Avient Corporation (AVNT) Q2 2013 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Second Quarter 2013 PolyOne Corporation's Earnings Conference Call. My name is Tahesha, and I'll be your operator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr. Isaac DeLuca, Vice President of Planning and Investor Relations. Please proceed.

Thank you, Tahesha. Good morning, and welcome, everyone, joining us on the call today. Before beginning, we would like to remind you that statements made during this conference call which are not historical facts may be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements will give current expectations or forecasts 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 statement. 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 measure and provides a reconciliation of them to the most comparable GAAP financial measures. Operating results referenced during today's call will be comparing the second quarter of 2013 to the second quarter of 2012, unless otherwise stated. Joining me on our 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.

Well, thank you, Isaac, and thanks again to everyone who is joining us on the call. We always welcome the opportunity to speak with our investors and analysts about the continued strong performance of PolyOne. And this morning, I'm very pleased to report we delivered second quarter adjusted EPS of $0.37, that's a 23% increase over last year and our 15th consecutive quarter of double-digit year-over-year adjusted EPS growth. Our Specialty platform led the way with a 50% year-over-year increase in operating income. And in fact, all 3 of our strategic platforms increased organic operating income, which we attribute to our investments in commercial resources, the value-based selling approach and the disciplined execution of our four-pillar strategy. I am very proud of the efforts our teams have made this year in driving growth. In challenging environments, some companies might accept declines, blaming the European or Asian economies, but that's not what our stakeholders have come to expect from PolyOne, and it's not our culture. We find ways to exceed expectations. And through our unique and innovative solutions, we continue to differentiate ourselves from our competitors in the eyes of customers and shareholders. Finding ways to help our customers win is the foundation of our unprecedented transformation, and this philosophy is driving our integration efforts at Spartech as well. It's been just over 4 months since we acquired Spartech, and we could not be more pleased with our progress during this short time. We've taken many steps to drive value creation within legacy Spartech, which include training our sales teams on customer-centric selling, including the use of our proprietary EVE tool; building a core Lean Six Sigma team and launching several projects; and aligning our assets to better serve our customers. To that end, on July 15, we announced the closure of 6 legacy Spartech manufacturing facilities. Now these decisions are difficult, but they're necessary and they're the result of thoughtful study, considering a number of factors, such as operational excellence, including both safety and quality; prudent capacity utilization; and most importantly, the voice of the customer. We understand the effect this realignment has on families and the communities impacted, and we're handling these transition activities with the utmost respect for people. But we believe these actions will improve both our near-term and long-term competitive position as we transform the former Spartech into a specialty company. Importantly, this realignment will improve our ability to serve customers with higher and more consistent quality, improved on-time delivery and new innovative solutions. We expect the realignment will contribute $25 million in pretax savings by 2015. And we're more confident than ever in our ability to realize at least $65 million in synergies announced at the time of the deal, as well as the $0.50 per share accretion to adjusted EPS once the synergies are realized. Through our aggressive early steps to reduce redundant public company costs, as well as early operational and commercial successes, Spartech is already accretive to earnings, adding a little over $0.02 a share in the second quarter. In July, we had the opportunity to show our Board of Directors our early success and the future potential of Spartech. During our July meeting, which was held in St. Louis, Missouri, our board had the opportunity to see firsthand the Designed Structures and Solutions Innovation Center, which showcases Spartech's impressive technologies. Our directors were highly impressed with what they saw, the facilities, people and technology. We all left our board meeting with an even more enthusiasm and optimism for the vision that we will make a reality. While we launched the transformation with the former Spartech, we also closed the sale of our non-core resins business to Mexichem, which was the last base resin producing component of our legacy portfolio. I want to thank the former PolyOne associates, now at Mexichem, for their many contributions in strengthening this business. We certainly wish them continued success. We plan to use the cash proceeds from the sale to invest in our organization to accelerate growth, enhance our specialty offerings, fund the Spartech realignment and return capital to investors via future dividends and share buybacks. It's been a fantastic quarter for PolyOne, and we're very pleased with our accomplishments, but there is plenty of room for improvement and growth. And for those of you who know us, we set the bar high and deliver. With that, I'd like to turn the call over now to Rich Diemer, who will discuss the second quarter financial performance. Rich?

Thank you, Steve, and good morning. It's my pleasure to provide more detail on our second quarter results, which continue the positive trends we saw in the first quarter of 2013. We reported second quarter sales of $1,038,000,000 from continuing operations, up from $757 million last year. This represents the first quarter in the history of PolyOne that sales exceeded $1 billion. Adjusted net income was $36.6 million versus adjusted net income of $27.3 million for the second quarter of 2012. Adjusted EPS increased 23% to $0.37 from $0.30 last year. These results were principally driven by strong organic gains in our Specialty platform, as well as a full quarter of ownership of Spartech. Overall, Spartech contributed $278 million in revenue and $13.9 million in operating income. Spartech was just over $0.02 per share accretive for this quarter's results. Sales increased 37% overall, principally driven by the acquisition of Spartech, while organic revenue was flat compared to prior year as we continued to improve our mix. Our pre-special tax rate in the second quarter was 37.1%, up from 34.7% in the second quarter of 2012, principally due to our sales mix being more heavily skewed to North America. This provided a $0.015 per share headwind to our bottom line profitability compared to last year. The completion of the sale of our resin business resulted in pretax proceeds of $250 million and we have accounted this sale as a special item as part of discontinued operations, resulting in an after-tax income of $138.2 million or $1.39 per share. This provides a nice boost to both our domestic cash levels and book value per share. Other special items in the second quarter were principally related to insurance reimbursements of prior environmental expenditures, partially offset by inventory step up costs as a result of the Spartech acquisition purchase accounting. Excluding the gain on sale of our resin business, special items added $2.2 million or $0.02 per share to our earnings per share for GAAP purposes. The funds from the sale of our non-core resin business supplement what was already strong liquidity. We ended the quarter with $392 million in cash, which, along with our asset base revolver, give us overall liquidity of over $700 million. After repayment of borrowings on our revolver, our leverage, which we define as net debt to EBITDA, is 1.9x on a trailing 12-month basis. After taxes related to the sale of resins are paid in future quarters, our leverage will be approximately 2.1x EBITDA. With this financial flexibility, we have continued our share repurchase program. During the quarter, we repurchased 2.2 million shares of stock at an average price of $23.69. As of June 30, we have repurchased approximately 3 million shares at an average price of $23.96 year-to-date. With just over 17 million shares authorized for repurchase, we are approximately 30% complete with our stated goal of repurchasing the 10 million shares issued for the acquisition of Spartech within 18 to 24 months from the date of the acquisition. Working capital for the second quarter was 11% of sales on a trailing 12-month basis. As you've -- and if you've followed us, following through our transformation, you know that we are not only best-in-class in working capital management, we are world-class. In fact, CFO Magazine recently named PolyOne as one of the leading companies in the chemicals sector in terms of working capital management for 2012. This is the third consecutive year we have garnered this honor. We were one of a handful of companies able to hold or improve working capital metrics during the year and placed second overall in the chemicals industry. Finally, capital expenditures in the second quarter were $14 million, with the largest investments going to support our Specialty platform growth. As you can tell, we had a great first half of 2013, and we intend to keep the momentum going. And with that, I'll turn the call over to Bob Patterson.

Thanks, Rich, and good morning. I am very pleased as well with our second quarter performance, both with respect to our financial results and our progress with Spartech integration activities. For the second quarter, mix improvement was again at the heart of our outstanding results, with our Specialty platform leading the way. Global Specialty Engineered Materials sales were up 38% versus the prior year to $192 million in the quarter, principally due to the acquisition of Spartech and Glasforms. Operating income increased to $16.1 million, a 25.6% increase over 2012, which was virtually all organic. In fact, our organic business improved return on sales 150 basis points over the prior year to 10.7%. Global Specialty Engineered Materials performance was driven by gains in North America, Asia and Europe. Notably, our European EM business expanded revenue 13.5% versus the prior year and grew adjusted operating income by nearly 2x. Led by our Vice President of Europe and General Manager for Engineered Materials in Europe, Holger Kronimus, we have achieved these results as we continue to focus on specialty applications and our unique technologies. Our second specialty segment, Global Color, Additives and Inks, increased revenue to $229 million, principally due to strong organic performance by North America and Asia, as well as the addition of Spartech. Operating income increased to $30.5 million, representing a 25.1% increase versus last year and a new record for this segment. This drove return on sales to 13.3%, also an all-time record for any PolyOne segment. Our third and most recent Specialty segment, Designed Structures and Solutions, delivered sales of $199 million and operating income of $9 million as we saw gains from our early integration efforts. And we are already seeing numerous examples of Spartech's innovative portfolio and how we can help customers win. For example, our packaging solutions team recently worked with a customer to redesign a food storage container that increased consumer interest and satisfaction, while improving freshness and storage. We also leveraged our Polycast acrylic technology to develop a transparent canopy for a helicopter manufacturer, which helped to meet their design specifications for optical clarity, strength and light weighting. It's these types of successes that will help Spartech become the specialty company we envision. And while much of the recent news regarding Spartech has been about realignment and reduction of costs, we have a deep-seated philosophy that you cannot cut your way to prosperity. While we are closing 6 facilities, we are investing $25 million over the next 12 to 18 months in new equipment at our remaining facilities. We are investing to grow, and we will also be making targeted investments in commercial and manufacturing resources where it makes sense to do so. Shifting to our Distribution platform. Sales increased 1.7% to $275 million, driven by expansion in health care, packaging and building and construction. Operating income increased to an all-time record of $16.9 million despite modest margin compression due to year-over-year raw material dynamics. We expect our POD team to deliver year-over-year operating income growth for the remainder of the year. Finally, Performance Products & Solutions expanded sales by 5.7%, driven by the acquisition of Spartech, while continuing to improve mix and upgrade business, which drove a 33% expansion in operating income, of which 2/3 was organic. At the same time, PP&S delivered the second quarter in a row of 8% or better return on sales, a 170 basis point increase over last year. We are proud of these results and expect to continue to see year-over-year growth for the remainder of 2013. Historically, when I have talked about opportunities for margin expansion, I have frequently cited our potential to improve profitability in Asia. In 2011, our Asia sales were just short of $200 million in revenue with a return on sales of 4.4%, far short of our Specialty expectations. In the second quarter of this year, on sales of $64 million, operating income reached an all-time high of 12% return on sales. We owe this success to important leadership changes, a dedicated Asian team and investments in commercial resources to target the right customers with specialty niche applications. We also expanded our innovation center in Shanghai to meet the growing demand for specialty products and services with an emphasis on color design. And all of this could be summarized as yet another example of the disciplined execution of our four-pillar strategy and with the right leadership team in place, we have made substantial gains in Asia. That concludes my prepared remarks in the second quarter. I'll now turn the call back to Steve for some closing comments.

Thank you, Bob. It's really great to see our transformation story come to life with extraordinary performances in areas like Specialty, EM Europe, Asia and, of course, the early Spartech integration success, serving as recent examples. We're very pleased with what we've accomplished this second quarter and the first half, and we hope it's clear that our strategy, which has been so successful at PolyOne, is woven into our culture and is indeed making a difference. We're now bringing that culture to Spartech, and we're off to a great start. We will not slow down, and we won't accept an average effort. I fully expect we'll continue to deliver. As we look to the balance of the year, I remind our investors that our second quarter is our strongest quarter of the year due to seasonality, and that will likely be the same again this year. However, we fully expect to deliver double-digit earnings per share growth in the second half of 2013 as well. With that, we have time for questions.

[Operator Instructions] Your first question comes from the line of Laurence Alexander from Jefferies.

I guess, just a couple of questions. First, could you give a little bit more detail on how much you think you're growing above your end markets in, for example, construction or automotive, and similarly, I think, regionally, as you think about how you're performing in Asia?

Yes. I mean, from an end market perspective, Laurence, we're -- just -- if you look at housing starts, for example, and that obviously, is a North American statistic that I think you're asking about. Certainly, our sales didn't get to the same level of starts increase. But as you look at the vinyl industry as a whole, sales were actually down for the first half of this year -- or excuse me, they were up about 2%, but about 4% of that was actually driven by pipe, where we don't participate. So if you look at the balance of vinyl-related products, sales were actually down in the vinyl space. And so our results, as it's connected to -- excuse me, window profiles, doors, fencing and decking, et cetera, we're roughly flat with the prior year. So we're up a little bit versus there, but you don't see what you have with respect to starts overall. And transportation continues to be a good guy with respect to what we see in North America and not as strong in Europe.

So I would say in Europe, to kind of address your question, Laurence, from the standpoint of what the market's doing, the Europe auto market was, I think, down 1%; the builds were down 1%. And we grew about 7% in Europe. We grew 15%, 16% in auto in Asia. So that's a market where I would say we are outperforming. It seems like we're -- it's very difficult for us to get a grip on full market growth rates in packaging, but it appears that we're outperforming in that space as well. So I think health care is another area where we seem to be growing at a faster rate than the market has grown. So those are some real positives. I think it's -- what makes it so difficult for us to give you specific market share type of metrics is, our market is so difficult to define, given that there's sold business, but we're growing a lot through business that is a conversion from one other kind of material into our formulations. And so, you can look at things like glass or metal or wood or aluminum, and we don't really get to capture those growth rates in certain markets, but we know we're growing as a result of converting them. So I hope we've given you at least enough data points to make some sense to answer your question.

Well, that's exactly the rabbit hole I was trying to head down. And I guess, just to go a little bit farther, as you think about the construction and automotive markets, and I think probably, maybe this is more germane for automotive. Do you have a -- do you get so much -- how far in advance of current sales is your placement cycle? That is, do you have some sense in terms of new platform wins that will be rolling out over the next couple of years in terms of -- so that we can get a sense for how much farther the penetration story is going? And I guess, maybe the question can also be extended to the medical applications.

Well, we do have -- we certainly know when we have new wins. Oftentimes in transportation, our success is with the OEMs on the design phase in terms of new products. So we know what those are. When you look at the preponderance of our revenue on a current basis, it goes into a number of different suppliers to those OEMs. So we haven't historically looked at our automotive business as being a backlog business because it's not from an order standpoint, but we've got visibility to successes in new programs.

So I would just add to help a little color with that, Laurence, if you look at the cycles of those 3 markets you just described, health care, housing and auto, health care is clearly the longest cycle for us. So we're working on business, in some cases, 3 years or more before we get the spec and the product formulated appropriately and some samples produced, et cetera. Then it would be housing, more because -- I think I'd look at housing this way, when you see permits, new building permits, there's a fair lag between acceleration of building permits and when we will see that translate into products that are used in the construct of that home. With auto, it's probably a little closer cycle, unless it's a very complex engineered application, which again would kind of fall in between the sort of the housing model and the medical model. So all 3 have different paces, medical being the longest. We're looking -- we look at the light-weighting applications. Glasforms, as an example, is looking at light-weighting applications with OEMs. And we can be looking 3 to 4 years out to get some of those orders that come as a result of hard work and effort to formulate around something unique.

And then just lastly, could you touch very quickly on the sort of exposure on aerospace and the sales cycle in there and penetration opportunities just to help us sort of benchmark [indiscernible]?

We will do our best. I mean, we're learning. This is a space, I think, we've been very public about, a space that PolyOne has not had much success in. It's a difficult market to crack -- industry to crack. It's very sort of risk averse, if you will, and Spartech has a great presence in there. We are doing very well in aerospace. We have some quite unique technology that Spartech possesses in cell-cast acrylics, and it's used in canopies for commercial and military use, but also for aircraft windows, instrument panels, et cetera. And it meets these strict pressure and optic standards that the industry requires. And we have really a unique way of producing this acrylic sheet. So we are very pleased with the progress in aerospace, but it really is the direct result of Spartech effort. And PolyOne has to learn how to utilize their position and contacts and image in that space to bring some additional cross-selling opportunities forward, but it's going to take some time.

Your next question comes from the line of Frank Mitsch from Wells Fargo Securities.

The area that I want to dig a little bit into is on the Colors side. I mean, it I kind of struck me. I mean, obviously, the profitability, very strong in that business, decent -- very, very solid results there, but your volumes were off significantly. Obviously, you got ColorMatrix with a big portion in Europe. Can you give some more details on what's going right in the Colors business for you?

Yes, I'll start with that, Frank. I mean, I think that what you see is a continuation of our mix improvement strategy in Color. And on the surface of it, I think that our analyst investors look at those volume numbers as concerning, but they really shouldn't with respect to our continued focus on specialty applications versus more commoditized materials. That really is at the heart of what you see year-over-year in terms of improvement. And we did report gains in North America and Asia. And we also had gains in Europe with respect to our legacy masterbatch business, so it was around the world.

It'd be great if you could offer some examples of some of these specialty applications that are obviously significantly higher margin than the volumes you are giving up and perhaps an example of some of the volumes that you're losing.

Well, I mean, the place where we're at, we're doing really well with respect to -- margin improvement, really, is around additives and formulations. And those are the places where I'd say we're seeing the best success with wins. With respect to even just the legacy masterbatch colorants, it's around specialty colors for numerous applications in terms of those things that have, let's say, a pearlescence or metallic-looking sheen, those kinds of things that are complicated, but oftentimes, it's mixed with an additive for UV protection or something else from an elements perspective where we're seeing the best. With respect to -- going the opposite direction, Frank, where we've seen volume declines has principally been in some of the blacks and whites businesses that we legacy had that just don't meet our performance expectations anymore.

Yes, I think that's a good summary, Bob. I mean, some of the real primary simple colors and certainly blacks and whites are areas that are not that distinct. And so, our energy, resources, our investment in R&D have been focused around building more complexity into the molecule and reducing steps for the customer. So giving their end product more attributes, features and benefits, and also at the same time, reducing the amount of work they have to do in the process of -- processing these plastic polymers. So that polymer now might have 7, 8, 9 different elements to it as opposed to a couple. White and black, it's pretty straightforward. You may throw some UV protection in, but there's just not much going on in those. So those are examples of high-volume, low-margin applications being converted, with our efforts going into more specialized applications.

All right. Terrific. And I can understand that probably in the future, the sales of green are going to pick up significantly as people get on the Jets bandwagon with the start of football season here. Steve, when you're talking about Spartech, you made the comment, "I could not be more pleased," and that actually doesn't sound a lot like you because you're always not satisfied with what's going on. As you got into the Spartech business, what has been the key surprise and perhaps more -- as importantly, what has been the key disappointment getting under the hood there?

So first of all, I didn't say I was satisfied. It's an important distinction, Frank, because you do know me, and I'm not. But I am pleased. What's exciting is the learnings about technology that even we think more potent than we thought from the outside and the enthusiasm of the people, the willingness of the people to participate and embrace change as opposed to a stiff arm and not -- and try to resist the change that we all know needs to happen. And it's going at a very fast pace. What do we see? So beyond technology and sort of a culture that was willing to change and adapt and recognize the goodness that PolyOne brings to the organization and the people in it, what is not done so well or the things that I've been disappointed with are twofold: safety, not that it's been bad, but it's not at our standard; and some quality issues that need to be fixed. So we circle this around the customer first and our employees as well, and we're going to fix both of these issues because it's imperative that we take care of the employees. It's about rigor and discipline and a culture of doing things right on all fronts. So those are the -- if there are adverse surprises, it would be in the area of safety and quality. And we're going to fix them both.

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

In terms of the 6 plants that you determined to close, if I sort of did the math, it looks like you're 60% to 70% of your way to the $65 million, including maybe some of the corporate stuff that you could have done already. When you look to finish that remaining $65 million, are there any particular areas, is it more plants? Is it operational excellence? Can you just maybe outline, I know it's still early, where the next round of synergies can come from?

Mike, this is Bob. Well, I'd say, we still have a lot of opportunity in front of us with respect to Lean Six Sigma improvement. We just put 9 of their individuals through the beginning phases of black belt training. And so, we're really just at the beginning phase of launching projects, so I'd say, we see opportunity there. Steve mentioned quality, and I would say that is probably one of our number 1 focuses is to improve the quality of the product. It's a drain right now from a P&L standpoint, and it's an important part of the value creation process for our customers. And we do see the opportunity to improve margins overall. But in order to do that, we need to better serve our customers with better quality. So those are the primary areas of focus for us. And I think it will come from commercial, as well as operational synergies.

I think there's a lot of opportunity on the supply chain side, including sourcing raw materials, et cetera. We can very easily and already have started that process of benchmarking, who's got the best appropriate pricing, and the relationship with the supplier, including access to innovations and exclusive access to some of the more unique innovations. So we put that altogether, we bundle all that when we look at sourcing. But clearly, there are opportunities for scale and price improvement on that side as well. I think with regard to the plants, we made this decision with a lot of thought. This thought process started before we closed the deal. We had some ideas. And a lot of things went into the decision-making. But we really -- what I'm really pleased with that the team did was started with the customer, and they started with what is not working with customers and what do we have to preserve and protect and improve. And that formed the basis for the decisions that were made. So we think we're in a really good position right now. We will go -- I guess, we're moving very quickly, but with regard to things that are going to touch the customer, our pace will be moderated a bit. We want to be careful. We want to not go in and put a business at risk during this important transition period. So our pace will be based around our capabilities to continue to deliver for the customers.

Okay. And then, a quick question on GSEM, the Global Specialty Engineered Materials business, margins less Spartech were pretty good, 11%. So if you sort of did the math, it looks like the Spartech piece within GSEM isn't making a lot of money, if at all. Can you remind us what that piece is? And what are your just thoughts of getting that business back on track?

I mean, it very much looks like legacy PolyOne business if you went back 6 or 7 years ago. With respect to some of the applications that are being served is lower margin today, but we see opportunities to improve that. When Steve and I made the comments about quality, that wasn't a DSS-only observation, it also extends to the CSC business, and there's a lot of improvements to be made there. So it is in some lower-end engineered materials applications in terms of the specialty spectrum, but there is opportunity for improvement. But -- I mean, you're right, you're spot on with respect to the observation of why it ended up at 8.4% for the quarter versus the organic number of 10.7%.

Okay, great. And then finally, Steve, can you just comment on 2015, I guess it's still -- the $2.50 is still the plan there. We've seen several companies that have backed away from their outlooks longer-term. Can you maybe just give us some level of confidence there? And maybe some of the walk to get there?

Sure, I mean. First of all, Mike, thanks for the question. We're not backing away. We continue to have a $2.50 EPS target for 2015. And it's going to come through organic growth, through mix improvement, which I think you see a lot of evidence of. And if you kind of extrapolate our current pace for the first half of the year, you can do some math and see what's going on, on that front. A lot of ongoing LSS projects, which have served us well over the past 3 years here. $0.50 of accretion from Spartech, that's the number we continue to look at. And there will be an impact of share buybacks as well. So that's kind of the walk, if you will, to the $2.50 target, and that remains -- that target remains our publicly shared target.

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

I was wondering if you could update us on your accretion expectations for Spartech here in 2013. I think when you acquired it, it sounded like low, $0.02 and then you ended up getting better financing on your debt. And now it sounds like things are going a little better than expected, and you got $0.02 this quarter. So just kind of -- what's your expectations for the year for Spartech?

Kevin, this is Rich. So yes, we actually had a $0.01 or $0.02, I guess, was in guidance or our feeling for what this year would bring. We obviously have $0.02 in the quarter. So we feel that -- we're obviously ahead of schedule. And I would say, based on the second quarter and kind of looking at that out to the back half of the year, we're probably looking at another $0.05 in the back half.

Okay. And then, you gave the 10.7% margins in GSEM, organic margins there. What would the margins be in Color and PP&S if we -- organic margins if we stripped out Spartech?

It's 13.5% for Color. And it's pretty much spot on for PP&S, it's about the same, 8.1%, 8.2%.

Okay. And then final question, just in terms of the Color business. How much of the improvement there came from the ColorMatrix business? I think you guys mentioned on the first quarter improved earnings, like 20% or something like that. So wonder if you could update us on how ColorMatrix did during the quarter as well.

Yes, Kevin, I'll take that. Actually, ColorMatrix had -- I mean, has exposure to Europe and was impacted there in the second quarter. Operating income for ColorMatrix was flat. However, we did invest about $1 million year-over-year in 3 areas, which really were in sales, marketing and technology resources. And so, what we've seen in ColorMatrix has been very strong performance in North America, Asia and South America, largely offset by Europe. And this is really additives into the packaging market where it's been down year-over-year, as well as just due to less consumption of those materials with what we understand to be driven partially by cooler weather. So that really describes where we are from a ColorMatrix standpoint. But we really continue to believe that this was a great acquisition. I think the level of investment that I just talked about in those 3 areas certainly highlights our intention to grow that business with investment, as was always our basis for doing the deal.

Yes, let me just add, Kevin, so we don't like a lot of excuses around here, and it seems -- it may seem a stretch to say there's anything related to weather, but the facts are, and if you do a little checking in Europe, it's been a very cool summer and late spring, and that means a lot -- if you look at the packaging market where ColorMatrix, that's the heart of their business, they suffered a lot from just reduced demand due to less products being sold and bottled. So we don't use that as an extenuation. We got to find other ways to pick it up, and ColorMatrix has to do that as well. So we are very confident in ColorMatrix near-term and long-term outlook. We're going to continue to invest in there. We could've had growth if we chose not to invest, but we see great opportunities by continuing to pour some, I think, much-needed resource investment into this business to grow the business on a global basis. And we really like what they did everywhere in the world with the exception of Europe. Europe, by the way, was impacted -- not only in the Western Europe, but even in Eastern Europe we, saw a pretty big slowdown in the packaging arena. So we think that, that will be a short-lived phenomena.

Okay. Actually, just one more real quick question, if I may. Could you remind us what the breakout is in terms of the Spartech business outside of Designed Structures and Solutions between the other 3 segments? Because it seemed like PP&S got a little more benefit from acquisitions than I would have expected. Could you remind us what the breakout is there?

Yes, Kevin, this is Rich. So of the $277 million of former Spartech revenues, $199 million in DSS, $39 million in EM, $22 million in Color and $18 million in PP&S.

Your next question comes from the line of Eugene Fedotoff from Longbow Research.

Could you comment on, I guess, volumes in July and any changes that you're seeing in your markets compared to second quarter?

Well, all we can really say about July is, it's been kind of interesting for the last few quarters, the last month of the quarter has been the softest. And we don't know if it's customers kind of watching their inventory or not. And it certainly started in the fourth quarter of last year, continued in the first, continued in the second. We're off to a very good start in July. It looks strong.

Okay, great. And just on PP&S margins. Bob said that the organic margins were 1.8% -- I'm sorry, 8.1%, 8.2%. I thought that the year-over-year decline was mainly due to the sale of resin business. What's going on with margins there? Can you provide a little bit more color?

Yes. I mean, if you took out the resins business and just looked at it on a comparable basis, the margins had actually improved from 6.4% up to 8.1%. I'm just doing my best to give you an organic number. And that continues to be mix improvement, largely through our Geon brand of vinyl businesses.

Okay, so it was 6.4% wash here excluding resins?

Correct.

Okay. And just a final question, if you can talk about the raw material costs in the quarter, any changes there, headwinds or tailwinds?

Look, I would say that the business that's probably impacted the most by raw material movements in a short period of time would be our distribution business. And we did note that we did see some margin compression in the second quarter this year compared to last year due to really selling higher costs to inventory at lower prices. We did see prices move down some in the second quarter, and that happened. Outside of that, there really wasn't much to report in the way of raw material movements for the quarter or what we expect for the rest of this year.

Since we've been in the specialty transformation, the level of sensitivity to raws has significantly decreased. And so, we're always monitoring raws, and we're incorporating that into our pricing. But the shift away from commodity-driven businesses into unique applications, it really has not isolated us, but significantly altered our sensitivity to raws. I'd also just point out that we have expanded our margins in periods of raw material inflation and deflation because of the nature of the -- the innovative nature of our applications. So it's something that we measure to make sure that we're incorporating into pricing, but it's not something we really worry about.

Great. And actually, just the last thing, I just want to understand that and make sure that $25 million coming from the North America restructuring you've just announced, that is a part of $65 million in synergies from Spartech?

Yes, it is.

Your next question comes from the line of Christopher Butler from Sidoti & Company. Christopher W. Butler - Sidoti & Company, LLC: Just looking at the Global Engineered Materials business, last quarter, if I remember correctly, your volumes were down year-over-year about 5%. This year -- or this quarter, you're up about 5%. Could you give us a sense on what you're doing right now, or what's changed here since the first quarter?

Yes, the volume question was specifically on what? Say it one more time, Chris? Christopher W. Butler - Sidoti & Company, LLC: On Global Engineered Materials.

Yes, so we have had really good success, I'd say, in 3 areas. One, is in consumer products with respect to our soft touch TPE offerings. We had a 13% growth in Europe, most of which -- or a big portion of that was actually volume from new business gains. And then a smaller number in Asia, which was driving that volume delta. So it was good to see that this year, and if I were to assign a reason to it, it was really all driven by new business gains.

Yes, what I would also add is that for us, the volume isn't all that important. Truthfully, it's the profitability, the mix, and that's front and center, it's the very heart of our strategy, just as a reminder for everyone. We are very willing to trade high-volume, low-margin business for a high-margin, low-volume business, and that's an ongoing chronic iterative process that's been going on now for the last 5 years. So in this particular case, the gains were big enough such that it did show absolute volume increase, but more importantly, to us, is the profitability increase clearly outpaced any volume growth. Christopher W. Butler - Sidoti & Company, LLC: And if we're looking at Spartech and the restructuring that you're going to do there and the capital spending that will be also needed to reach your $0.50 accretion target, could you give us a sense on what the total spending is going to be there in order to reach your target?

Sure, Chris. This is Rich. When we did that press release, we talked about $25 million of additional capital. And the way I would phase that is $10 million this year and $15 million next year. So to ask your follow-up -- answer your follow-up question, what I would say is that, so this year's CapEx would now be in the $80 million to $85 million range. We were at $70 million to $75 million before the update, the North American realignment got factored in. Christopher W. Butler - Sidoti & Company, LLC: And on restructuring cost, any additional as we move forward? Or is the closures that you've announced pretty much it?

No, we sized that in the press release again, and we talked about the fact that there is basically, let's call it, $20 million of expense that we're going to have cash expense. And then there's also some accelerated depreciation, which is non-cash. And those things you take as you take activity, right? So they will be over the course of the next 18 months. So we -- that's also in there, too. Christopher W. Butler - Sidoti & Company, LLC: So there's not another restructuring that will be announced at some point with additional costs?

We don't have any plans to announce at this point, and I'd tell you -- maybe this will be helpful, Chris. When we announced the Spartech acquisition, we talked about total cash cost approximating, let's say, $65 million to make all that happen -- or $60 million to make the $65 million happen. We don't see any really changes in that perspective between now and 2015 and '16.

So, Chris, the 2 pieces that we talked about, $38 million in charges in that press release, $23 million of which will be cash and $15 million of which will be non-cash. That's the accelerated depreciation.

Your next question comes from the line of Henrique Akaishi from Piper Jaffray.

This is Henrique in for Mike. So going off of your raw materials commentary, what is the role of butadiene based [indiscernible] with regards to raws?

And when you ask about what the role is, I'd say that it is a building block for TPE, so just a portion of our Engineered Materials business probably is involved in, I'm guessing, less than 5% -- about 5%, perhaps, of our revenues.

Okay. And how has those -- how did the raws kind of performed with that regard?

I mean, if you just look at the state of butadiene prices, certainly those have moderated over the last couple of quarters versus where they peaked, let's say, 1 year ago, even going back into the fourth quarter of '11. So that has happened.

Okay. And last one for me. So coming through an active period of M&A, are you prioritizing cash towards debt paydowns and purchases, which I know you referred to during your EPS bridge for 2015? Or are there any -- are there still some attractive properties on the market that you're entertaining?

Well, we prioritize our cash to continue growth through our Specialty platform. We have no stated goal to pay down debt anymore. I mean, we basically just put the current capital structure in place. We did some borrowings on our revolver earlier in the year, but now I'd say, we're pretty cash rich in terms of both cash globally and cash in the U.S., so I think it's the continued growth of the company. Yes, there are targets out there. Yes, there are -- we're looking at a number of them. But you're only as good as your last acquisition, and we would be prudent and just like we have been with our recent acquisition. We also have a high priority and a stated goal to buy back stock, which I mentioned in my commentary. And then -- so I think we're very financially flexible and looking to grow the company more with our current capital structure in place.

All right. Thanks, Tahesha. This concludes our second quarter 2013 conference call. I want to thank you for your continued interest in PolyOne and for joining us on the call today. And we certainly look forward to updating you on our third quarter 2013 results during that conference call, which is scheduled for late October. Thank you all very much.

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