Avient Corp (AVNT) 2013 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the PolyOne Corporation fourth-quarter 2013 conference call. My name is Allison 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'd like to turn the call over to Isaac DeLuca, Vice President Investor Relations. Please proceed, sir.

Thank you, Allison. 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 may be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Forward-looking statements will give current expectations or forecasts of future events and are not guarantees of future performance. They're based on Management's expectation and involve a number of business risks and uncertainties, any of which could cause the actual results to differ materially from those expressed 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 fourth quarter of 2013 to the fourth quarter of 2012, 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 Executive Vice President and Chief Financial Officer, Brad Richardson. I will now turn the call over to Steve Newlin.

Well thanks, Isaac, and good morning, everyone. I'm pleased to share our fourth-quarter results with you as we close out another record-breaking and transformational year for PolyOne. We delivered fourth-quarter adjusted earnings per share of $0.26, a 44% expansion over last year. And this marks our 17th consecutive quarter of strong double-digit year-over-year adjusted earnings per share expansion.

Our strong performance in 2013 built momentum throughout the year and exceeded our 25% compounded annual adjusted EPS growth rate of the past four years. Our consistency in delivering outstanding results like these positions us in a unique group of companies who regularly exceed expectations, differentiate themselves from their peers and help their customers win and succeed.

And Bob and Brad will talk more about our quarterly performance shortly, I want to briefly reflect on 2013 as well as look forward to 2014. We're extremely proud of our 2013 results and view the year as an inflection point for PolyOne.

For the full year, our revenue set a record of $3.8 billion and we delivered adjusted EPS of $1.31, a 31% increase over 2012. What's really impressive about our earnings growth for the year is that we exceeded the S&P 500 earnings growth rate nearly six fold based on full-year estimates.

Our 2013 performance accelerated during the second half of the year with solid organic growth and a 35% increase in adjusted earnings per share. And this powerful momentum, which sets us up well for 2014, allowed us to strengthen our solid foundation for the future based on four fundamental drivers.

First of all, our Specialty Platform has been at the heart of our achievements. Underlying this performance has been our relentless focus on mixed improvement complemented by our shift to high-growth less cyclical end markets. As evidence of our mix improvement success, during 2013, our organic gross margin in Specialty expanded over 300 basis points to 30.7%.

At the same time, we continued to move into high-growth markets like packaging, healthcare and consumer products. In fact sales in these attractive end markets now account for more than $1 billion of our revenue.

Second was innovation. And our 2013 product launch has proved our innovation engine is really running well. A few of the unique and highly differentiated products we recently launched include: Percept, which is our anti-counterfeiting additive technology; Versaflex HC which improves patient safety and reduces manufacturing complexity for healthcare applications; and InVisiO color design services which is a first of its kind offering that supports color and product development from concept to reality. These are just a few examples of a rich pipeline of opportunity for the future.

Third was our acquisition of Spartech. We're less than a year into our integration but we're already demonstrating that Spartech is making an impactful complement to PolyOne's leading specialty portfolio. Finally, our portfolio is further refined to Specialty in 2013 with the divestiture of non-core resin assets. However, the proof of the Specialty is in the numbers, and as the end of 2013 operating income from our Specialty Platform now accounts for 62% of our total operating income, up from just 2% at the end of 2005.

And none of these achievements would have been possible without the successful unyielding execution of our four pillar strategy by our global associates. As we look to the future, this commitment will not change and it's what will drive us to our 2015 goals and beyond.

We're a little less than two years away from the timeline we set for the 2015 goals we collectively made public in May of 2012. Let me reinforce that these goals are not my goals, they are commitment by the Senior Leadership team and the entire organization. They're backed up by a proven strategy and solid plans that will get us there and beyond. In fact, there are several levers that will help us achieve the goals which include our target of $2.50 adjusted earnings per share.

And I want to highlight the most critical. First and foremost is profitable growth. We were encouraged in the second half of 2013 with improved organic top line growth of approximately 4%. To achieve our 2015 goals, we expect to grow organic revenue mid-single digits in 2014 and 2015.

The second lever is to continue to innovate. Innovation has been a key element of our transformation. It differentiates us and makes us the business partner that our customers will collaborate with for the long term.

As evidence of our continued innovation, through the fourth quarter of 2013 our vitality index was 43% which is world-class for any organization. Importantly, our innovation focuses on niche specialty applications that are differentiated. Like additives that extend shelf life and preserve product quality or light weighting options to reduce energy costs. Antimicrobial technology to reduce the risk of infections in healthcare settings, and ballistic resistant materials which protect employees and assets.

Next is to continue the success that we've seen with integrating the former Spartech business. We have exceeded our own higher expectation this year but we still have work to do to realize the $0.50 in accretion by the end of 2015.

Finally, these key business drivers help strengthen our already solid financial position giving us the flexibility to continue our share repurchase program, pursue Specialty M&A and invest in our award winning Lean Six Sigma program to continue to deliver operational and commercial excellence.

Since 2007 it's been our practice to set aggressive goals and then deliver where our customers and stakeholders have come to expect. And I'm proud to say that the last five years we've substantially delivered on virtually every major goal we've set and commitment that we've made and we've consistently met your expectations of earnings performance. We have the same expectation to deliver on our 2015 goals.

All of our associates recognize our track record of performance has raised the bar. Our goals are owned by the entire organization, that's just how we do things at PolyOne.

With that, I want to introduce the newest member of our Executive team, Executive Vice President and Chief Financial Officer, Brad Richardson. Brad brings extensive experience and insight to PolyOne after more than 20 years in finance and operational goals with Amoco and nearly nine years as a public company CFO with Modine Manufacturing and Diebold.

Brad is really off to a terrific start and he's already proven to be a valuable member of our Executive team. His experience and leadership will be invaluable to PolyOne. I'll now turn the call over to Brad who will talk more about our financial performance for the quarter.

Thank you, Steve, and good morning. I am truly excited to be a part of a high-performance organization with a proven track record of PolyOne. During my diligence process on PolyOne, one of the things that impressed me was the laser focus this Company has on performance, execution, rigor and its unwavering commitment to the four pillar strategy.

I believe my experience in both operational and finance roles brings a new perspective both in working closely with each of our Business Unit Presidents as well as continuing to improve our capital structure to support our continued growth and returns to shareholders.

With that, it is my pleasure to provide more detail on our fourth-quarter performance which continued the great results we saw in the first three quarters of 2013. We reported fourth-quarter revenue of $923.6 million, up from $651 million last year. Adjusted net income from continuing operations of $25.6 million versus adjusted net income of $15.9 million for the fourth quarter of 2012.

Adjusted EPS expanded 44% to $0.26 per share versus $0.18 last year. Sales increased 42% overall, principally driven by the acquisitions of Spartech and Glasforms while gains in healthcare, electrical and transportation end markets drove the 4% increase in organic revenue.

We attribute this success to our investments in commercial resources, improving mix, solid growth from new technology launches and early success with the integration of Spartech, which continues to accelerate. With the addition of Spartech in 2013, our income mix is heavily skewed towards North America. As a result, our pre special tax rate in the fourth quarter was 39.2%, up from 37.3% in the fourth quarter of 2012.

Special items in the quarter resulted in a net after-tax charge of $4.9 million, or $0.05 per share and included the following: restructuring charges, principally related to the realignment of the former Spartech business of $28.6 million; a favorable mark-to-market pension adjustment of $44 million; a $26.8 million gain on the third and final earn out payment in connection with the SunBelt divestiture, bringing total proceeds to approximately $240 million; and finally, a $47 million charge related to environmental remediation activities related to a former BF Goodrich facility in Calvert City, Kentucky.

PolyOne never operated at the Calvert City site and our environmental obligation arose as a result of an agreement by our predecessor, The Geon Company at the time of its spinoff in 1993 to reimburse Goodrich for environmental costs at the site. This charge represents estimated costs related to environmental remediation based on a thorough review jointly developed by PolyOne and the environmental protection agency and other relevant parties. We are pursuing available insurance coverage to offset expenditures related to the site.

This charge, as well as the investments in the restructuring of the Spartech business, was partially offset by favorable mark-to-market pension adjustments of approximately $44 million driven by higher discount rates and better than expected returns on pension assets.

Importantly though, we've made significant strides in strengthening our balance sheet with $68 million in contributions made to the pension plan during the year. Currently, are US qualified plan is now 100% funded, up from 76% at the end of 2012.

To preserve the funded status and to further derisk the pension plan, we have shifted a substantial portion of the plans assets into fixed income investments that match the duration of the plans liabilities. This serves in large part to insulate the funded status from changes in interest rates.

In addition, through voluntary early file offers we will save a meaningful amount of ongoing administrative and regulatory expenses by reducing the number of participants in our plan. Lastly, as it relates to our US qualified pension plan, as a result of our shift from equities to fixed income investments, we have lowered our estimated rate of return on assets from 8.5% to 6.9% in 2014 and consequently anticipated $0.07 increase per share in corporate costs.

Turning to the balance sheet. We once again delivered world-class performance as it relates to working capital. For the fourth quarter, working capital was 10.9% of sales on a trailing 12-month basis.

Importantly, with our early integration successes we are beginning to see, we are beginning to see improvements in Spartech's working capital management. In fact, working capital will be a key area of focus for me in 2014 and we expect additional improvements in that regard as we implement operational excellence programs to enhance Spartech processes.

Our exceptional working capital Management has contributed to our strong liquidity. From a cash perspective, we ended the year with a cash balance of $365 million. Including our asset based results -- revolver capacity, total liquidity at the end of 2013 reached $651 million.

We continue to employ the strong liquidity in ways that drive the most benefit to our stakeholders. Specifically, we used our strong liquidity to accomplish the following. First, we continued our share repurchase plan; During the quarter we repurchased approximately 1.2 million shares at an average price of $31.01 per share. For the year, we have purchased 5 million shares at an average price of $26.30 per share. And we are 50% complete towards repurchasing the 10 million shares issued in conjunction with the acquisition of Spartech.

Second, in early December we announced a 33% increase in our quarterly dividend. While we do not aspire to be a yield stock, this increase represents our commitment to return capital to our shareholders and reinforces our high expectations of long-term performance.

Third, capital expenditures in the fourth quarter were $34.6 million, with the largest investments going to our Specialty Platform principally for new manufacturing facilities in Turkey and India, in addition to funding our North American manufacturing realignment.

Even with these cash outflows, sequentially our liquidity increased by $19 million, and our net leverage remains about 2 times EBITDA. Looking ahead, our financial strength will allow us to continue investments in additional commercial resources, funding our robust innovation pipeline and pursuing M&A to grow our specialty platforms.

In closing, I am very excited to be a part of this organization. We have a lot of terrific things going on and I look forward to reporting throughout 2014 on them to you. I will now turn the call over to Bob who will discuss our segment performance.

Thanks, Brad. It's a pleasure to have you with us here today for your first investor call and what a great way to start with an outstanding fourth quarter, bringing to close a record year for PolyOne.

Once again our Specialty Platform led the way, and in the fourth quarter Specialty revenues increased 72% over the prior year to $514 million. While much of this revenue growth comes from the recent acquisitions of Spartech and Glasforms, I want to highlight that our Specialty Platform delivered our strongest quarterly organic sales growth of the year in the fourth quarter of 5%. Asia gained 14.2%, North America picked up nearly 5%, and Europe was up 4%.

While we did see some help from FX in the fourth quarter, point out that this is the first quarterly revenue growth we have seen in Europe in two years. And with this organic growth, we saw a substantial improvement in mix and margins. Coupled with our efforts to expand profitability in DSS, Specialty operating income doubled over the prior year and reached a new fourth-quarter record of $44 million.

The Global Color, Additives and Inks segment capped off a tremendous year with a strong finish in the fourth quarter. Sales increased 15% to $198.6 million on double-digit organic growth from ColorMatrix and Asia Color as well as the addition of Spartech.

Operating income grew to $20 million, a 57% increased over the prior year and a record for this segment. Notable gains were achieved at every region for our Color business, but I want to highlight our teams in Asia who expanded sales by 16% and delivered a 25% improvement in operating income. ColorMatrix also finished strong with a 12% increase in sales and operating income more than doubling in the fourth quarter.

For the full year, Global Color, Additives and Inks reached a record return on sales of 12.2%, a 250 basis point improvement over the prior year. Global Color is now already at the low end of the 2015 operating margin targets with a real opportunity to reach or exceed the high end of the range.

Our second Specialty segment, Global Specialty Engineered Materials, increased revenue to $146 million, or 16% over the prior year driven by organic growth in healthcare and electronics and the addition of Spartech and Glasforms. EM expanded operating income to $11.8 million, a 27% increase over 2012 which was entirely organic. And it was particularly pleasing to see our European engineered materials business overcome headwinds in the regions to expand fourth-quarter revenue by 24% and deliver record fourth-quarter operating income.

Finally, our third and newest Specialty segment Designs, Structures and Solutions delivered sales of $169 million and operating income of $12 million. While we didn't own DSS last year, I would point out that $12 million is nearly triple the operating income DSS achieved in the fourth quarter of 2012.

Clearly our integration efforts are well underway at DSS and all of the legacy Spartech businesses. We have seen great progress with respect to our efforts to reduce cost and improve quality, service and mix.

In total and as a result of these integration efforts, Spartech added approximately $0.06 to EPS for the quarter and $0.12 for the year, well ahead of our preliminary estimates of $0.01 to $0.02 per share for the year. Though much work remains to reach our goal of $65 million of profit expansion and $0.50 of earnings per share accretion in 2015.

Our integration efforts in 2014 will be on several key initiatives. First is driving operational excellence through the implementation of Lean Six Sigma to improve both safety and quality in our manufacturing facilities. Second is to continue to strengthen the team and train our commercial resources to better serve customers and capture the value of Spartech 's leading positions in custom sheet, roll stock and packaging solutions.

Third is the completion of our North American manufacturing realignment, which we expect to finish by the end of 2014. And finally, we will leverage our marketing and international resources and begin to seek ways to globalize these recently acquired businesses and better serve our multinational OEMs in the same way that we do with our other Specialty businesses.

I believe we have clearly demonstrated our ability to implement and execute proven best practices and acquire businesses. We've had outstanding success with improving of profitability of GLS, ColorMatrix and now we are doing the same with Spartech.

Our Distribution business did not show the same year-over-year improvement relative to the rest of our segments as we were unable to overcome the timing and impact of higher raw material costs. However, we still delivered a 5.9% return on sales for the year which is very respectful and we expect measurable improvement in 2014.

We are relentlessly focused on hitting our 2015 goals and that begins with delivering our margin targets in all of our platforms. PP&S is no exception and they are well on their way. For the quarter, PP&S sales expanded by 37% versus 2012 driven by the acquisition of Spartech and the growth in building and construction and related end markets.

However, the real story is how continued mix improvement has led to impressive profitability gains in PP&S. For the year, operating income increased 44% and reached a return on sales of 7.2% surpassing the 6.2% achieved in the prior year. All of this was accomplished as a result of relentlessly focusing on finding ways to differentiate our sales in a very competitive final market.

And differentiation is really at the heart of everything we do to create a sustainable advantage in the marketplace. With our current innovation pipeline, we have identified over $1.1 billion in opportunities for new product launches. Of course they may not all come to fruition, but this helps to quantify the order of magnitude we see as innovation potential.

You know that we have more than doubled the amount of money spent on research and development since we began our Specialty transformation. And as Steve said, our Specialty Platform vitality index is at a world-class level of 43% and margins have expanded as a result.

But you probably want to know what is next and what does the future hold? To answer these questions and give our investors a glimpse of what is yet to come, we plan to host a special, innovation day in New York City on May 16 of this year.

There, we will highlight recent innovations in healthcare, and our counterfeiting, anti-counterfeiting, color and design services and light weighting just to name a few. For those of you who are able to attend, we think you will get a much better picture of where we are investing to create new and innovative solutions for sustainable differentiation.

We also think you will gain more confidence in our ability to continue to drive profitable growth and reach beyond our 2015 targets. While the margin targets we have set for our sales in 2015 our aggressive, we don't believe they represent the ultimate level of profitability we can achieve.

Like the 2012 goals we set back in 2007, we view the 2015 targets as a stepping stone, a point of reflection the next several years of our journey to our becoming a world-class Specialty Company. That concludes my remarks, I'll now hand the call back to Steve for a few closing comments.

Well thank you, Bob. It's great to hear about what we accomplished last year. But the time for celebrating 2013 successes is over, we have a new year to focus on with higher expectations from our customers and our shareholders.

And to deliver on those expectations, we have a lot of work to do, growing revenue, improving profitability and introducing new and innovative products will not simply happen based on past success. We have to make it happen and we will.

We will not rest on our laurels nor will we ever become complacent. Great companies never do. We have a tremendous amount of excitement and organizational energy building at PolyOne.

I just returned from attending a grand opening of our new facility in Turkey last week. And for all the negative news of late about Turkey and other emerging markets, you sure wouldn't know it from our associates and our customers there.

It was energizing to hear our customers talk about how our portfolio is helping improve their businesses. As well as the opportunities our facility and its capabilities can offer. Our business in Turkey doubled operating income over the prior year in 2013. And recently Turkey gained the number two position in Europe for plastics consumption with a growth rate of over 10%.

Our state of the art facility is a Specially plant to designed to meet that growing demand. It shows PolyOne in a different light and our customers are eager to develop long-term collaborative working relationships with us. And Turkey is just one example where our energy is teaming.

There are many others and the energy momentum will carry us well into the future. We expect to continue to deliver strong double-digit adjusted earnings per share growth in 2014, growing our Specialty portfolio and importantly introducing unique innovations that our customers value providing strong returns to PolyOne.

We look forward to sharing our first quarter 2014 results in early May and seeing many of you at our special Innovation Day on May 16. With that, we now have time for questions.

(Operator Instructions)

Robert Koort, Goldman Sachs.

Wonder if you could give us some sense within Spartech I think Bob you mentioned there's still some training going on. How far are you in changing the sales culture, the EVE tools, the whole process of reinvigorating that marketing and customer interface effort?

I think that we're still in the early innings. We really have made great progress this year with training and introducing the tools like you mentioned, the EVE tool, as well as in general customer centric selling skills but we've got a long way to go. I'm encouraged by the associates in Spartech, I think they're willing to embrace specialization and largely have been very energetic about being part of PolyOne and receiving that training.

And on the cost side, the asset optimization, can you talk a little bit about where you expect to get the savings there? Obviously there's facility closure and some headcount reduction. Are there other logistical benefits or how else do you got some value out of that process?

Right. Well in terms of the $65 million of operating income improvement that we defined early on, that did include benefits from sourcing savings, supply chain improvements, Lean Six Sigma et cetera, and some of that is connected to the North America manufacturing alignment. So it's included within the $25 million. I don't have an exact breakdown for you but it is included in the $25 million. And much of which comes into play in 2015 with those closures being largely scheduled for completion by the fourth quarter of this year.

I just mentioned, hitchhike on that thought, Bob, is that we have a lot of work that's going on around improving product quality and reducing scrap rates. And there's a pretty nice prize to be had when we get all those issues resolved and we're making excellent progress on that front. And then I think Bob mentioned supply chain but certainly, there's a lot of additional volume that suppliers are interested in and competing for and we think we'll gain some advantage on that front as well.

Terrific I'll get back in line, thanks.

Frank Mitsch, Wells Fargo Securities.

Good morning and nice end to the year, fellas.

Thanks, Frank.

On the organic growth in the Specialties Platform I believe Bob I think you said it was 5% organic growth but then also you mentioned that ColorMatrix had double digits organic growth. Does that imply that the GSEM was well below the Specialty average?

No, both -- well Specialty Engineered Materials was at about 6% organic growth year over year. And then we had all in Color, so I mentioned double digit for ColorMatrix and then it was the legacy Masterbatch business that was a little below that average at about 3%.

Okay, all right the math is helpful there. And is that -- should we think about your 43% vitality index in terms of that area of growth that parts of Color are doing particularly well and other parts not so well and then GSEM is in that average? How do we think about how that 43% breaks out by the three major pods?

Each of the three businesses have better than 35% vitality index, so I wouldn't point to either one as being a laggard or a particular positive I think they're all doing very well. And we have had some influence from bringing out new product lines such as liquid color and additives in ColorMatrix. So I'd say on balance right now, Color is a bit higher than EM but certainly all -- both of those businesses start in world class.

Terrific and then lastly on the distribution side you talked about some of the weakness that you saw in Q4, how should we be thinking about that business in 2014?

We still got a lot of sites to gauge our margin targets in 2015, so we need to get past 6% return on sales and get closer to 7%. We had an unfortunate beginning to the year, if you will, with respect to raw material prices and unfortunately couldn't overcome that throughout the course of 2013 but we've got good line of sight to doing so this year.

All right. So you're expecting a significant progress in distribution as we go through Q1 and beyond?

Yes I think we're see good top line growth as well as margin improvement.

Thank you so much.

Laurence Alexander, Jefferies.

Good morning, this is actually George [Daniel] on for Laurence today. Given the current market environment, is the ongoing mix shift enough to support a mid-teens growth [cans] in each quarter or will progress become more lumpy going forward?

So, I would say that mid-teens would be below our expectations and below our four year performance if you look at our CAGR over the last four years has been 25% and accelerated in the second half of the year. So I would personally be disappointed with that level of performance. I think the lumpiness for us is kind of working its way out of the system as we move to markets that are last cyclical.

I think the wonderful advantage that we have a PolyOne is this great opportunity of business potential that it's really up to us to execute. We're not as linked to -- of course everybody is link to the macroeconomic issues and if there's a big downturn, obviously same store sales would erode. But for us it's more about capturing new business gains that are very profitable that enable us to have incremental growth.

And we really don't and for that reason we don't ever talk about metrics like what's the GDP growth rate and do we have a number above that at which we expect to grow. Our expectations are more around our ability to innovate, gain new business and execute.

So I think the lumpiness for us has a little bit of seasonality to it, if you will, to use your term of lumpiness and it really works like this. Our second quarter is almost always our strongest, our third quarter is the second strongest followed by the first quarter and then the fourth quarter. So that's the only element of I guess lumpiness that I would see is more as a seasonal factor.

Okay, thanks. And one quick follow up, can you give any guidance on CapEx for 2014?

Yes, let me just take that -- if you look at historically and certainly what we did in 2013, we spent about $76 million, which is roughly about 70% of our depreciation rate. As we look to 2014, we're looking at a number more like $100 million, slightly below our depreciation rate and that's really a function of the fact that we are investing in the manufacturing realignment for the North American business, so that's roughly in the $100 million range.

Okay, thank you.

Mike Sison, KeyBanc.

Hello, guys, congratulations on a great year.

Thank you, Mike.

A couple things in Design Structures and Solutions, very impressed that you got operating margin 7% as I recall even the fourth quarter tends to be the weakest quarter seasonally for that business. When you think about 2014 and all the cost savings you have, how much progress do you think you can get? Is it a couple hundred basis points based off where you're at now?

Well we haven't set any specific targets for 2014 but we certainly have a trajectory that would lead if believe we could get there. I think that last year and that fourth quarter they were right around 2%, so we have achieved pretty significant year-over-year growth.

We may see some of that being backend loaded with respect to manufacturing realignment timing and getting the remainder of that in 2015. But certainly had great progress so far, but I don't expect to stop in 2014.

You think -- what you view on sales for 2014 for DSS in the sense that I think you've got the product rationalization efforts that you tend to do in terms of improving businesses there. And can you maybe describe what -- is there a way to describe what at Spartech are keepers now versus what have been keepers earlier in the year?

I mean I certainly would -- it's reasonable to expect that we'll have ongoing pruning activities through the course of 2014 as we look to highlight the more profitable product lines. We're not intentionally trying to walk away from any customers or business but we do want to focus on those areas where I think we have the most differentiation. I would tell you that we're emphasizing the packaging sector as a place where we want to be longer term and certainly that will be an area where we would emphasize growth.

Okay. And one last quick one, Steve, when you think about GSEM, it certainly had some progress in 2013 but obviously the farthest away from those 2015 goals in terms of operating margin. Any thoughts there? Why isn't there quicker improvement, what needs to happen to get it on that trajectory?

Yes, so that's a fair observation and here's how we view this. We are very gung ho and optimistic about GSEM and they have made tremendous progress.

The reason that they're lagging is that this is a very long sales cycle business. You're dealing with the OEMs, you're getting spec in, you're passing a lot of test to qualify and getting a lot of approvals. And we have consistently said this is typically more like a three-year sale cycle.

So this past year we reaped the benefits some of work done three years ago next year same thing so the process continuing. And we've added resources into the organization to penetrate further but it is a very long sales cycle process. And while that's a little frustrating on the front end to see the results as early as you'd like, it's really terrific when it comes to building barriers once you do get entrenched and established.

You think about the markets that we're selling into in that business, healthcare, aerospace, auto, these are businesses that you need to work hard to get specified and they're going to require some convincing, some conviction and some proof before you begin to collect orders.

So, I think that's the reason for the lag and I think we're doing a very good job of improving and executing in that space. So I would stay tuned and we certainly expect that business to grow and make the range that we've laid out for 2015. And I would also say my personal opinion is long term, that will become the most profitable part of PolyOne.

Great, thanks, guys.

Kevin Hocevar, Northcoast.

Good morning, everyone, and congrats on a great end of the year.

Thanks, Kevin.

Wanted to ask you, in Spartech I believe on last quarter's call you mentioned you expected it to be accretive $0.08 to $0.09 for the year and ultimately turned out to be $0.12. So wondering what went right over the past couple of months that really accelerated that business?

I think it's a couple things and they really relate to our interactions with our customers where we've been able to quickly implement the use of the EVE tool and demonstrate our value. And while we expect some pruning activities, it hasn't been to the extent that we had planned. So I would say that that number wasn't as high as we thought it would be and ultimately margins were better as a result.

And we're also ahead on timing with respect to cost out. So while we haven't changed the total goal of $65 million, I think we've gotten there faster this year from a cost reduction standpoint.

And I'd just add, I'll give our team some credit here for this. We put some high-powered talent down in that business, we had [Ben Strength] to backfill for them and Julie McAlindon has done a great job of leading that organization. Tom Kedrowski and the manufacturing organization are doing fantastic work so, I think we're just executing a beyond our expectations.

Okay, great. And then wanted to -- sounds like you have an expectation of mid single-digit type organic growth in sales growth in 2014. What type of incremental margins can we expect particularly in the Specialty platform where organic growth has been hindered either from Europe or product printing or what have you over the past couple of years.

But wondering now that this is going to be a tailwind next year. What type of incremental margins we can expect?

Well, on the operating side and we've always planned on trying to do 100, 150 basis points of improvement, and I think that gets us inside our range where we want to be in 2015. A lot of that comes from ongoing benefits from Lean Six Sigma but also improving emerging markets.

I point out that Europe is 35% of our EM and Color businesses and remains behind from a profitability standpoint as they hopefully come out of this recession, we saw great progress in that regard in the fourth quarter and I think that'd be a tailwind for us next year.

But lastly it's really innovation and our ability to introduce new and unique solutions for our customers drives margin performance beyond the other two. That's why we're going to host an Innovation Day on May16 is to highlight what's next and what you can expect.

Okay, great. And a final question, does this harsh weather that we've had, particularly December and January, have any impact on your business at all?

A little bit. We've had some challenges with delivery in December as well as in January and we've been fortunate to be able to keep our customers supply, but it wasn't easy. So we've had a little bit of work to do around making sure we navigate all the problems that are out there.

And then most recently of course with nat gas pricing changing, obviously that's going to impact our business both in terms of cost to produce as well of ultimately raw materials. But we manage that and we manage it well so you can expect us to recover that and build margin through pricing related to the energy costs as a result of the weather.

Okay, great. Thank you guys very much.

Mike Harrison, First Analysis.

I had a question on the Color business. Maybe if you could talk in a little bit more detail about the uptick that you're seeing on the liquid side? And is that cannibalizing some of the more traditional Masterbatch business?

And then specific to Masterbatch, are you seeing any competitive pricing pressure there? You mentioned that the organic growth rates were a little bit below average in that business.

We are not seeing any cannibalization from the liquid color business. In fact this is something that really crystallized for us when we were conducting due diligence on ColorMatrix is how different the marketplaces are that the two business are in and where we're trying to grow. So for us, we've always viewed it as a strength that we can offer both the Masterbatch and a liquid color solution and haven't seen any conflict there.

A lot of the growth that's been coming out of ColorMatrix I think has from adopting some of our own best practices with respect to communicating value to the use of the EVE tool, et cetera, and getting some margin expansion as a result. And then from a Masterbatch side, it's always a competitive market out there and to some extent you have got some ongoing pruning, but most notably in blacks and whites as we continue to emphasize Specialty colorants where we think we can be differentiated.

And then on the Spartech side, you mentioned that leveraging that business internationally is something you would look to do over time. Is that something that you can do organically now that you have the combined resources? I think as we think about the Spartech business we always thought that that might be a roll up opportunity as you looked at Europe or tried to expand it. Can you do it organically or do you need acquisitions?

We can do this organically if we choose to, it'll be a buy build. Do you do it on income statement or the balance sheets decision, we're just not ready right now to do this. We're getting closer but we certainly want to have the house in order before we start extending it and leveraging it globally.

We have capacity opportunities and space in some of our existing plants for example to do this and all the infrastructure is there. So certainly theoretically we could do this on a homegrown basis, but again every one of those decisions will be based on opportunities that are out there to get there faster and then becomes just a financial decision more than anything else.

All right, and then the last one for me. Did I hear correctly that you saw 24% organic growth in Europe in Engineered Materials? And if so, how did you do that?

You did hear that correctly and really through new business gains. Our -- we started to see some weakness in that business going back to 2010 and 2011 with the recession there.

And I'd like to say things have -- are not getting any worse in the fourth quarter, but for the most part our performance has been driven by our ability to go out and win new business at better margins, it hasn't been about an economic recovery.

All right, thanks very much.

Dmitry Silversteyn, Longbow Research.

Good morning, and congratulations on a nice quarter and a very good year.

Thanks, Dmitry.

Couple of questions. First of all on the PP&S side of the business as you look both towards 2014 and ultimately towards your 2015 goal, how is that tracking with respect to housing starts versus your expectations which I think were somewhere around a million housing starts by 2015?

And assuming that the construction market in the US recovers, or North America recovers a little bit slower than that, are there levers that you can pull inside the business and things that you can do from internal execution to still get to your margin goal and have this be a counted on contributor in that 250 number for 2015?

So I think the way I would look at this Dmitry is I believe we said 85% of the 50 year norm and that came out to be around 1.2 million, 1.25 million housing starts in 2015. Here are some data points that might be helpful. In 2011, there were 610,000; 2012, 780,000; 2013, 920,000 starts estimated. And the expectation, the consensus, the mean expectation for 2014 is 1.12 million.

So we're tracking really nicely. Expectation for another 200 incremental -- 200,000 incremental starts in 2014 and if you take that trajectory, we'll certainly get to the 1.25 million that we had stated when we put those goals out. And maybe it's possible to have a little bit more than that. I don't have any 2015 estimates yet, but based on the way the ramp up is going, we should be pretty much in the ballpark.

Okay, that's good to hear. Thank you. And then as you look at your both current performance as you finish 2014, and your delta to the 2015 target, is there much difference in your Specialty business regionally between North America, Europe and Asia, Latin America? Where do you have to do the most work to make sure you hit those margin targets where you are on target or a little bit ahead of your expectations already?

I guess to answer the question about where do we see the most work, I would say that is in our emerging markets and outside the US. We still have some work to do, I think, to overcome a recession in Europe that could turn to be a good guy in the event that the market recovers or turns around.

But we also have some regions such as Brazil that just aren't where we want them to be from a margin standpoint. And so got a lot of work to do there, but fortunately we have very -- but that's not the preponderance of our business as you know. So we've got great success and momentum in North America and Asia with some pockets of work to do in some of these smaller markets.

We just -- we're blessed with abundant opportunities in all of the regions and so it's up to us to execute on all those fronts. And for us it's hard to single one out. Obviously Asia is really important to us long term and we're doing extremely well there. The European recovery will help.

I would not overlook North America, I mean the successes that we're having with Specialty in North America are rather extraordinary. And they have a lot more to do with the applications and creating value for the customer than they have to do with the economic growth rates. So we've got to execute on all fronts.

Okay so in terms if there's a significant difference in growth rates between these regions in 2014 versus 2013 for example, if Europe goes from being a negative to being a contributor, is their differentiation in margin strong enough that we have to be at least cognizant of some margin headwinds or conversely tailwinds if some of the regions grow faster than the others?

I think that the balance and the weight is such that the biggest business we have is of course is the highest margin, the most attractive businesses. But as we begin to expand our growth in these other economies and we're doing so with new technology, it's priced right. Our new technology is priced right so we should have accretion.

I guess the exception would be to try, I think I'm getting at your underlying question, is DSS has a lagging margin profile. And so to the extent that they have more weight, more sales, they would be dilutive to the core -- somewhat dilutive to the core of our gross margins. But it's more of a platform basis than it is a regional basis.

And yes, I would also say Europe lags a little bit on the SEM side but boy the opportunities that they're taking advantage of now are much more profitable than in the past because they're getting out of the base nylon businesses and into more attractive Specialties. Hope that helps answer your question, Dmitry.

It does, thank you very much.

Robert Koort, Goldman Sachs.

A couple follow ups, if I might. Do you have a sense or plan in terms of taking the Spartech products to Europe or more globally how fast you might be able to do that or what metrics we should look at from the outside?

Yes, I think that we're -- it's still early for us, we want to be careful with this. We see opportunities and we move at a pretty brisk pace around here but I think we're really wanting to make certain what we have and selectively lift the platforms that are the most attractive, not just from an end market standpoint but from a technology and applications standpoint.

And I'll tell you that we haven't sorted through all that yet, Bob, and we're gaining a lot of knowledge but it's really too soon for us to make a call on we're going to take this and we're going to go to Europe first or so on and so forth. And there will probably be some regions we may leap frog, it may not be quite as natural of a progression in terms of typically North America, then Europe and Asia.

We will sort through all of that based on understanding of end markets and growth opportunities as well as our capabilities and what's migratable and what's transferable and leverageable. So I can't give you much more on it than that right now.

Do you have a sense from your SAP system how many of your customers in North America exist in other regions? Is it 5%, is it a 25% level?

We are surprisingly global in our customer mix. We focus on the global multinationals. It's been part of our strategy and so we're overwhelmingly weighted toward companies that operate around the globe as opposed to locals.

Now, it's not necessarily true with all the molders because molders oftentimes tend to be smaller more entrepreneurial. But when you're getting specked in and you're working with the OEMs, these are the big brands around the world that are all household names that you'd be aware of.

All right and two quick ones for Brad, if I might. I think you mentioned the pension costs could hit you $0.06 or $0.07 from a lower returns expectation, but I'm not sure you sized the benefit of having a fully funded status. So does that offset that? I think you said some people might leave that, you would be able to reduce the overall numbers in the pension.

And then secondly, in light of your targets for 2015 and what looks to be pretty spectacular growth I would assume your stock price my take a similar path. So have you considered an accelerated share repurchase to get the other $5 million of the Spartech dilution?

Yes let me answer both of those questions. Again, and you're right in that we have had an early buyout program, we've taken about 1000 of the participants and we bought them out of the plan. That really reduces your ongoing costs that are funded by the plan. And the assumption is the $0.07 is on a net basis, so we factored in the lower rate of return from [more] weighting fixed income. That does also factor in the current funded status so that $0.07 is an all in type number.

As it relates to the question on the accelerated share repurchase question, again we're 50% of the way there in terms of the commitment that we made to repurchase the 10 million shares issued in conjunction with the Spartech. We're still on track to complete that within the 18 to 24 months period from the date of acquisition.

I would just say this, that as we look out purchasing the remaining 5 million shares, we're going to be very opportunistic as we enter the market and execute on that program.

All right, thank you.

Thank you, Bob. Thank you all, that concludes our fourth-quarter 2013 conference call. I appreciate your interest.

I just want to remind you all about the May 16 Innovation Day in New York City, hope you'll put that on your calendar, think you'll find it exciting and interesting and hope you all will be able to join us. Thanks for joining us on the call today.

Thank you. Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation, you may now disconnect and good day.