited about that customers are excited about is our Percept application. That's an authentication technology. What that's all about is brand protection in avoiding fraud and security issues. It draws from covert, overt and forensic techniques. This really enables our manufactures to protect their products from counterfeiting and from billions and billions of dollars of unauthorized distributions that go on. It's a very customizable set of technologies that helps customers reduce revenue and mitigate their risk and really protect their share. Those are just some off the top of my head that I think are important ones to discuss.

Great. Thanks a lot guys.

Thank you, Saul. Good to hear from you. One more question, Bob.

Thank you. The next line of question comes from Christopher Butler, Sidoti & Company. Please go ahead.

Bob gave us a lot of good details earlier, but I don't know that I heard the organic operating income growth just from the Speciality platform. Could you give us that figure please?

Yes, from a color standpoint that was actually just below 40% and then for Engineer Materials it was 13.6%.

And the healthcare. Could you give us an update on your progress on your healthcare end markets and your emphasis there? I heard you mention it in PP&S, but are you still seeing the same growth in the Speciality side or is that starting to play out due to success that you have had over the last couple years?

Well, healthcare sales were up 13%. Gross profits were higher than that. And Speciality healthcare growth was over 36% for the quarter. So, we are really pleased with the investments we've made and the payoffs that we are beginning to realize and have been realizing in our healthcare sales.

Sounds like you are still positive on runway to come then on that front.

Definitely. We had record gross margin level in healthcare this past quarter, so we are very well positioned and excited about a lot of opportunities in healthcare, Chris.

I appreciate your time.

Okay.

All right. Thanks. This concludes our third quarter 2013 conference call. We thank you all for your continued interest in PolyOne and for joining our call today. Thank you.

Thank you. Thank you for joining us today, ladies and gentlemen. You may now disconnect. Thank you.