Avient Corp (AVNT) 2014 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the PolyOne Corporation third quarter 2014 conference call. My name is Tracy, and I will be your operator for today.

(Operator Instructions)

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

Thank you, Tracy. 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 forecast of future events, and are not guarantees of future performance. They are based on Management's expectation and involve a number of business risks and uncertainties, any of which could cause actual results to differ materially from those expressed in or implied by the forward-looking statements. Some of these risks and uncertainties can be found in the Company's filings with the Securities and Exchange Commission, as well as in 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 2014, to the third quarter of 2013 unless otherwise stated.

Joining me on the call today is our President, Chief Executive Officer, Bob Patterson, and Executive Vice President and Chief Financial Officer, Brad Richardson. I will now turn the call over to Bob Patterson.

Thanks, Isaac. Good morning to those of you joining us on the call today. I am pleased to report that despite European economic headwinds, we achieved another strong performance during the third quarter. We delivered a record $0.49 in adjusted earnings per share, and that's a 36% increase over the prior year, and a third-quarter record.

With these results, we have achieved yet another significant milestone in our Company's history. PolyOne has now delivered 20 consecutive quarters of double-digit year-over-year adjusted EPS growth. That's five straight years of strong double-digit adjusted EPS growth, a truly impressive accomplishment that we are certainly proud of, that I have no intention of seeing come to an end.

(Technical difficulties) we have done exactly what we have said all along the way. We put our customers first in everything we do. We followed our four pillar strategy without exception. We emphasized excellence and execution as a differentiator for us in the marketplace. Quite simply, we have lived our core values of collaboration, innovation, and excellence.

When this streak began five years ago, PolyOne was only a glimpse of the Company we are today. Our transformation had just started to accelerate. Our innovation engine was just getting warmed up.

We invested heavily in commercial resources and marketing, technology and sales. We also expanded our specialty strategy portfolio of offerings with the acquisitions of ColorMatrix, Glasforms and Spartech. These investments are now paying off, with a robust pipeline of new products, enhanced customer solutions, and underlying mix of earnings that has never been stronger.

Today, our innovation pipeline is $1.7 billion of market potential of new products, the largest it has ever been. Some of these new products are real game-changers that can quickly expand our presence in higher-margin applications in markets such as healthcare, consumer, and packaging. Mix improvement has always been at the heart of our transformation stories, underpinned by an increasing contribution from new products and services. Our vitality index measures the health of our current period revenues, by looking at the percentage of sales from products introduced in the last five years.

During the third quarter, our vitality index reached an impressive 43%, and we believe world-class is 35% or better. We have always emphasize value over volume as the best way to meet our customer's needs. This has resulted in expanding margins and returns for our shareholders. Quite simply, this was, is, and always will be our pathway to prosperity, and we will not deviate from it.

This year our specialty businesses are achieving record levels of profits and profitability. All of our segments are well on our their way to reaching or exceeding their 2015 margin targets, if they are not already there. What is more impressive is that we are doing this despite the macroeconomic and geopolitical concerns in Europe, impacting demands for our specialty engineered materials and color businesses.

During the third quarter, we saw a significant slowdown in Europe. To put things in perspective, during the first half of the year, sales in Europe expanded 5% over the prior year, but in the third quarter they contracted 5%. In our color business, which benefited the most from the upgrowth in Europe in the first half of the year, was subsequently impacted by the decline in demand conditions in Q3. I remind our investors that some of our most profitable business with ColorMatrix, for example, has always been in Russia and Eastern Europe, two markets which have been disproportionately impacted by current tensions there.

Europe is our single largest concern, and we have proactively taken steps to reduce costs in the region. These actions include shuttering a facility, primarily as a result of absorbing Spartech's previous production into our own facilities, as well as rationalizing and integrating back-office functions. You will see the impact of these actions in our quarterly results compared to last year.

Relatively speaking, business conditions in North America are better. We have only observed year-over-year declines in one market in North America, and that is wire and cable. And absent the right-sizing recently acquired Spartech business and specific wire and cable impacts, we estimate our sales in North America expanded 3%. Profits expand by a far wider margin of 14%.

I am very proud of our teams for delivering these results, which as I said upfront, led to record levels of third-quarter margins, operating income and earnings per share. I will now turn the call over to Brad to discuss our financial results in more detail.

Well, thank you very much, Bob, and good morning, everyone. I am pleased to share that our team has been working very hard on a number of fronts, and delivered another outstanding performance during the quarter. As Bob mentioned, it was a very busy quarter for us, but one that stands out as another true statement that our mix improvement strategy is delivering results.

Regardless of economic conditions, we find a way to win. And with the 36% increase in EPS versus the prior year, we have now been winning for over 20 consecutive quarters, five years of tremendous double-digit EPS growth.

I have been with PolyOne for almost a year now, and have developed a real appreciation of how mix improvement, supported by a 43% vitality index drives results. This quarter is a perfect example. From a headline standpoint, revenue declined 5% versus the prior year to $958 million, but with the exception of weaker economic conditions in Europe, and depressed sales to the wire and cable markets here in the US, this strategy of revenue optimization is all by design. It helped us achieve and deliver better bottom line results.

Let's examine our revenue picture more closely. We took action in July to exit certain product lines in Brazil, and you are all well aware of our ongoing initiatives to right-size (technical difficulties). These actions combined led to a pruning of $53 million of revenue, yet operating income expanded 24%.

Weaker economic conditions in Europe and lower demand in wire and cable account for another $8 million. Outside of these effects, revenue increased about 1%, primarily coming from our targeted end markets, transportation, healthcare and consumer. This growth, coupled with ongoing benefits from our award-winning Lean Six Sigma program, accelerated Spartech synergy capture, and tighter controls and efficiencies related to G&A expenses across all of our segments resulted in expansion of operating income and margin in every one of our businesses over the prior year.

Let's focus on specialty, first. All three of our specialty businesses delivered third quarter records for operating income and return on sales. Our commitment to innovation and laser-focus on mix improvement drove a 13% increase in specialty operating income to $61.6 million, and improved return on sales by 250 basis points to 12.1%. Specialty accounts for 65% of our total year-to-date segment income, and is right on track with our 2015 target.

Despite the previously discussed weakness in Europe, global speciality engineered materials had a breakout quarter, as operating income expanded 26% over the prior year. While right-sizing actions and a decline in European demand resulted in revenues declining to $146 million this year, mix improvement from soft touch TPEs and composites resulted in operating income expanding to $18.4 million. This strong performance drove SEM to a record 12.6% return on sales, an impressive 330 basis points increase over the prior year.

Global color additives and inks was the most heavily impacted by weakness in Europe and the Russia Ukraine crisis. But this did not stop them from aggressively upgrading their portfolio to service key end markets such as healthcare and transportation, all of which contributed to an increase in operating income to $30 million, and a return on sales of 14.2%, the highest of any segment.

As our specialty segments continues to reach new levels of profitability, designed structures and solutions also delivered an outstanding performance. As a result of right-sizing actions we put in place and continued to execute against, operating income increased 20% to $13 million. Return on sales improved 280 basis points, and reached a new, all-time record of 8.6%. Not only does this provide line of sight to their 2015 targets, but this also marks the first time they have ended the quarter inside their 2015 target range. We remain on track with our integration efforts, and our momentum grows as our four pillar strategy takes hold throughout the former Spartech business.

In fact, I want to highlight three key areas of focus as we continue our transformation of the former Spartech. First, we have over 70 Lean Six Sigma projects under way, focusing on safety, quality, and value that will benefit our customers and associates. Second, during the quarter, we formally launched a project to roll out SAP to the former Spartech, which will be completed in early 2016. SAP will link all of PolyOne onto a single global platform, and enable deep visibility into our manufacturing cost structure, standardization of our key supply chain and pricing processes, and promote best practices across our entire organization.

Finally, in regards to our previously announced manufacturing realignment efforts, I am pleased to report these will be substantially complete by the end of this year. Our realignment efforts will not only improve quality in the long run, but also reduce re-work costs which will ultimately benefit our customers. We are now more confident than ever in our ability to deliver the previously communicated $0.50 in adjusted EPS accretion from Spartech in 2015.

Stepping aside from the specialty platform, PP&S continues to have a record year. North American sales for this segment expanded 3% to $213 million. This, coupled with further mix improvement, Spartech synergy capture, and Lean Six Sigma benefits led to an 18% increase in operating income to $18 million. These gains drove a record return on sales for PP&S of 8.4%, another example where our focus on value versus volume has paid off.

Finally, distribution expanded sales to $281 million, and operating income increased 13% to $18.7 million or 6.7% return on sales, a third quarter record. Our distribution business is finding its rhythm again, and doing so by better serving our customers with materials (technical difficulties). Return on invested capital is nearly 50% in this business, and their cash flow contribution this quarter helped PolyOne to deliver an aggregate free cash flow of $65 million for the third quarter.

Overall, we continue to strengthen our balance sheet and improve cash flow, which is critical to fuel our transformation. Working capital management improved sequentially to 10.3% of sales on a trailing 12 month basis, from 10.7% of sales in the second quarter.

Our efforts to consistently maintain best-in-class working capital have not gone unnoticed. For the fourth consecutive year, CFO Magazine recognized PolyOne for having one of the best working capital management programs in the chemical industry. I am proud of the organization for yet again being honored with this distinction, but I submit we have room for even more improvement.

Our continued focus on converting earnings to cash, grow free cash flow of $65 million for the quarter, and contributed to our overall cash balance of $264 million, giving us total liquidity of roughly $560 million. This balance sheet strength, coupled with rapid earnings growth allow us to continue returning value to shareholders in the form of cash dividends and share repurchases. In fact, we recently announced a 25% increase in our quarterly cash dividend. Our dividend is now 250% higher than we initiated it in 2011.

Additionally, during the quarter we repurchased 1.5 million shares, bringing our total shares repurchased since early 2013 to 9.7 million. We anticipate completing the repurchase of the shares issued in connection with Spartech during the fourth quarter, but we don't plan on stopping there. We have another 10.3 million shares remaining in our Board-approved repurchase plan, and will remain opportunistic in continuing our share buyback efforts.

With a very low net debt to EBITDA ratio of 1.7, we continue to make strategic investments in the business. During the quarter, our CapEx totaled $23 million, principally related to our manufacturing realignment efforts, and we remain on track to finish this year with CapEx spending of around $85 million. Our effective tax rate for the quarter was 33.5%, down from 35.6% in the prior year. We continue to make excellent progress in improving our effective tax rate, which should average around 34.5% for the year.

Finally, special items in the quarter resulted in a net after-tax charge of $13 million or $0.14 per share, largely driven by our Spartech manufacturing realignment and restructuring efforts in Brazil. This concludes my remarks. And I will now hand it back to Bob.

Thanks, Brad. It was, indeed, another great quarter, notwithstanding the weakness we are seeing in Europe.

Our now five-year streak of double-digit adjusted EPS growth is something we are very proud of, but by no means are we content. It's a streak we intend to continue to build upon, as we continue executing our four pillar strategy across all of our businesses. I am very pleased to have an exceptional management team in place with the experience, skills and leadership to continue this great momentum.

We are working hard to build our management team through internal advancement, and putting our executive team members in positions where our Company and customers need them most. At the same time, we have got great programs in place to provide coaching and mentoring to a group of director level talent that has the potential to perform at an even higher level. Our leaders are always delivering, and not just in the day-to-day operations, but also on strategic projects that are helping us to drive growth. The third quarter included several highlights where our team introduce new products, improved operational efficiencies, and expanded thoughtfully in high-growth regions of the world.

In September, we were honored to be selected by Uptime Magazine for its 2014 Best Emerging Maintenance Reliability Program award. PolyOne earned the honor as the result of our three-year initiative to increase materials supply reliability to our customers through improving the on-time delivery, increased equipment and asset longevity, all while improving safety. We have successfully implemented our reliability program, as an extension of our award-winning Lean Six Sigma program.

Also in September we opened a new facility in Pune, India. This state-of-the-art facility operates the manufacturing of solid liquid color and additive formulations. It includes development labs, and houses the sales and customer service center for the region.

The products produced at the facility serve multiple end markets, including transportation, healthcare and packaging. Under the strong local leadership of Vikas Vij and a dedicated team who knows specialty, and knows the regional market, we are excited to be differentiating PolyOne as a clear leader for specialty innovation and material science expertise in this important and growing region.

(Technical difficulties) unmatched portfolio, combined with cross business unit collaboration can lead to new innovations, mainly through our Versaflex soft touch TPE material, which can now be formulated to utilize our Percept anti-counterfeiting technologies. In the last year, the US Department of Homeland Security logged $145 million worth of counterfeit consumer electronics entering the country. And our material is developed to help counteract this trend, providing anti-counterfeiting indicators in products like smartwatches, earbuds and other wearable electronics.

For those of you who have followed us in the past, you know that customer specific applications and wins can often be small relative to our overall size. However, these wins take place every day, and when you add up to thousands of singles and doubles we hit every year, we have the winning formula for success and for growth. Each of our segments is reaching new records of profitability, and higher-margin less cyclical and markets. And each has line of sight to reaching or exceeding their target margins for 2015. And this has never been more important, as we face growing concerns about economic conditions in Europe.

The challenges we face there are not unique to PolyOne. Every day you can read the headlines, and appreciate how reduced consumer confidence is impacting spending and leading to lower demand conditions. This is exacerbated by increased geopolitical tensions in the region.

But we are not making excuses. We are being proactive. We have already taken actions to streamline our operations, all while improving customer service. We continue to invest in commercial resources and innovation to drive growth, and we remain relentlessly focused on our 2015 goals with a view toward our platinum vision for 2020.

This quarter we provided some additional detail on top line drivers to help articulate our mix improvement story. Certainly, specific actions taken to right-size the former Spartech business, and certain product lines in Brazil have resulted in lower sales, but they have also made us more profitable and they have made us stronger. I am pleased with our third-quarter results, as we not only delivered a 36% increase in EPS, but achieved growth that are targeted end markets. This is important, because we are at an inflection point. While pruning is never done, our innovation engine is just taking off as the key driver of growth.

Our vitality Index is at an all-time high of 43%, and we have a robust pipeline for new products. As I said earlier, at $1.7 billion of market potential, our pipeline is also at an all-time high.

Our solutions help our customers win new business, while often lowering their total cost of production. This is a powerful combination that cannot be beaten. Our focus on value for our customers is unwavering, and our fundamentals have never been better.

It is exciting to think about what is next for PolyOne. We have delivered profile change over the last 20 quarters, and we have absolutely no plans of slowing down. Not this year, not in 2015, or beyond.

We have a long way to go to realize our full potential at PolyOne. We have a platinum vision for what we aspire to be by the end of this decade, and we are working on developing a pathway to achieve it. As we look to the remainder of 2014, I remind investors that seasonally our fourth-quarter is the slowest, but that does not change our expectations for strong, double-digit adjusted EPS growth.

We look forward to sharing these results with you in January, and our view for 2015 and beyond promises to be strong year-over-year, double-digit growth. With that, we can open the call for questions.

(Operator Instructions)

Frank Mitsch, Wells Fargo.

Good morning, and congrats on a solid quarter. Bob, has the statute of limitations passed to talk about New Jersey's college football teams beating Michigan's?

(Laughter). Yes.

Damn, we should have this call earlier. Hey, obviously a lot of concerns with Europe. Can you remind us as to how big that is for the overall PolyOne portfolio, and what implications may that have, in terms of the able to achieve the $2.50 for 2015? Is everything in place, do you believe to get there?

Well, as a reminder on the size of Europe for PolyOne as a whole, it's about 15% to 16% of our global revenues. But I would remind everyone that it is about 35% of our two highest margin specialty businesses, color and engineered materials. So those are the two businesses that can be most heavily impacted by Europe, and we have seen some of that already in this third quarter. So well, look, the slowdown in Europe certainly gives us some concern as we enter (inaudible -- technical difficulties). We still expect to deliver strong double-digit adjusted EPS growth. And look, we have the seven goals for 2015, including our margin targets and return on invested capital, and we are not changing any of those at this time.

All right. Full steam ahead then. And then, obviously, the top line is coming off, and obviously, a large part of that is pruning. You mentioned Brazil. Latin America and profitability, can you talk about that? When do you think we might actually get past the point of materially pruning unprofitable businesses, so that investors can see honest to goodness top line growth?

Well, with respect to Brazil, we are at about breakeven coming out of the third quarter. Our expectation is to get to single-digit type return on sales in 2015. We have got line of sight to getting there. With respect to pruning, some of the larger actions are obviously associated with the acquisition of Spartech. And as long as we are doing acquisitions like that, I would say the pruning actions could be large. But certainly, with respect to our organic businesses, I don't believe we will be seeing, quote-unquote, material pruning actions going forward.

All right. Terrific. And just remind us, I think Spartech synergies were $0.07 Q1, and $[0.08] Q2. Where do you think it was in Q3?

It's about $0.08, maybe a touch better than that in Q3.

Thank you so much.

Yes.

Mike Sison, KeyBanc.

Hey, good morning, guys. Nice quarter.

Hello, Mike, thanks.

Good morning, Mike.

Bob, you talked about having line of sight in terms of meeting several of your goals for the segments in 2015. Can you maybe just give us some insight of where you feel most confident in terms of those goals, and particular segments?

Yes. Well, with respect to our margin targets, I would say we have got a great degree of confidence, with respect to getting inside or exceeding those ranges. If you look at where we are in the third quarter, clearly, we have done the best in our color segment, and have the greatest opportunity to exceed the range in that business. Specialty engineered materials had a breakout quarter this quarter, despite the challenges that we saw in Europe. So I am feeling very good about them.

And I guess, overall, what I would say, Mike, is feel very, very confident about what we are seeing from a margin target standpoint. There is no doubt that Europe impacts us most heavily in our highest margin businesses. But I still think that we are going to get inside or exceed the ranges as I just discussed. But from a growth standpoint, it could impact the top line going into 2015.

Okay. Great. And then, for the last couple years acquisitions have played an important role in generating growth for you guys. Can you give us an update on what you are seeing in the marketplace? Are there any attractive opportunities that you are looking at that could help ensure double-digit growth longer-term for you?

Yes, we are always looking at deals, of course, and certainly, those that help to expand our specialty portfolio of offerings. We have seen in the last, I would say six to nine months or so, that valuations have certainly ticked up to make it up more of us seller's market, notwithstanding what we have seen perhaps, in the last month or so. So we are just going to be prudent, and make sure that we spend a fair price for deals as we look at them. I can't comment specifically on any one particular transaction we might be looking at today.

Okay. And then, finally your ability to grow earnings is impressive, given sales declines, and you talked about why. Just fundamentally, how long do you think you can continue to do that? And how much more legs does the mix ability story have? And just want to get a feel for -- at some point, we probably should see some sales growth to get the earnings growth. But maybe there is a lot more legs in the mix store than we think?

Well, what we tried to do this quarter, was to give some more details around the specific drivers on revenue changes versus the prior year, by articulating how much of an impact we believe the Spartech pruning had, our decisions around exiting certain product lines in Brazil, and the wire and cable markets that we have seen in the US. Ultimately, if you look in North America, we believe growth was at about 3%. And so, we are seeing organic growth in the target end markets that we are focused on, and would expect -- continue to see strong operating income growth on top of that.

As I have pointed out in the past, one thing to remember is that we have got pockets of excellence in our specialty platform, and we have got other areas that have yet to get to our specialty level of performance. And I have highlighted Brazil in the past, and we have taken actions to improve that. And some of our other operations around the world specifically in Asia, are not yet up to the operating margins we expect for the segment as a whole. So it is not necessarily going to be a pruning story, but there is a lot of opportunity to improve margins yet around the world.

Great. Thank you.

Bob Koort, Goldman Sachs.

Thank you. (Inaudible -- technical difficulties) I wonder if you could talk a little bit about what has happened in Europe. I mean, I generally see your business as being a little less volatile than some others. So going from up 5[%] to down 5[%] seems pretty dramatic for your product line. Can you talk about maybe what happened with daily sales trends through the quarter? So was this more of a tough [just] year-over-year issue, or was there some meaningful sequential declines? And then also, I know you mentioned Russia and Eastern Europe is a high margin area. Was the weakness in Europe confined to certain geographies?

Well, just to put things in perspective, one of our largest markets served in Europe is packaging. The recent article that came out on the 13th of this month, highlighting specific weakness in Germany's plastics packaging industry, with nearly 30% of producers expecting a decline in sales for the upcoming quarter or months ahead. Packaging is a big market for us, and it is the biggest one that we serve in Europe, and it's also some of our highest margin business, with respect to our liquid color and additives.

Specifically what we have in Eastern Europe and in Russia specifically, is about $15 million to $20 million in revenue. And it is very high margin additives business for us that was disproportionately impacted in the quarter. So there is no doubt that that weighed on our results this quarter. Sequentially, Bob, yes, we are seeing a decline in sales in the third quarter, versus the second quarter. So it is not just a year-over-year impact.

And I am wondering if you could talk, in your distribution business in the US, have you seen any influence from the declining oil price, in terms of purchase deferrals as customers might wait to see if they can capture a little lower resin prices going forward?

We might have seen that back in the second quarter, and we talked a little bit about some of that behavior taking place at the end of specific months. I don't think we saw any of that here in September. But as I always point out, the fourth quarter is one where everyone, customers and suppliers alike, of course, are always looking at their on-hand inventories with an extra degree of scrutiny. So that may happen in the fourth quarter, but I don't know yet.

Great. Thanks for the help.

Sure.

Laurence Alexander, Jefferies.

Good morning. I guess, first question, do you -- are you seeing any end markets where, as we think about the bridge into 2015 we should be thinking about significant acceleration, either because of improving end market trends or market share gains due to [better] product penetration?

Well, I think from a regional perspective, Laurence, that North America is going to continue to be strong. We haven't seen any indications that that would not be the case. For us, that is heavily influenced by packaging and consumer electronics again, but also transportation and construction.

So transportation has been doing very well this year, I expect that to be the same in 2015. Construction has been somewhat of a disappointment in 2014. For us specifically, that is single-family residential starts which has been a little bit below where we thought they would be. And I don't know that that's going to pick up next year, but it could. So I mean, that could be a good guide doing into 2015.

And then, as you think about the trade-off between your margin expectations where you are coming in a little bit ahead of plan and the demand headwinds, is the -- are your targets for 2015 benchmarks that we should judge you against? Or are those goals that are easily achievable, and there is a margin of error? Or how do you see it? Is the sensitivity, or is this going to be something that we need to revisit sort of in the February/March period, when you have a little bit better sense of trends after the Chinese New Year?

Well, I think -- make sure I understand your question, here. I mean, with respect to the margin targets that we have for 2015, let me first say, those are not the end game targets for our businesses. They are really a stepping stone to ultimately getting our businesses to higher levels of profitability, that in our Innovation day in May, we talked about our specialty businesses having the potential to get to, and exceed 20% return on sales.

We still believe that is the case, and we believe that our targets that we set for 2015 were aggressive at the time we set them, but have confidence in our ability to get inside or exceed those ranges next year, and I don't have any different view on that. I am not sure if I answered all your questions on that. But with respect to the demand conditions that we are seeing right now in Europe, certainly that impacts color and EM the most. But not to the point where I have got concern over those margin targets.

Thank you.

Mike Harrison, First Analysis.

Hello, good morning.

Good morning, Mike.

Just looking at EM segment and the SG&A line in there, it looked like you were able to take that number down pretty dramatically, down to around $21 million in the third quarter. Can you talk about the actions that you took there, and whether something around $21 million is a sustainable number going forward? Or was there something unusual?

The SG&A relates -- (technical difficulties) to the EM. Actually, if you look across all of our businesses, you would see some downward trend in SG&A. And that just to be clear, it really is just G&A. And actually, if you were to go in and look at our spending in the third quarter, our investment in commercial resources actually went up by $4 million across all of our businesses. So we continue to invest in the commercial side. But you are seeing a lower set of G&A costs, principally associated with the Spartech realignment, with the cost that we have taken out in Brazil, and those are the two biggest effects going on. And so, what you see in GSEM, is a good number to think about going forward.

And then, in terms of the Brazil business that you exited, the $53 million, how would that break out across segments, and kind of what was it?

And Mike, just to be clear, the $53 million that was in my remarks was both the Spartech pruning and Brazil.

Okay.

So that was the combination. So Brazil was, call it $6 million of that $53 million.

That makes more sense. (Laughter). And then, the last thing I wanted to ask about was in PP&S, it sounds like the key driver there is shifting away from being kind of a housing leverage story, and more toward a mix shift, tapping new markets, the new applications where vinyl is advantaged over other materials. How is that process unfolding? And as you look at this quarter, was it more of a -- the mix story that was driving the margin higher? Or is it volume that is driving leverage or both?

There really were -- first of all, let me just give our PP&S team a lot of credit for their work over the years to help diversify our end markets. That has only been accelerated with -- under Michael Garratt's leadership. And we really are focused on innovating in that business, and getting us into healthcare, packaging and consumer applications, much like our specialty businesses. So we are seeing that as a good guy, from a margin expansion story in Q3. You are also seeing the effect of some of the rationalization activities that have taken place with respect to Spartech. A big piece of Spartech's business went into the PP&S platform. A lot of that business is transportation, appliance-related out of Mexico, and our business has done a great job of improving the profitability of that as well.

And -- sorry, maybe just one more for Brad. Can you talk a little bit about the impact that you would expect for FX on the top and bottom lines, as we see a stronger dollar here?

Well, I certainly think that in the third quarter, FX was not much of an impact. But as we look to the fourth quarter, certainly with what has happened to the euro, when it started to decline in mid-to late September, that will have an impact -- a negative impact on the Company in the fourth quarter.

All right. Thanks very much.

Dmitry Silversteyn, Longbow Research.

Good morning. I would just like to follow-up on Mike's question. I think --I am not sure what he was looking for, but I am looking for more of a sensitivity to change in FX, to whether or not you have some EPS sensitivity to every cent of change of FX -- a percentage change in FX, and that would be helpful.

Yes, about a 10% move in the euro is $3 million or $4 million, roughly on an annualized basis for us.

Okay. 10% is $3 million to $4 million. All right, great. Second question. I just want to clarify on the repurchase activity. You talked about completing the Spartech related repurchase by the fourth quarter, but then having [$]10.3 million still left on the authorization. Is that correct?

Yes.

Okay. And -- I'm sorry, go ahead.

Well, I just wanted to emphasize that, one, we are always looking to strike a balance, of course, with how we return cash to shareholders. Really pleased with increasing our dividend in the last quarter. It is something we are very proud of, since we initiated it in 2011. But certainly, the amount we have been spending on share buybacks is a larger percentage of that number, and we expect to continue to be buying back our shares, particularly in an environment where the M&A options may not be as many as we like.

Okay. You mentioned that in your PP&S -- excuse me -- business that you are looking at markets outside of the traditional PVC related housing markets. But housing, I think, is still a big part of what PP&S sells into. And given your comments that the construction industry or construction market in the US hasn't been as strong as you expected, and we will see what 2015 looks like. But is the sort of slowing housing starts having an impact on PP&S's ability to get to your 2015 goals? And if yes, what other businesses would need to do better, and have a better -- best line of sight in doing better to compensate for that, and still get you to the [$2.50] in earnings that you are looking for?

Yes, I mean, look, we go back -- when we set our 2015 targets, and we talked about where we believe (technical difficulties) we cited a -- I think $1.250 million. And one thing that has been, I would say significantly different from our expectations at the time, was the mix of starts, and being more focused now on multifamily units versus single residential. And that is not a good mix for us, as we do mostly single residential, so clearly that is a headwind to the 2015 goals.

But as we look to all the levers that we have, in terms of how we expand our earnings per share between now and next year, I would say we have got to get more growth from our specialty businesses, and continue to implement Lean Six Sigma everywhere around the world. I have specifically talked about some of our regions not yet being at our margin expectations, and those will be key drivers for us going into next year.

Okay. One final question, you are feeling -- (inaudible) you have talked about seeing a little bit benign raw material input costs, particularly in Europe. And with lower oil price, and hopefully that bleeding into your (inaudible) products, and including some of the [raw materials] that you might buy? So what did you experience in the quarter in terms of raw material costs, and how do you look for that to develop over the next, let's say, two or three quarters? And if there is a difference between dynamics in North America and Europe, that would be helpful, as well.

Yes, I mean, off the top of my head I can't cite a specific difference between Europe and North America. I know we did see an uptick in cost around PVC and plasticizers and butadine a little bit, and I expect some of that to continue in the fourth quarter. Off the top of my head, I can't give you a really good split between North America and Europe. So just setting those trends, generally.

So overall, you would say that your raw material costs have probably gone up a little bit in the third quarter, and would you expect that trend to continue then?

Yes, I mean, if I took the whole basket of raw material costs, it has absolutely gone up.

Okay. Thank you.

Rosemarie Morbelli, Gabelli & Co.

Thank you. Good morning, and congratulations.

Thanks, Rosemarie.

Just a little clarification, first, on the FX. Your 10% change in euro versus dollars hits you -- about what, hits or helps, by $3 million to $4 million? Is that on the revenue side? And if so, what is the impact on the net income or per share side?

The $3 million or $4 million was in operating income number. So it's roughly -- translate that into $0.03 or so for the year.

Okay. Thanks. And so, now looking at the decline in Europe, you said that of course, it declined in Q3 versus Q2. But if you look at the third quarter on a monthly basis, did you start seeing it in August, or did it start earlier than that? And then, what are you seeing in October? Is the decline kind of accelerating, or is it at the same type of pace?

Probably, we really started seeing it in August. And our initial reflections on that were I would say, mixed, in the sense that August, of course, is typically a slower month for us in Europe, but it was slower than it was last year. So we really had some heightened concerns about it, then it slowed down even further than that in September. I am not seeing any kind of meaningful change in that trend in October to change our views on things right now.

Okay. And then, looking at the working capital, Brad, you talked about more improvement coming. Could you help us understand where you are getting that lower working capital? Are you working on inventories? Or can you give us a feel for what else needs to be done?

Well, I think we were 10.3% on a trailing 12 month to date basis. And when I talk about more opportunity, it really is on the acquired businesses that have been made in the last couple of years, so the ColorMatrix business and the Spartech business. So that is where we would look to drive kind of further improvements in the working capital.

Okay. So this is really part of getting the synergies in those operations?

Right.

And you also talked about getting start Spartech on SAP. That very seldom goes smoothly. Do you have a team in place that has already done that for the rest of PolyOne, and are you -- do you have a high conviction level that it won't create any issues?

Yes, I have a very high conviction level. I recognize, kind of maybe some of the history that you might have. But I have looked at our historical implementations here at PolyOne, and we have a very, very good track record. We just went live, for example, on ColorMatrix North America in August, and that will be going live on ColorMatrix in Asia here next month. So we have had a very, very good track record of, one, meeting our deadlines, But two, is staying within our overall authorization. So I feel very good. We have got a great team in place that is driving the Spartech SAP implementation. So I have no worries about that.

Great. And then, if I may ask one last question on the tax rate. What is your target? Where do you think you can get, let's say, one or two years out?

Well, I think over the next several years, with some of the planning projects that we have, I would like to see us get to the low 30[%]s. (inaudible --technical difficulties).

Okay. Thank you very much.

Yes. We have got time for one more question.

Jason Rodgers from Great Lakes Review.

Thanks for taking the question.

Hello, Jason.

Hello, just looking at that top line for the quarter, could you break out volume versus pricing and mix?

I would just refer you to our 10-Q, where you have got that by segment and in total.

Okay, the Q is out. Okay.

It will be out in five minutes.

Okay. (Laughter). Thank you.

That's the final question. Then I would just like to thank everyone for dialing in today and your attention to our comments, and certainly your support. We really have a great story here at PolyOne. We are very proud of achieving our 20th consecutive quarter of double-digit adjusted EPS growth. That is five years of this great streak, that we don't plan on seeing come to an end. We look forward to sharing our results in the fourth quarter with you in January. And thanks, again for dialing in today.

Thank you for your participation in today's conference call. This concludes the presentation. You may now disconnect. Good day.