Avient Corp (AVNT) 2015 Q2 法說會逐字稿

Good morning ladies and gentlemen and welcome to the PolyOne Corporation second-quarter 2015 conference call.

(Operator Instructions)

As a reminder, this conference is being recorded for replay purposes. At this time I would like to turn the call over to Eric Swanson, Director of Investor Relations. Please proceed.

Thank you, Stephanie. 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, many of which could cause actual results to differ materially from those expressed in or implied by the forward-looking statements. Some of these risks and uncertainties can be found in the Company's filings with the Securities and Exchange Commission as well as in today's press release.

During the discussion today the Company will use both GAAP and non-GAAP financial measures. Please refer to the earnings release posted on the PolyOne website where the Company describes the non-GAAP measures and provides a reconciliation of them to the most comparable GAAP financial measures. Operating results referenced during today's goal will be comparing the second quarter of 2015 to the second quarter of 2014 unless otherwise stated.

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

Thanks Eric and good morning. I'm pleased to report record second-quarter earnings per share of $0.57. That's a 12% increase over the prior year.

We achieved this record performance despite continued weakness in the euro and challenging market dynamics facing our industry. The weaker euro alone reduced earnings per share by $0.02 when compared to last year. We don't report our results on a constant currency basis but if we did adjusted EPS would have grown by 16%.

It was a very strong quarter for our established specialty segments color, additives and inks and specialty engineered materials, both of which set second-quarter records for operating income and return on sales. They were joined by an outstanding performance from distribution which delivered record return on sales of 7.2%.

Year over year our adjusted earnings per share has now increased for 23 consecutive quarters, an impressive streak few companies can claim. We understand and work hard to find ways to win and to grow despite a challenging environment.

For the quarter, our adjusted consolidated operating margin increased to an all-time high of 10.4% which underpinned our double-digit growth. Expanding profitability even in trying times should come as no surprise to those that have watched our specialty transformation unfold.

We are one quarter away from delivering six years of quarterly EPS growth. If you only remember one thing from this call today it should be this, our specialty strategy continues to deliver. Although progress may not always be linear, as evidenced by our turnaround of the former Spartech businesses, there is no doubt that specialization is the right path for our customers, our shareholders and us.

As a specialty company, we are investing in innovation like never before. Our current pipeline of new innovations has $1.9 billion of market potential. Our vitality index, which measures the percentage of sales from products introduced in the last five years, is 43%.

As a specialty company, customers look to us not just for our innovative polymer solutions but for our world-class service, delivery and ability to collaborate throughout the entire value chain. Some companies use the word specialty to define themselves but few companies truly are. It's our unique broad ability to work with customers that sets us apart from competitors and this is reflected in the continued health and sustainability of our performance.

As a specialty company, we have created a world-class sustainable organization for our associates who are dedicated to serving our customers. Our investment in talent development, training and education is distinguishing us as not only a supplier of choice but also an employer of choice. And lastly as a specialty company our investors rely on us to deliver growth and do so consistently.

As I said we've delivered 23 consecutive quarters of year-over-year EPS growth, 22 of which have been 10% or more. Our specialty platform continues to be the engine for growth and this quarter was no exception. Color, additives and inks continues to achieve exceptional results and hit an all-time high in return on sales of 18.2%.

Color now comfortably outpaces its 2015 target margin range. Growth in the quarter was driven predominantly by continued mix improvement, notably in Europe and Asia. We have long recognized how important color is in influencing consumer preference and our color expertise continues to differentiate us from the competition, with value-added services such as Invisio color design and Color Matrix Select.

Offerings like these help deepen our relationships with customers because it's helping their business and enabling their success.

Specialty engineered materials delivered return on sales of 14.4%, a new record for the second quarter. Like color, mix improvement was at the heart of their margin expansion as we've grown sales of specialty offerings like our ECCOH advanced wire and cable solutions and composite formulation.

In the second quarter much of this growth was in North America as operating income increased more than 40% year over year and operating margins increased over 300 basis points in the region. While the year-over-year comparables for designed structures and solutions are still disappointing, I'm very pleased to report a sequential increase in operating income from the first quarter. While return on sales also improved we are beginning to see the results of our efforts to improve operational efficiency, on-time delivery and reduce scrap.

And the impacts of customer losses are beginning to lap themselves. Most importantly we won $25 million of new business during the second quarter, the highest since we acquired Spartech. We are well-positioned to report margin expansion for the balance of the year and sales growth beginning in the first quarter of 2016.

Perhaps the greatest reason for my confidence surrounding the direction of the DSS business is our leadership team we have in place. For those of you who aren't aware in early May we hired Rich Altice as president of Design Structures and Solutions and I'm extremely pleased to welcome Rich to PolyOne's leadership team. He's a proven performer who has nearly 30 years of experience focused on driving growth through innovative product development at leading specialty chemical companies. In addition John Midea, our Senior Vice President of Operations, is devoting much of his time to DSS as well.

Performance products and solutions improved from a challenging first quarter to deliver $16.3 million of operating income and that's a 42% improvement from Q1. While below 2014 primarily due to the impact of expected lower contract manufacturing sales from Spartech, operating margins reached an all-time high of 8.6%. PP&S has a relentless focus on portfolio mix optimization and they are innovating in new markets such as healthcare and electronics.

Distribution had an outstanding performance for the quarter with a return on sales of 7.2% and that's a new record for POD. Although margins and POD are lower than our total portfolio I'd like to remind investors that 7%-plus is best-in-class for a distribution business.

These results are even more impressive when you consider the recent volatility in raw material prices which significantly lowered sales. On the whole, the strength of our specialty businesses and distribution piloted another quarter of impressive double-digit earnings growth at PolyOne.

At this time I now like to turn the call over to Brad to provide additional details related to our financial performance.

Well, thank you, Bob and good morning everyone. I'm pleased to provide additional comments and color on our second-quarter results.

The difficult macro conditions Bob alluded to provided another opportunity to showcase the strength of our specialty strategy. Driven by record performances from our color, engineered materials and distribution businesses we overcame notable headwinds including the weak euro and a slowing Asian economy to deliver a record adjusted EPS of $0.57 per share.

On a GAAP basis EPS increased from $0.33 to $0.74. Special items in the quarter resulted in a net after-tax benefit of $15.9 million, or $0.17 per share and included the following. A tax benefit of $23.9 million primarily related to our ability to use foreign tax credits on our US federal income tax returns and pretax realignment charges of $7.4 million primarily related to Spartech.

Our color, additives and inks business posted exceptional results with operating income increasing despite a weaker euro which negatively impacted year-over-year operating income by over $2 million for the segment. Continued strong growth in our high-value services and our additive portfolio drove improvement in operating income to $39.6 million for the quarter. This represented a return on sales of 18.2%, the highest in the Company and an improvement of 170 basis points over the prior year.

Europe led the way in color with a 26% increase in OI despite the weaker euro. Global specialty engineered materials also posted strong year-over-year improvement with operating income of $20.1 million. This was a second-quarter record and return on sales increased to 14.4% from 12% last year.

At designed, structured and solutions our plan to improve the business is working. The beginning effects of our operational improvements are just starting to hit the bottom line.

Operating income increased 40% over the first quarter to $4.5 million. Return on sales grew sequentially by 130 basis points.

No doubt there is still a lot of work to do in this segment. But as Bob previously discussed we have the right team in place and are confident we will continue to drive profitability expansion as the year progresses.

Performance products and solutions grew its operating margin by 30 basis points to a new all-time record of 8.6% and generated sales of $190 million resulting in operating income of $16.3 million. Finally, our distribution business was heavily impacted by lower hydrocarbon-based raw material cost resulting in a sales decline of 7% on a volume increase of 1%. The team delivered a remarkable performance in the quarter, reaching an all-time return on sales of 7.2%.

POD reported operating income of $19.1 million on revenues of $267 million. I am extremely pleased with how each of our segments are navigating the current top-line environment so successfully. New product launches, investment in technology, cross business collaboration and unmatched customer service are the seeds of growth that provide us with the ability to capture increased value.

Turning to our financial position, our balance sheet and free cash flow remain strong. Working capital management improved year-over-year to 9.9% of sales on the trailing 12-month basis from 10.7% last year and this contributed to our strong liquidity. In fact, for the fifth consecutive year CFO Magazine recognized PolyOne for having one of the best working capital management programs in the chemical industry.

Free cash flow for the quarter was $95 million and we ended June with a cash balance of $237 million giving us total liquidity of nearly $500 million.

I am regularly on the road meeting with investors who frequently ask about our capital allocation priorities. Our top priority remains investing in our business to foster organic growth. Our balance sheet strength coupled with earnings growth allows us to continue to invest in our selling, technical and R&D resources.

This will drive long-term growth and innovation across the businesses.

Secondly, we will continue to pursue strategic acquisitions that fit within our specialty platform. Our net debt to adjusted EBITDA ratio remains very modest at two times and we are well-positioned to complete acquisitions when we find the right deals.

Our M&A process is robust and thorough. We will only do deals that we believe help us drive long-term growth, not just to provide a short-term benefit from consolidation. To this end we are pursuing opportunities that meet our financial targets, are aligned with our four pillar strategy and expand our specialty offerings in targeted end markets.

Finally, we will continue to opportunistically repurchase shares and we plan to increase dividends as earnings expand to return cash to shareholders. During the quarter we repurchased nearly 600,000 shares at an average price of $39.63 per share. We still have another 7.6 million shares remaining on our Board approved repurchase program and we'll continue to remain opportunistic in our share buyback efforts.

This quarter represents another demonstration of what we can achieve as a specialty company. It's performances like this that we expect to continue as we remain committed to achieving double-digit EPS growth.

That concludes my prepared remarks. I will now hand the call back to Bob. Bob?

Thanks, Brad. Our specialization strategy continues to drive our strong performance. It is our focus on innovation and exemplary service for our customers that truly defines who we are and differentiates us from the competition.

In June I was in Shanghai to celebrate our most recent investment in innovation with the grand opening of our new Innovation Center. This facility is located in a high-tech industrial park in Shanghai and will help us better serve our customers while further enabling innovation and speed to market. And it also helps to bring our specialty businesses together to foster cross business collaboration.

This has never been more important in Asia as the economy shows signs of slowing. In the first half of 2015 our sales in Asia declined 1.5% versus the prior year. However, operating income grew 9% and operating margins expanded more than 140 basis points.

Our team's ability to increase profitability in this environment speaks to the importance of mix improvement and the investment in innovation needed to support it. At a time when others might be cutting back on investments in Asia due to macroeconomic concerns we are continuing to invest so that our customers can innovate and grow. Asia is the right place to be long term and we remain confident in our ability to grow in the region.

In May I traveled to Europe where I saw firsthand our efforts to drive growth in an environment that continues to be plagued by macroeconomic uncertainty. Our team is doing a fantastic job, proactively managing through this environment including ongoing challenges in Russia, the euro devaluation and the recent crisis in Greece.

On a constant currency basis operating income in Europe increased 9%. This tenacious approach to business continues today and our core values of collaboration, innovation and excellence are strengthening our relationships with customers.

We go well beyond simply providing a product. We collaborate with our customers closely and are redefining the meaning of service. The results are long-lasting relationships and lifelong business partnerships and this is how we truly win.

A great example of this recent partnership is with PolyCase. For those of you who are not familiar with PolyCase they are an innovative customer who has developed corrosion and heavy metal free ammunition known for being lightweight, efficient and accurate. Their innovative technology was recently featured on the cover of the July issue of Guns & Ammo Magazine where you can also find an article on us and how we've partnered with PolyCase.

We have been collaborating with them to develop an advanced polymer that can replace lead in ammunition and we've done it. Our Gravi-Tech offering provided the high density polymer solution that is a perfect lead replacement for this application.

Now this has been an exciting program to watch evolve. I frequently refer to our new business gains as singles or doubles but this has the potential to be a home run.

Eliminating toxic lead from products is good for the environment and promotes safer conditions across various high demanding applications. For those of you who have followed us you know we have been eliminating lead in the healthcare industry and our partnership with PolyCase illustrates our ability to translate this success to new markets and applications.

During the second quarter I spent time in St. Louis overseeing a leadership transition with Rich Altice as president of DSS. Our operational and commercial improvement plans are underway and I'm confident we have the right team in place to get the business and deliver the potential we know it has. I can attest that the DSS associates are reinvigorated about the opportunities on the horizon.

There's a renewed sense of excitement and energy among the team and it's making a difference. Perhaps most importantly we are winning new business and as I said earlier logged $25 million of gains so far this quarter, the highest since we acquired Spartech. All of these exciting investments and wins with our customers give me great confidence in our growth potential.

In the near term, margin expansion will drive our results for the balance of the year where we continue to expect double-digit EPS growth for 2015. But beginning in 2016 we will deliver organic sales growth and we will also continue to expand margins as we drive toward our longer-term platinum vision for 2020.

At our Investor Day in May we highlighted each segment's path to increasing sales and profitability. Underpinning this growth are specific initiatives to accelerate new product launches and collaborate with our customers to bring them the full breadth of PolyOne solutions. Future organic growth will be driven by innovation, collaboration and globalization as we leverage key megatrends that favor our unique polymers and solutions.

With that we have time for questions.

(Operator Instructions) Mike Sison, KeyBanc.

Hey, good morning guys. Nice quarter in a tough environment.

Bob, you noted double-digit EPS growth in 2015. Again if you take a look at the second half of the year kind of frame up where consensus estimates are at, it's pretty big growth 30%. So any chance you could give us a little bit of help what type of growth you can generate in this environment?

Yes, we're coming-out of the first quarter which was very challenging for us. We have not seen customers replenish inventory after the significant destocking in Q1.

We don't think we make that up this year and then we see some continued weakness with a slowing economy in China and at this point we're not predicting any change in Europe or the euro dynamics. So despite these challenges we expect our EPS can be up about 10% for the full year for 2014 and that helps you to frame out how we see things for the balance of the next six months.

Right, great, thanks. And then on DSS I just wanted to you won $25 million new business, sales were down a lot in the second quarter, what gives you confidence that you can maybe stop some of the sales leakage on the outside and I think previously you thought operating margins could improve to a good level by the fourth quarter. Any changes to that outlook?

Well, one I hadn't previously mentioned any attrition data in the past but I know that's really narrowed down to a very small number now. So I know we've got a handle on either leakage and/or pruning depending on what the reason was for the losses. And those gains are all positive and should start to contribute to the second half of the year.

Previously we had talked about possibly getting back to 7% or 8% exiting the year. With where we are right now I think that's probably a challenge but we could get closer to 7% in Q4 really dependent upon how fast we can bring in the new business gains I just referenced.

Great, thank you.

Frank Mitsch, Wells Fargo Securities.

Good morning, gentlemen and hey, Bob, thanks for referencing that Guns and Ammo magazine. I also thought the article on Winchester's train and defend was pretty interesting in that issue as well.

I haven't heard you talk about home runs much. Can you expand upon that, timeframe, order of magnitude, etc.? This is new news coming from you.

Yes, I mean to put things in perspective when I've referenced singles or doubles in the past as you know oftentimes specific applications can be $1 million to $2 million, maybe $3 million. We've talked about some of our sales in consumer markets being up around $10 million or so and I think this has the opportunity to be twice that high on an annualized basis.

And care to venture a timeframe?

Well I think that we could see maybe it would be something in the low single digits here over the course of the next 12 months and ramping up after that.

All right, great. And how should we think about the interplay on raw materials and pricing?

It's something we thought we'd be seeing a bit more of a benefit, etc. So how should we think about raw material benefits for PolyOne in the back half of 2015?

Yes, well I think in terms of the level of raw material benefit that we're going to receive has really been realized through the first half of this year. I wouldn't see any further margin expansion beyond that just as a result of anything happening with raws.

In fact, some raw material prices are starting to tick up. And I'd also point out that while it's difficult to quantify, for us in the second quarter there were obviously a multitude of force majeures in Europe.

I don't believe that affected us directly but I think it affected a lot of our customers and their ability to produce and as a result we've juggled our supply around quite a bit. So I wouldn't have anything incremental in the second half of the year from where we were in this first half.

All right, terrific. Then lastly you mentioned in the discussion on PP&S that there was some products moving to Spartech that didn't occur and that was part of the reason for the results being off a bit. Can you expand upon that? How big is DSS for PP&S?

Yes, I mean first of all it really was one specific customer. And when we did the acquisition we knew there was a piece of business that would be going away as a result of that customer bringing certain manufacturing in-house.

As you know inside PP&S we do have some contract manufacturing business. That actually grew substantially when we acquired Spartech and there was one major customer that we knew would go away. I thought that would've happened last year.

As it turns out it really came out at the end of 2014 in the beginning of 2015. But the net addition I think from Spartech into PP&S for what we acquired on that side was probably around $150 million initially in revenue.

All right, terrific. Thank you so much.

Bob Koort, Goldman Sachs.

Thank you, good morning. Bob, I think you mentioned that destock occurred in the first half as customers reacted to the economy and the drop in oil.

We've had well oil in a range here for quite a while but I think you mentioned you don't expect any restock. So what is it that's different about the way customers are managing working capital? Or do you sense there's fear there's another leg down in commodity pricing and maybe they're waiting for that?

Yes, and specifically on restocking I was really referencing what we just saw specifically in the second quarter in the sense that while I think orders picked up in Q2 vis-a-vis the first quarter it wasn't a result of actually putting more product on the shelves. So I think customers are cautious. I think they are running with lower inventory levels than they have in the past and that may ultimately be as a result of being cautious about the economy overall.

I think you referenced Asia having some challenges, I think you mentioned sales were down just a bit in the second quarter. I guess that's 15% or 20% of your specialty businesses over there.

Can you characterize, I guess maybe I was under the presumption you had more of a consumer orientation to some of those applications but is it a pretty broad representation across the economy there? I would have thought maybe you could still eke out some volume growth as you're further penetrating those markets.

Well you're spot on with respect to consumer is an important market for us. Much of that actually makes its way back to the US and Europe. From a manufacturing standpoint it is just made in Asia.

And I would say that was a market that was down for us in the second quarter on consumer products. But in the other observations I'd have I don't have one other specific end market that I would point out as being uniquely different than the others there.

And if I might ask Brad, you mentioned the use of cash flow obviously the share repurchase ramped quite a bit in the second quarter. Is that opportunistic?

Should we expect similar rates if you're not buying things? Can you help us barring an acquisition what the capacity and preference is for that pace of share repurchase?

Yes, Bob, again we purchased 600,000 shares in the second quarter. Again, I would characterize that as you just did as opportunistic and I would see us continuing at that pace.

Okay, thank you.

Ben Kallo, Robert W. Baird.

Hi, this is Tyler Frank on for Ben. Thanks for taking the question. You know outside of Europe and outside of Asia can you just comment on how things are progressing here in the US and then in South America or in Mexico as well?

Yes, sure. I'll say first of all it's really been in North America where we have seen really the most significant impacts of raw material volatility, specifically the rapid decline in the first quarter. And so that really set things back in that quarter.

We did see a pickup in the second quarter but year-over-year sales were still down primarily as a result of lower selling prices in our distribution business which is for the most part set by the market and/or our suppliers. From an end market standpoint I would sort of echo a comment that I made earlier which was that I think everyone is being very cautious at this point. Generally speaking I think people are optimistic about the North American economy and still moving forward in a positive direction but at what level we'll see growth I think remains to be seen but probably lower than people thought starting the year.

Great, thank you.

Dmitry Silversteyn, Longbow Research.

Good morning, guys. A couple of questions if I may.

First of all, we've seen the decline in margins of engineered materials in this quarter, certainly on a sequential basis, and given that color and additives saw sequential increase in margins it seems to be a little bit of a breaking of a pattern. So can you talk a little bit about what's driving the engineered materials profitability mix whether it's particular regions or markets or something nonrecurring year over year or sequentially?

Yes, really it's three things. The first is we did see the first quarter was a stronger quarter for engineered materials with respect to sales in the consumer market than what we saw in Q2.

The same thing is true for our composites business which had a very strong first quarter. I'm not drawing any conclusions from either of those two data points that somehow there is a bigger problem there. I really just think that's a quarterly fluctuation.

And then the third element of their performance vis-a-vis Q1 was some incremental spending on sales and research and development which is really twofold. One is we have hired additional sellers and secondly we did launch our new Innovation Center in Asia, some of which is borne by the EM facility, or the EM segment, sorry.

Okay, got it. So if I'm looking at engineered materials for the second half of the year should I be looking, should I be thinking about mid-teens EBITDA or EBIT margin rather than high teens which you've been able to deliver for colors?

I believe that EM still has the opportunity to expand margins between now and the end of the year. You did see some mix impact in Q2, again it was slightly unfavorable in Q1. That can recover in Q3 and Q4.

It may not get to the same level that color is. I would expect color finishes the year ahead of where EM is from a total percent of sales standpoint.

Got it, got it. In terms of acquisitions you mentioned you talked about your pipeline being solid. Are you looking at bolt-ons or are you looking at some of the transformative deals and if it's the transformative deals how do you think about them in the wake of the experience with Spartech over the last couple of years?

Well first of all I would tell you that the experience that we've had with Spartech doesn't in any way change how we feel about that acquisition. I still feel like it was an outstanding deal and while we're having a challenging year this year that just is sort of I think illustrative of how challenging the business was that we acquired and how much time, energy and investment it would take to turn it around. Much in the same way it was I think with the early years in PolyOne.

So my reaction first and foremost is I'm very pleased that we did the Spartech deal. If I had another opportunity like that we would try to make it happen.

So I'd say we are looking at transformative deals but we're also looking at bolt-ons. It has been a challenging environment in terms of being a buyer and trying to be prudent about price.

I believe that real, true specialty companies can command a premium multiple and that's okay to pay that. But right now the expectations seem to be for very elevated multiples for just about any deal that's out there.

So we're being cautious right now with respect to M&A. I think that will pay off in the long run.

Okay, so in the meantime I guess share repurchases would be the preferred destination for capital in the absence of M&A?

Well, that's what happened is over the course of the last year and a half obviously we picked up the remaining shares from Spartech. If we don't see acquisitions that we think makes sense then we'll continue to return the cash to shareholders through share buybacks.

Okay, thank you, Bob.

Jason Freuchtel, SunTrust.

Hey, good morning. Did weather conditions in the quarter either positively or negatively impact demand for any of your end markets in the quarter?

I don't think there was anything material to write about. It's possible that heavy rains here in certain parts of the US had an impact on construction but nothing I would cite as material or large.

Okay, in the DSS segment do you still expect new equipment to be operational in the fourth quarter?

I don't think the new equipment will be in in the fourth quarter. I think it will be sometime in 2016. I don't have a revised estimate for you on when that will be in but we will shortly.

Okay, great. Thank you.

Mike Harrison, Global Hunter Securities.

Hi, good morning. Bob, just to follow up on that previous question, can you walk me through what operational changes are going on in the DSS segment between now and the first quarter, first half of 2016? And also comment on where the on-time delivery number was in Q2 relative to the number you mentioned at your Investor Day?

Sure. Just to take the first part, we have really been focused on improving operational efficiencies and by that I really mean specifically reducing scrap generation.

In some of our larger sheet production facilities we still are producing what I would deem to be an unacceptable level of scrap, some of which is due to having the outdated equipment again to reference the previous comment on getting new lines. But some of that is also just getting up to speed with our own leadership teams and operational teams as those are in many cases in new locations from where they were last year.

We're making the absolute progress in those areas in terms of reducing scrap, improving the operational efficiency. And with respect to on-time delivery I would say that we probably moved that up maybe 2% or 3% in Q2 versus Q1 but certainly starting to get better coming out of the end of the second quarter.

All right. And the $25 million of new business that you won in DSS, is that part of the $60 million that you expected to win during the course of this year or was that incremental?

That was part of it.

And the last question for me is just looking at the top line down 12%, and I'm sure this will come out with the Q but can you break out what the FX and pricing headwinds were and also talk about where we are still in terms of pruned business so that we can try to get to some sense of where the underlying volume growth or organic volume growth was? Thank you.

I mean overall FX was just a little bit below 3%. If you look at what I'd sort of pull together as the total impact of Spartech and/or lower or ongoing integration with all the Spartech businesses that's probably 6.5% to 7% and then raw material impacts another 3%.

So all those are going in the negative direction. That leaves you with about a percent, let's say, which is really the Accella acquisition plus flat from an organic standpoint beyond that.

Thanks very much.

Rosemarie Morbelli, Gabelli & Co.

Thank you, good morning everyone. Bob, looking at the 7.2% margin on the distribution side this is I mean really high and you commented on that as well. Was it something specific to this second quarter, meaning a change of mix or changes that you have done internally in terms of your operations?

Well, I mean if you went back in time, Rosemarie, to some of the comments that we made in 2014 about our distribution performance we really didn't feel like we had as much discipline as we should around the rigor with which we actually processed the transactions, incorporated pricing, etc. So I feel like we're doing a better job overall in that respect.

But to some extent this is also the impact of just what happens in a quickly decelerating sales price environment where to some extent you can see higher margins as a result of just lower selling prices. So that's an element of this, too, that I'd say plays out in the second quarter. For the most part and pretty much across the board our suppliers set the price in this particular industry and we're trying to just manage the on-hand inventory quantities that we have the best that we can.

Okay. So we should I mean assuming that raw material costs stay around where they are today and therefore so will your selling prices, is that a margin that we can look at for the balance of the year or was again something special in this quarter?

Well I would remind everybody that we do have seasonality in this and really all of our businesses. Our second quarter is typically the strongest, so my expectation is that margins do come down some in Q3 and Q4 for distribution but that's driven more by probably seasonality more than anything else. Our long-term vision for POD is 6.5% to 7.5% as we outlined at our Investor Day in May.

Okay. And then if I may your 21.8% gross margin for the quarter, again I understand that this is a strong quarter seasonally but does it affect your overall gross margin as much as it does your POD?

Are you talking about for the balance of the year?

Yes.

Look, I think typically what you'll see is that in the second half of the year margins do come down and that's a result of seasonality and that's across all our businesses, not just POD. There could be some benefit as I might have been mentioning with Frank on an earlier comment just related to consumer and EM having a little bit better Q3. But on balance I just always tell people generally speaking you should expect that Q3 is below Q2 from a margin standpoint.

And if I may ask one last question, you have talked about the weak euro. Could you give us a better feel as to what you're seeing in terms of the demand in Europe?

Well I'm cautiously optimistic. Even despite all the challenging headlines and everything that I said I do believe that there seems to be some early signs of improvement. Just seems like every time we see a good sign there's something else that comes up that takes the headline.

So it's really mix at this point. I think we're finding a way to win ourselves with our own new business and improving profitability and that's really how we been able to grow there. So I still have sort of mixed observations on Europe at this point.

Thank you.

We've got time for one more call.

Jason Rodgers, Great Lakes Review.

Yes, thanks for taking the question. I was just wondering if you could talk about the second half of the year as far as your expectations on the sales performance on an organic basis?

Can I comment on did you say second-half sales growth?

Yes.

Yes, what you've seen obviously in the first half this year is that sales have been below 2014. The main drivers of that have been the weak euro, lower hydrocarbon base raws primarily impacting PP&S and POD and then also the year-over-year sort of integration impact from Spartech.

So my sense is those carry through through the balance of this year. There's a chance that we could see growth in Q4 but we will see organic revenue growth in the first quarter of 2016.

Thank you.

Well, thanks everybody for joining us on the call today. As always we appreciate your interest in PolyOne and look forward to speaking with you at the end of next quarter if not before. Take care.

Thank you. Ladies and gentlemen, that does conclude today's conference. You may all disconnect and everyone have a great day.