Avient Corporation (AVNT) Q1 2013 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, and welcome to the PolyOne Corporation First Quarter 2013 Conference Call. My name is Patrick, and I'll be your operator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. At this time, I would like to turn the call over to Isaac DeLuca, Vice President of Planning and Investor Relations. Please proceed.

Thank you, Patrick. Good morning, and welcome to everyone joining us on the call today. Before beginning, we would like to remind you that statements during this conference call, which are not historical facts, may be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements will give current expectations or forecasts of future events and are not guarantees of future performance. They are based on management's expectations 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 first quarter of 2013 to the first quarter of 2012, unless otherwise stated. Also note that during the first quarter of 2012, results have been restated to account for our resin business as a discontinued operation per accounting regulations. Joining me on the call is our Chairman, President and Chief Executive Officer, Steve Newlin; Executive Vice President and Chief Operating Officer, Bob Patterson; and Senior Vice President and Chief Financial Officer, Rich Diemer. I will now turn the call over to Steve Newlin.

Thanks, Isaac, and thanks again to everyone who's joining us on the call. I'd also like to welcome all of the new PolyOne shareholders who joined us after the exchange of Spartech's share as part of the acquisition and extend a special welcome to all the new PolyOne and former Spartech associates listening to the call for the first time. We have great news to share with you this morning, as we delivered record-setting results and further advanced our specialty portfolio transformation with the acquisition of Spartech and the announced sale of our non-core resin assets during the quarter. And to start, I'm very pleased to report that we delivered first quarter adjusted EPS of $0.31 a share, a 29% increase over last year and a new first-quarter record. This achievement marks our 14th consecutive quarter of double-digit year-over-year adjusted EPS growth. Underpinning this growth was a breakout performance by our Specialty businesses, delivering a 34% increase in operating income. All regions within Specialty contributed to our earnings growth. This includes Europe, which expanded operating income despite economic headwinds based in the region. We've invested heavily in commercial resources and innovation, and these investments are continuing to pay off through substantial mix improvement and growth. In fact, organic operating income expansion was at the heart of our EPS growth this quarter, as the Spartech acquisition was EPS-neutral. A great example of investing to grow is ColorMatrix. We acquired this specialty provider of liquid color additives and solutions in December of 2011. Over the last year, we made over $7 million of investments in this business, and they delivered a 20% increase in operating income over last year. And while I mention ColorMatrix, it's just one example. Our Specialty Engineered Materials segment increased its operating income 37%, their largest quarterly increase since the third quarter of 2010. I'm particularly excited about performance like that, especially because it's showing our team's superb execution and confidence in our strategy, and we're seeing firsthand a profound effect that's having on global resources. In the last 4 months, I spent several weeks on the road in Europe, China, India, Saudi Arabia and the United States. My focus was on visiting our customers, supporting our recent investments in emerging markets and participating in sales force training and recognition events. It was one of my heaviest travel quarters ever, but it was well worth it. With our expanding portfolio of specialty solutions, I have never seen more opportunities to grow our business than observed during these trips. Our team is committed, they're energized, and we've comprehensively embraced specialization, moving from volume to value. And there's a clear understanding about how this unlocks potential for our customers and our company. In addition, the level of cross-business unit collaboration is stronger than at any time in PolyOne's history. As our teams collaborate, we're focusing on formulating, not compounding, for Specialty applications. Leveraging the full suite of our Specialty offerings to better serve customers is a competitive differentiator, and with the addition of Spartech, our ability to do this grows even stronger. On March 13, we completed the acquisition of Spartech. And you'll recall in October of 2012, when we first announced the deal, we discussed how financially and strategically compelling the business was to PolyOne. Well, now that Spartech is part of PolyOne family, we're even more encouraged by the opportunities this acquisition offers. Underpinning the Spartech integration is the implementation of our 4-pillar strategy, focusing first on commercial and operational excellence to better serve customers immediately. We're also gaining insight to help us leverage their business portfolio's unique technologies in markets such as aerospace, security and specialized packaging while taking advantage of cross-selling opportunities within PolyOne. We established a new segment in our Specialty platform called Design Structures and Solutions, which is primarily comprised of the former Custom Sheet, Rollstock and packaging businesses of Spartech. This new segment is led by Julie McAlindon, an industry veteran who most recently established and led PolyOne's corporate marketing organization. Julie is supported by a team of associates from Spartech and PolyOne, and I'm very pleased with the energy and enthusiasm that they're showing. It's important for that team to support and drive change, and they're off to a great start. They're embracing our 4-pillar strategy in the short time they've been on the PolyOne team and are clearly committed to an accelerated transformation that will drive value for customers and shareholders. Now in terms of synergies, we remain committed to our previously announced estimate of $65 million, which we expect to deliver by no later than the end of year 3. We expect that this will result in driving Design Structures and Solutions' operating margins from 2% to between 8% and 10%. Now that sounds like a lofty goal, but it's one that's entirely consistent with the margin expansion we've achieved, transforming the legacy PolyOne businesses. The second notable accomplishment in the first quarter was our agreement to divest our non-core resin assets to Mexichem. Since we began our Specialty transformation, we have divested commodity equity investments, including OxyVinyls in 2007, SunBelt in 2011, and we've reinvested the proceeds to accelerate the growth of our Specialty offerings. As the only remaining asset in our portfolio that is directly involved in base resin production, we view this divestiture as a very natural next step in our transformation. Once completed, we plan to use the cash proceeds to invest in our organization to accelerate growth, enhance our Specialty offerings and return capital to investors via future dividends and share buybacks. While this sale will be dilutive in the near term, we reiterate our belief that it is in the best interest of our customers, associates and our stakeholders to focus on core competency, our real core competency, which is material science formulation for Specialty applications, not base resin production. And even with this divestiture, we remain steadfast and confident in our commitment to our 2015 target of $2.50 of earnings per share. And lastly, when we announced our agreement to divest our resin assets, we realigned our Specialty Coatings business into our Global Color, Additives and Inks segment. Our Coatings business is another success story within PolyOne. Though historically included within our PP&S segment, it has innovated and delivered profitability in line with our Specialty offerings. Cynthia Tomasch, who many of you know from her service as our Vice President of Planning and Investor Relations, led Specialty Coatings from 2009 to 2011 and will once again lead this business as part of her responsibilities as General Manager for Color North America. While these 2 businesses are now together, we look forward to enhancing cross-business unit collaboration to better serve our customers. Well, it's certainly been an exciting quarter for PolyOne, and we continue to deliver consistently on our commitments. But abundant opportunities for growth and improvement remain, and I assure you, we have no intention of simply sitting back and enjoying our success. With that, I'm going to turn the call over to Rich Diemer, who will discuss our first quarter financial performance. Rich?

Thank you, Steve, and good morning, everybody. It's my pleasure to provide more detail on our first quarter results, which are a great start out of the blocks for what we expect would be another record year. Steve covered several highlights, including the acquisition of Spartech and the announced divestiture of our resin assets. With these moves come some segment changes and the requirement to present our resin assets as a discontinued operation in all prior, current and future periods. Concurrent with our press release, after the market closed yesterday, we filed a Form 8-K with retroactive restatement of our segment information and the adjusted earnings-to-GAAP calculations. Reconciliations for 2011 and 2012 will provide details for the investment community on an apple-to-apple basis for how we will report going forward. Our financials have been restated to reflect these changes. Let me summarize them to you now. Firstly, we created a third Specialty segment, Design Structure and Solutions. The former Spartech Color and Specialty Compounds or CSC segment has been split between our Global Specialty Engineered Materials, our Global Color, Additives and Inks and our PP&S segments. Our resins business is now reported as a discontinued operations and assets held-for-sale in our balance sheet and income statement. And as Steve mentioned, Specialty coatings, which historically has been part of PP&S, now reports as part of our Global Color, Additives and Inks segment. With that said, let me review our first quarter results. We reported first quarter sales from continuing operations of $801 million and adjusted net income of $28.9 million versus sales of $745.5 million and adjusted net income of $21.5 million for the first quarter of 2012. Adjusted EPS expanded 29% to a first quarter record of $0.31 versus $0.24 last year. While the acquisition of Spartech contributed $54.7 million to quarterly revenue, it had no impact on first quarter earnings. Sales increased 7.5% over prior year, driven by the acquisition of Spartech and Glasforms. From an end market perspective, we experienced strong revenue growth in healthcare, building and construction and packaging. All regions contributed to our year-over-year operating income growth, including Europe. While we believe that the European economy will continue to remain fragile and is not likely to improve anytime soon, thanks to our mix improvement strategy, we are optimistic we can build on our first quarter success and increase operating income there for the full year. During the first quarter, we grew our operating income to 24.4% to $57.1 million, an all-time record. Our Specialty business accounted for 70% of our business segment growth. Our pre-special tax rate in the first quarter was 33.6%, flat compared to the first quarter of 2012, which was influenced by a slightly higher percentage of U.S.-generated income offset by the impact of the 2012 R&D tax credit, which we recognized in Q1 and provided a $0.01 EPS benefit. Special items in the first quarter were principally related to change of control provisions for Spartech executives and onetime charges related to the writeoff of prior capitalized financing costs from our 2011 secured financing, which we retired in connection with our first quarter note offering, resulting in an after-tax charge of $17 million, or $0.19 per share. During the quarter, we also took several steps to strengthen our balance sheet while also returning cash to shareholders. Broadly, our actions fell into 4 categories: cash management and liquidity; capital structure; share buybacks; and a dividend increase. First, in terms of cash management, we ended the quarter was $169 million in cash, including $23.2 million in earn-out proceeds from our SunBelt joint venture, which we recognized in the fourth quarter of 2012 and collected during Q1. Including our revolver, our total liquidity is $454 million, which allows us ample flexibility to meet ongoing obligations, fund share repurchases, facilitate commercial investment and fund innovation. During the quarter, we also upsized our asset base credit facility to $400 million with an accordion feature to expand it to $450 million to further strengthen our liquidity. Next, we strengthened our financial position by issuing $600 million of unsecured 10-year senior notes with a stated coupon rate of 5.25% and an effective rate of 5.5%. We used the proceeds from this offering to repay $300 million in secured notes due in 2017 with an effective rate of 5.75%. We funded our acquisition of Spartech, and we made a voluntary $50 million contribution to our pension plan. Our pension plan is now 90% funded versus less than 70% just a year ago. We view this offering is a meaningful step towards our goal of obtaining an investment-grade rating by 2015 and improving our long-term capital structure and financial flexibility. Third, we repurchased 840,000 shares of stock at an average price of $24.71, and we have additional authorization to purchase an excess of 19 million additional shares as of March 31. We remain committed to our goal of repurchasing the 10 million shares issued in conjunction with the Spartech acquisition over the next 18 to 24 months. Finally, we demonstrated our continued commitment to sharing PolyOne's success by returning cash to shareholders as we increased our quarterly dividend 20% from $0.05 to $0.06 per share. As you can tell, a lot of terrific things are going on, and I look forward to reporting on them as we make our way through the year. At this time, I'll turn the call over to Bob Patterson.

Thanks, Rich, and good morning. I am very pleased as well with our first quarter performance, both with respect to our financial results and our progress in broadening our Specialty platform offerings. I'm also very excited about the opportunity we have in front of us with respect to our recent acquisitions, Spartech and Glasforms. As Steve mentioned, our Specialty platform truly had a breakout performance this quarter. While the 18% increase in revenue to $406 million was driven by the addition of Spartech and Glasforms, the 34% increase in operating income was almost entirely organic. Our Specialty platform expanded operating income to a first quarter record of $42.2 million, driven by our investment in commercial resources and new products. Global Specialty Engineered Material sales were up 12.5% versus the prior year to $159.8 million in the quarter, principally due to the acquisition of Spartech and Glasforms. Operating income, however, expanded in all regions, including Europe, driven principally by our mix improvement strategy. In fact, operating income in Global Specialty Engineered Materials expanded to a new record, going to $16.2 million, which represents a 37% improvement over the prior year. This helped drive return on sales to 10.1%, the second highest level of quarterly profit ever for Specialty Engineered Materials. Our second Specialty segment, Global Color, Additives and Inks, increased revenue to $205 million, driven by organic gains by ColorMatrix and the addition of Spartech, and which were slightly offset by lower sales in Europe. Global Color reached $24.1 million in adjusted operating income, a first quarter record for this segment, representing a 23% increase over the prior year, and return on sales reached an all-time high of 11.7%, a 200 basis point improvement over the prior year. Remember that in 2006, this business had a return on sales of just 1.7%. Their margin improvement truly reflects and highlights the transformation we have undergone in Specialty. While we only had our newest Specialty segment, Design Structures and Solutions, or DSS, in our portfolio for a couple of weeks, I echo Steve's comments and say we are even more convinced that Spartech was a great acquisition. Our integration efforts are fully underway, and we are working collaboratively with DSS and other Spartech associates to drive their Specialty transformation. To that end, our near-term integration priorities have been: first, to train our new DSS Associates in customer-centric selling skills; second, implement many of the commercial best practices so well understood and utilized now within PolyOne; and third, continue to evaluate manufacturing capabilities to gain alignment with the voice of the customer. Tom Kedrowski is leading our manufacturing alignment efforts, as well as integrating our sourcing and supply chain. As many of you know, Tom has led our award-winning Lean 6 Sigma efforts in PolyOne since 2007. And I am pleased to report that our proven capabilities in this area are already being applied at DSS. Our latest class of black belts is the largest in PolyOne's history and includes 9 former Spartech associates, who will soon be deployed to improve projects throughout those businesses. Our distribution platform sales increased 1.9% to $268 million, driven by expansion in healthcare as well as in wire and cable. Operating income fell 3% to $16.2 million as a result of favorable raw material dynamics in the first quarter of 2012 that did not repeat this year. As we said last year, we estimated the favorable impact of this dynamics to our distribution in the first quarter of 2012 was $2 million in operating income. While we were unable to replicate that this year, we have every confidence in our POD team to deliver increased year-over-year operating income for the balance of the year. Finally, our third platform, PP&S, delivered impressive operating growth of 53%, led by our Geon business. Sales fell short of the prior year, due primarily to weakness in wire and cable sales and in transportation. We believe the wire and cable shortfall is due to heavier-than-normal customer purchases in the fourth quarter by customers assuming Hurricane Sandy would bring with it an immediate uptick in replacement activity, which we did not see. Regardless, PP&S expanded adjusted operating income to $13 million, representing a return on sales of 8.1% and an increase of 310 basis points over the prior period. These returns were driven principally by improving mix, as we selectively sales grow -- grow our sales in the housing sector. As you can tell, we feel great about our company's first quarter performance, record operating income and double-digit EPS growth. 2013 is certainly off to a great start, but it's clear that achievements in our business are not possible without a continued focus on innovation and growth. One great example of our innovation efforts occurred in March, as our color business released Color Inspiration 2014, a collection of 6 color palettes that deliver insights about global color experiences. As color preferences of consumers shift and change with the world around us, designers and developers increasingly rely on the influence of these global movements to select product colors. This innovation has been coupled with our OnColor Portfolio application for the iPad, which brings mobile convenience to the color development process and helps customers accelerate product development and product selection. The application helps users evaluate color ideas, request color samples, submit color request and easily access information about color and additive technologies. This app is just the first step in our ability to leverage mobile technology to generate tools that help customers streamline their product development process. But it's not just the products and services we're offering, it's a cultural and mindset shift that is taking place in our organization, and here are a couple of simple yet telling examples: We no longer refer to our color technology resources as Color Matchers, but rather, they are Color Designers. And more broadly, we are collaborating custom formulators, not compounders. And this is not just semantics. It's reflective of the expertise and intimate role we play with our customers. These individuals design new and innovative solutions to attract consumers to our customers' products, whether it's in a showroom, product display or in a convenience store aisle. Because we are an integral part of their development process, we become a trusted partner that adds value, and this further distinguishes PolyOne within our industry. These are great examples of how we've evolved from an everyday commodity-based organization to a total solutions provider that is already truly unique and bound for even greater things in the future. At PolyOne, we just don't talk with investors about becoming a Specialty company, we deliver. And the evidence of this is clear. And just look at our margin expansion, which is unparalleled, and we are just getting started. Thank you for your time this morning. I'll now return the call back to Steve for some closing comments.

Okay. Thanks, Bob. Well, I think you can see and can tell that we're very pleased with our performance this quarter as well as our continued transformational progress, and we are excited about the positioning of PolyOne for future growth. We have the right leadership team in place, unique offerings to deliver in the near term, and our innovation and commercial investments continue to enable us to meet our longer-term goals. And we have a history of delivering for our shareholders. To continue to achieve strong double digit quarterly EPS growth, our priorities are clear. We have to successfully integrate the former Spartech business and Glasforms into our Specialty portfolio and better serve customers with an expanding selection of specialty solutions. We need to drive growth with improved sales force efficiency and effectiveness along with cross-business unit collaboration, and we will continue to expand margins with our mix improvement strategy. So with these priorities in mind, we reaffirm our commitment to the 2015 targets, including strong double-digit EPS growth to $2.50 per share. It's up to us to deliver. And for those of you who know us well, you know that, that's what we do best. And with that, we do have some time for questions.

[Operator Instructions] Your first question comes from the line of Laurence Alexander with Jefferies. Robert Walker - Jefferies & Company, Inc., Research Division: This is Rob Walker on for Laurence. I guess, first, how should we think about free cash flow generation over the course of the year?

Well, we're going to generate a high percentage of our income into free cash flow. I'd say in terms of where that goes, obviously, in continued investment and innovation and in the growth of the company. And then obviously, when you're getting a higher dividend, et cetera, that's all a given. A high proportion of what's been free cash will be dedicated to our commitment to buy back the shares that we put out in connection with Spartech. So we have enough funding, we're going to generate good cash flow, and that will be our priority as we've committed in the past. Robert Walker - Jefferies & Company, Inc., Research Division: Okay. Then 2 points on the cash flow. I guess, what is your CapEx outlook for the year? And I guess, in the balance sheet, why were inventories up so substantially from Q4?

Okay. So what I would tell you in terms of CapEx, for the company including Spartech, it's $70 million to $75 million is the range. Former PolyOne or PolyOne legacy, $50 million to $55 million, which is what we talked about after the fourth quarter. And Spartech, we're ranging at $20 million to $25 million. Importantly, our profile in terms of CapEx to D&A is still going to be about 2/3 CapEx to D&A, so we're still going to generate the cash coming out of that look at the company. In terms of inventories, actually the bulk of it is Spartech. And typically, we would build inventories organically, if I could call it that way. And we actually had an excellent quarter in that we were actually down year-over-year on an organic basis. So I can give you the exact number as it relates to Spartech: Spartech inventories were $150.4 million, and as you know, with purchase accounting, we actually wrote up that inventory, and we did have a special item in the quarter. I believe that number was $4.1 million -- $3.9 million related to Spartech, $0.2 million related to Glasforms, and we segregated that out as nonrecurring and a special item as -- because it certainly, definitely is. But those are the pieces of the inventory. Robert Walker - Jefferies & Company, Inc., Research Division: Great. And it looks like you may gain share in Europe. What drove this? And are there other areas that you're seeing any market share shift?

So I think in -- I'm really proud of the performance in Europe. Our team there is doing fantastic job. I'm not sure about share because we don't really look at our business. Much of our new growth comes from -- not from competition in the plastics space, but from alternative materials: metals, wood, glass, aluminum, et cetera. And so they have been very successful in making a lot of conversions of that nature. And I think that you continue to see them going after higher, more value-added applications with a higher margin profile, so I think that, more than anything else, kind of drove our European performance. They also had outstanding development in healthcare as well as packaging. Those were good markets for us there. Our degree of penetration in those markets is improving. Robert Walker - Jefferies & Company, Inc., Research Division: Great. Then maybe finally, I guess, how are order trends in Q2 and -- given the recent decline in oil prices?

I think we're still seeing positive momentum here in the U.S. I don't know that there's anything I would point to that's unusual or different about April versus the first quarter. We still believe, candidly, that Europe is the weakness market that we participate in, just based on the economic situation there, and there's no new news there either.

Your next call comes from the line of Dmitry Silversteyn with Longbow.

Just a couple of -- well, actually, since I only get one question, let me make it a good one. Can you talk about the -- you mentioned healthcare as being part of the area where you're getting decent traction in Europe and getting some conversions. Medical and healthcare has been an emphasis for you in a while. So can you update us on what percentage of medical and healthcare is now -- as part of the overall company? I know it's a big part of distribution. Is it becoming a bigger part of the Specialty businesses as well?

Yes. I'd say that healthcare is about 12%, 12.5% of our sales. It had actually peaked up a little bit higher than that last year, but with the addition of Spartech, you see it come down just a touch. But we still made great progress organically with sales going up double digits year-over-year. So I don't know if you wanted to say anything else about that?

No. I'd just say that we exceeded 10% revenue growth, and of course, our margins in that space are a little more robust, so with -- the gross margin and the gross profit improvement exceeded the sales improvement. So it was well into double digits, and we see this continuing. I think we're -- we have a long sales cycle. Outside of POD, we have a long sales cycle in this space. We've been working on it for some time, and we continue to capture key wins for us. So it's an area -- I think it just demonstrates, when you really focus on something and you get a team around it and you develop core competence and expertise around something that's very specialized, you can win, and that's what we're doing. So we're happy with it. Double-digit growth, it's great, and we're all set in healthcare.

To answer the second part of your question, Dmitry, the growth rates were actually highest in the Specialty segments, Color and Engineered Materials. So while we did have a large base in healthcare and growth in POD, the fastest-growing segments were in EM and Color.

Got it. And that actually is a good transition, Bob. Looking at the Specialty business, if you exclude the Spartech and, in the case of Color, Additives and Inks -- I'm sorry, in the case of Engineering Materials, Glasforms, what was that sort of underlying growth of the Specialty businesses on an organic basis? And what did the margins do if you exclude the Spartech contribution?

Well, the margin expansion -- if you look at Color, for example, at about 11.7%, if you excluded the Spartech influence, it would have about 11.9%. And then Engineering Materials, I'd say it's a pretty similar effect if you included -- or if you excluded EM and Glasforms -- if you excluded Spartech and Glasforms, because they didn't contribute that much in the first quarter from an operating income standpoint.

Yes, Dmitry, Specialty really drove the growth for the quarter. It was a big preponderance of the overall OI improvement that we had. It kind of hit on all cylinders, across the board throughout Specialty, and I'm talking x Glasforms and x Spartech right now. So really happy with that performance. And as you well know, we've continued to devote a lot of time and energy to this mix-up strategy, where we're selling more concentrated products, a smaller number of products, helping our customers win and differentiate, and so we replace some larger applications with smaller application. If you look at our -- the size of our orders, they have steadily gone down, and that's been purposeful in that we're selling more concentrated products with more uniqueness, we're selling smaller -- we're making, producing smaller batches and being paid for those, and it's just really part of the array of boutique applications that we have now out there that are differentiated from others. So I think that wraps up -- hopefully, that wraps up your question regarding the Specialty performance.

Yes, it does. I just want to do a quick follow-up on the topline. The 12% growth that you delivered in Engineering Materials and Colors and Additives, what would've the growth have been like without the acquisitions? Would you have still delivered positive growth, or would it have been slightly negative?

Dmitry, this is Rich. And we actually do this in Q and go through each of the pieces. I will actually give you the revenue as it relates to the acquisitions, if that might be helpful. So for the total Spartech revenue, we disclosed this, it was just shy of $55 million. 75% of that was in DSS. That's its own segment. About 15% of that was in EM, 7% in Color, and 3% in PP&S. And the other acquisition was obviously Glasforms. Let's call that 10% of revenue, and that's falling to EM.

Your next question comes from the line of Mike Sison from KeyBanc Capital Markets.

When I take a look at the gross margin for GSEM and Global Color, clearly mid-20s and over 30 there, certainly up in an area where you feel pretty comfortable, at least I feel comfortable, it's really been transformed in the specialty business. When you think about Design Structure and Solutions longer term, is that where you think you can get that business? And maybe give us a little bit of a feel how much of that would be some cost savings and sort of the mix improvement that you can generate over the next couple of years?

I mean, I would start by just coming back to the guidance we gave at the beginning of the year with respect to DSS and seeing operating margins getting to 8% to 10%, Mike. I think that, that is going to come from a balance of synergies and ultimately growth, but mostly on the synergy side as we improve the mix of the business. I wouldn't be able to take that to another level and say, this is what I think the gross margins would be. I'd say that 8% to 10% is an intermediate goal. And then ultimately, I would see it getting to a place like our Engineered Materials business.

I would say, Mike, that we went into this thing believing a certain intermediate-term and long-term margin expectation. And there will be a balance of some synergy from improvements with plant consolidations, et cetera. But what's really going to drive this growth, in my judgment, is innovation. They have some great innovative products, and we have some other application molecules that can be hitchhiked, we can hitchhike onto this existing good technology and build complexity and functionality into the products for their customers. And I think a great example are some of the applications that ColorMatrix possesses, some of that technology, being stacked onto some of those Spartech technology to end up with polymers that don't exist out there for others to deal with and simplify life for processors and customers. And so with that comes a great opportunity for sharing the value that is created for the customers and for our company. So I would -- very confident that we can achieve this immediate goal, but just as we did in '07, when we set our '12 goals, that's not the end-all, and we would expect, longer term, to get well into the double-digit arena with the return on sales numbers.

Okay. Great. And then when you think about -- Bob, you mentioned some evaluation of manufacturing capacity for Spartech over the next year. Can you maybe help us, what are the easy areas to sort of focus in on? And then what's going to take a little bit more time in figuring out where their capacity will fit in best with PolyOne?

Well, I think the most important first step of our evaluation is just truly understanding which customers are served out of which plants and how we can best serve them going forward. Consistent with actions we've taken in PolyOne's recent history, meaning going back to the '08-'09 type time frame, when we've made decisions to align plant assets, it's always done with the voice of the customer in mind. And I'd say that's the first priority, and I wouldn't describe any of that as easy. I mean, I think it's complicated, it's challenging work, and we want to continue to serve them best. At this point, we are not in a position to discuss any of those points of contemplation for us, as we're just continuing our evaluation.

There is some real sort of simple no-brainers at the outset, Mike as you would expect. For example, in sourcing. I mean, we do have greater volume now. We have 2 different sets of cost centers, and we need to consolidate and cherrypick from the best commercial arrangements on those. Those are pretty simple things to do, but as we start making decisions about plants, and this will be -- and it's already started, but this analysis will be inclusive of PolyOne plants. We're going to decide where's the best location and the most efficient operation with the right kind of workforce to serve our customers. And that will form the basis of the moves on a plant closure. So we're going to be taking a little bit more time on that to do it right. Many years ago, and this predates me coming here, PolyOne made a -- had to make a big decision about a lot of plant closures. And we didn't do a great job at that, and we lost a lot of business as a result because we didn't start with the customer in mind. So we're not going to make a mistake like that and be -- have a decision that's made in haste.

Your next question comes from the line of Kevin Hocevar with Northcoast Research.

I was wondering if you can give a little bit more color on ColorMatrix. I know you said operating income grew 20% year-over-year. How did the top line do for that? And also, how are some of the initiatives you have going on there in terms of cross-selling and pricing, and how are some of those going compared to your expectations?

I'll take that first. The top line did grow. It was mid-single digits year-over-year. Remember that this is a business that does have a high exposure into Europe. They're not entirely immune to what's going on there from an economic standpoint. But nevertheless, globally, did grow from a top line standpoint, and as we mentioned on the call, had a 20% improvement in operating income after the investments that we made in that business. I have only positive things to say about the integration activities, and what we're really excited about are the long-term prospects for ColorMatrix with respect to new product launches that we expect to start gaining traction this year.

I'll just add to that, Kevin, that -- I'd like to put it in context. First of all, as Bob's mentioned, a preponderance of their business is in this difficult environment in Europe. And they absorbed this $7 million that we've made to position this company for longer-term growth. So when you put it in that context, 20% was quite impressive, and we see -- we're really positive about the future of ColorMatrix. And the challenge we have right now is actually taking some of that technology, and this is kind of their own organic growth right now, we have yet to capture much benefit from migrating that technology into our other businesses. That's kind of -- that's a little more slow developing. So lots of upside and lots of opportunity for ColorMatrix.

Okay. And Rich, just kind of a quick one on the -- you bought back 840,000 shares during quarter, and I think you only had the ability to buy in the final 2 weeks because of the Spartech, based on when that closed. So I was just wondering, that seems like a pretty fast pace. Did you kind of expect this fast pace to continue throughout this year? And -- because I think of the 10 million shares that you plan on repurchasing, maybe 3/4 of that you're expecting on the first 12 months. So is that still kind of the expectations?

So Kevin, we had 18 days in the calendar that we owned Spartech, and I couldn't tell you off the top of my head the number of trading days we owned it. But we were active in the market during each of those days. I think it was really important for us to demonstrate our commitment, to get a good start out of the block on the buyback. We're not going to comment on what we did subsequent to the end of the quarter but as you can imagine, the price went down and that makes it more attractive for us. So I would say you shouldn't extrapolate those 18 days. I think we're indicating our commitment and as the year goes by, we will continue to demonstrate that commitment. We have the ability to do it and I'm very conscious of people looking backwards and saying, look at what you paid for this stock? But in this case, we wanted to get out off the block and show the commitment that company has been doing and what we said we're going to do.

And then finally on the distribution business. I believe this is, compared to the other businesses, a little more susceptible to movements in raw material prices. So was that a negative impact in the first quarter, particularly rising polypropylene prices? And could that reverse here in the second quarter given that some of those raws have really come down a bit?

Yes. This is Bob, Kevin. I would say, first of all, as we started last year and I reiterate it again on the call, there was about $2 million benefit in our first quarter of 2002, which I would just describe broadly as a favorable raw material price dynamics. We did not replicate that in the first quarter of this year, but absent that, there would've been operating income growth, which we expect for the full year for POD. At this point, I wouldn't comment on whether or not, we're going to see something favorable in the second quarter but we do probably an operating income expansion for the balance of the year.

You next question comes from the line of Rosemary Morbelli with Gabelli & Company. Rosemarie J. Morbelli - Gabelli & Company, Inc.: Which brings me to my first question. Was it above your internal expectations? Was there anything special in the quarter, some in that particular in that strength, some pre-buying from Q2? Can you help us understand what was going in Q1 that you did not expect ?

I think that we were really very happy, obviously, with the results for the quarter. It was, as we described, a breakout quarter for our Specialty platform. I think we always believed that we could achieve operating income and expansion in Europe, but probably perceived that at the beginning of the year as our single greatest challenge. So as I look back in the first quarter, I'd say our results in Europe are probably one of the things that we point to as a positive upside.

And this is Rich, Rosemary. The only thing I would spike out as a little bit unusual is we did have the penny, which I mentioned as it related to recording our R&D credit from last year in our first quarter. That was because President Obama didn't sign that into legislation into 2012, and that's the only kind of below-the-line unusual thing I would spike out. On taxes?

On taxes.

So we really -- we feel like, I guess, if there was a surprise to us, and we do have high expectations, of course, but I think Europe certainly exceeded our expectations for the quarter, given the environment that they're in. But I think we're really beginning to see more and more benefit from some of the investments that we've been making over the last years, seeing more and more penetration in some of the longer sales cycle opportunities that we've been pursuing like healthcare, et cetera. So all in, we're very happy, and we feel like we're well positioned for future growth. Rosemarie J. Morbelli - Gabelli & Company, Inc.: That sounds great. And I was wondering, also, as you are increasing the margin on Spartech, you are going to be toying, for the lack of a better word, with the profitability of some product lines and some customers. So should we expect revenues to come down at first as you eliminate some of those low-hanging fruit, so to speak?

So we're all eager to answer this one, Rosemarie. I mean, so first of all, we need to instill a profitability mindset, and you can do -- that is not inconsistent with a customer orientation. I want our customers treated extremely well. I want the best quality, the best innovation and service available for them. And I want to give them competitive advantage, but I expect a fair return for us in exchange for that. And that's the mindset change that we have to go through. There will no doubt be some business that has to be pruned. There are some business applications where we are not creating any value for our company. And many cases where we are creating value for the customer, we're going to have to change that balance a little bit. We're going to have to do this carefully and surgically as we did with PolyOne, but I believe we can move faster because we already have the sales training programs developed. The proprietary EBE tool that took us 18 months to develop is already being placed in their hands. There are lots of tools, pricing tools, understanding the input cost that we have, understanding our variable and fixed costs. We have all of those insights now to move much more quickly. So the answer is there will be some pruning of business, but we're going to be thoughtful about it, and we're going to be conscious of the customers' needs as well as the shareholders' needs, and we're going to strike the right balance.

Your next question comes from the line of Christopher Butler with Sidoti and Company. Christopher W. Butler - Sidoti & Company, LLC: Looking at PP&S here for the quarter, this is -- of your segments, this is -- this is one that I've always viewed as more sensitive to volume. We saw revenue down, yet gross margin was improved substantially year-over-year. Could you talk to what occurred and how sustainable this is going forward?

I would say on the volume side, Chris -- and I noted earlier where we saw declines in wire and cable and transportation. Some of this is perhaps anecdotal, but we do think that there was some effect of -- in the wire and cable space with buying ahead in the fourth quarter, it didn't repeat in the first quarter. So there is some -- certainly some volume sensitivity to that. We did grow in the quarter from a housing perspective, which is a positive and I think connected to what we're seeing in the space there. But really, the biggest and the most impressive story in PP&S continues to be margin expansion, which is around improving mix in our all of our end markets. Christopher W. Butler - Sidoti & Company, LLC: And could you give us a little bit more color on where the strength was that helped improve the mix? Is wire and cable, on the other side, a little bit lesser of a mix for you?

Wire and cable -- historically, wire and cable is, yes. So I mean, to the extent that, that was down, that was improvement in mix. Don't often like to point to something being down as a good guy, but that is one way of looking at it from a mix standpoint.

But I think it was anomalous this quarter was wire and cable was up in POD and down in other areas. And there were some expiration of infrastructure incentives and subsidies from the government that expired at the end of the year. We aren't sure yet whether that has a long-term impact on wire and cable or not, but certainly, we did see that on a non-POD side. And again, electronics and auto, softer with really good growth in healthcare, packaging, appliance and some modest growth related to housing. Remember, we're later in the housing cycle too, generally. When you get a permit, it's a period of time before our products are generally ordered, so we'll see how that plays out the rest of this year. Christopher W. Butler - Sidoti & Company, LLC: And with the divestiture this quarter and your look now under the hood of Spartech, are there businesses in PP&S still, in the Spartech acquisition, that are less core for you and may not be in the cards 5 years down the road?

Well, I don't know. Honestly, 5 years, Chris, is a long time, and we constantly scrutinize our portfolio. It's a dynamic business environment. But at this time, we're pleased with the portfolio position that we have. When we get this last -- this next deal done, we'll be happy about that. I think we're always going to be on the prowl for Specialty applications that offer uniqueness, so probably more in than out, if you will, from that standpoint.

Your next question comes from the line of Mike Ritzenthaler from Piper Jaffray.

This is Enrique on for Mike. On the operating margins, without asking you to provide any guidance, do you think it's possible for operating margins to expand sequentially with Spartech now in the mix?

With -- could you repeat the last one? Did you say with Spartech in the mix?

Yes, correct.

I think operating margins can continue to expand organically. I don't know the math off the top of my how the addition of Spartech impacts the consolidated operating margin. But I would just remind you that this -- our business still has seasonality to it. Second quarter is typically our strongest, and we do usually see the highest operating margins therein, and so I would expect sequential improvement as a result.

Great. And last one for -- how have auto exposures across the globe affected first quarter revenue growth year-over-year?

I mean, auto globally, and this is -- we haven't seen this for a while. Globally, auto was down 1.5%, so really down heavily in Europe. I think it was close to 9% down in Europe, and Asia's had modest growth of 2%, 3%, something like that. So it is no question that auto production rates are down. That said, it's our job to figure out ways to penetrate the market and to continue to work on lightweighting application. So that's what we've been doing on that front.

Your final question comes from the line of Steve Schwartz with First Analysis.

In the press release, when you talked about the $0.50 of accretion from Spartech, is that just related to synergies? Or does that include the base business itself that you acquired?

It's Bob. It's all-in. So I mean, we obviously did acquire a base business. It assumes that we achieve those synergies and that we also buy back the shares in connection with the acquisition.

Okay. I guess one idea, back-of-the-envelope calculation just for you to take the business as you bought it and increase the operating margin to what PolyOne's level is, that pretty much is the savings right there. But back to Rosemary's question on pruning, the net pretty much assumes -- since you bought a business that was doing $0.50 or so in EPS, that assumes that you might lose a lot in terms of the pruning, no?

What I would assume is that we had -- we acquired roughly $52 million, $53 million of EBITDA. Assume that the $65 million this additive to that. And so while you may see some top line movement, we're not expecting any really underlying erosion in the base operating income or EBITDA that we acquired. So at this point, the way we came up with that $0.50 really, again, is starting with that base, adding the $65 million and then assuming we buy the shares back.

[indiscernible] financing interest cost and share buybacks in there, as well. So it's all-in when you look at it from that standpoint. But we'll manage the pruning. I'm not the least bit worried about the impact of the pruning. That will be a good thing. It will be one of the cases where you find out exactly where your business proposition is valuable and where it isn't, and you don't need to be participating in places where you're just not adding value or differentiating yourself. And we're going to have some of both. But the main thing is that we're going to build on the existing higher-tech, more innovative platforms to create more value for our shareholders as well as our for our customers. So ... It's why we keep saying that the top line is not the best way to judge this, because of all the dynamics of more concentrated products going in, replacing commodity-oriented products or semi-commodity-oriented products. We'll be doing the same thing at Spartech. We are not going to -- we want to treat our customers right. If we don't have an arrangement that makes sense for them and us, we will understand that, we'll be professional, and we'll help the customers do something differently. But we have to have a business proposition that differentiates us, does something for the customer and does something for us. So we'll keep -- it'll be an ongoing process, and it will be iterative. It still goes on to some degree at PolyOne, to a lesser degree now, but we continue this after 5 years of it here at PolyOne.

There appear to be no further questions. So at this time, I will turn the call back to Steve Newlin for closing comments.

Okay, well, we're running a little bit over here, so I'm sorry for that, but it does conclude our 2013 conference call. I want to thank you for your continued interest in PolyOne. And we look forward to updating you on our second quarter 2013 results during our second quarter conference call, which is scheduled for late July. Thank you very much. Have a great day.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.