Avient Corporation (AVNT) Q3 2013 Earnings Report, Transcript and Summary

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

Thank you, Anette. Good morning, and welcome to everyone joining us on the call today. Before beginning, we would like to remind you that statements made during this conference call, 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're 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 on the company's filings with the Securities and Exchange Commission, as well as in yesterday's press release. During the discussion today, the company will use both GAAP and non-GAAP financial measures. Please refer to the earnings release posted on the PolyOne website, where the company describes the non-GAAP measures and provides a reconciliation of them to the most comparable GAAP financial measures. Operating results referenced during today's call will be comparing the third quarter of 2013 to the third quarter of 2012, unless otherwise stated. Joining me on the call today 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 good morning, everyone. Well, it was yet another outstanding quarter at PolyOne, and I'm thankful you joined us this morning to learn more about this past quarter, as well as our plans and expectations for the future. I'm very pleased to report that we delivered third quarter adjusted EPS of $0.36, which represents a 29% increase over last year. This marks another unique and significant milestone in our company's history, and I'm very proud to announce today, PolyOne has now delivered 16 consecutive quarters of strong double-digit year-over-year adjusted EPS growth. Four straight years is an impressive accomplishment that not many companies, and certainly none of our peers, can claim. And the credit goes to our global associates who've worked tirelessly to execute upon a focused, unwavering and transformational strategy. And it's easy to forget when this streak began in -- back in 2009. The early years of PolyOne were focused on commodity offerings and equity investments, where volume was king and innovation just really wasn't discussed. PolyOne struggled, and as a natural result, there were some who didn't believe that the company would even survive. But not only did we survive, we've thrived. And as we've successfully moved from being a commodity company and taken giant strides towards becoming a specialty company, we've made much progress along the way. For those of you who may not be as familiar with PolyOne, I want to comment briefly on our historic success, and more specifically, on our four-pillar strategy. But perhaps more importantly, to all of you, I want to talk about our future and why we can continue to deliver double-digit adjusted EPS growth. Our four-pillar strategy of specialization, globalization and commercial and operational excellence is at the heart of our transformational story. Our strategy has remained unchanged since we launched it in 2007. It drives every action, every investment, every decision we make and helps us deliver the reproducible, sustainable results our stakeholders have come to expect. We're very focused. I hear others talk about implementing a specialty strategy like ours. And to us, frankly, it's flattering. But this is not easy to do. Our experience, attitude, discipline and know-how drive our ability to deliver and differentiate ourselves from our competitors and peers. But while our strategy is important, you'll hear me say repeatedly that execution is even more important. And for those of you who know us, we are relentless and consistent in the execution of our strategy. And that, more than anything else, has delivered the past 4 years of accelerated growth. Our specialization focus has changed our company and our culture from an unsustainable and oftentimes unprofitable reliance on volume to a passion for delivering clear, bottom line value to our customers and growth for our shareholders. Within our Specialty Platform, we measure our innovation success with the Vitality Index that measures the percentage of current period sales for products introduced in the last 5 years. At a world-class Vitality Index of 44%, our new and unique solutions are driving the preponderance of our Specialty Platform profitability growth. And nearly 2/3 of our company's segment operating income, our Specialty mix of earnings has never been stronger or profitable. We're in markets and applications that are not only delivering now, but they're aligned with strategic mega trends that have us extremely well positioned for the future. Healthcare is probably the best example. Healthcare represented about $100 million in sales in 2006. It is now on pace to exceed $400 million in revenue this year, with improved margins. But our shift to Specialty had to be properly supported as we meant to market. And that's why we executed on our commercial excellence pillar. Not everyone may remember that coming out of the recession, we invested for growth. This included creating a marketing organization where there once was none. This required investment and commitment. And in 2010, we added over 150 resources in sales, technology and marketing roles. At an annualized cost of $25 million, we created a commercial organization that is unmatched by our peers. We've overhauled our culture to one that is deeply embedded -- has deeply embedded customer-centric selling know-how, and that is increasingly focused on cross-selling our new and innovative solutions for our customers. This is a global skill set, and it's an essential component of our strategy. Within operational excellence, we've internally improved our efficiency, and as a result, externally improved our delivery times, quality and service to our customers. The Lean Six Sigma methodology serves as a blueprint for how we operate in manufacturing, functional areas as well as the commercial arena. We've built an award-winning LSS machine in the process. It's now part of who we are and who we will remain in the future. And just who we are is becoming more and more consistent within PolyOne around the world. And that's reflective of our globalization pillar, which drives our decision-making as we look into expand into new strategic markets and better serve our multinational OEMs. Our recent successes in Asia and Europe, along with our expansion efforts in Saudi Arabia and India, to name a few, serve as examples of our commitment to expand globally and better serve our customers where they need us. Now our Spartech acquisition, with more than 90% of its revenue generated in North America, has temporarily re-proportioned our percent of sales in the U.S. But yet, this is another great opportunity. Once we're through the initial stages of integration, we will look to expand the DSS platform globally. We have the infrastructure and know-how to do so. We remain committed to being a global company. But this, to us, means so much more than simply being present in multiple geographies. Our ability to provide our customers with peace of mind when it comes to quality, service and product performance globally is a competitive advantage and differentiator for us. Our four-pillar strategy is well understood, and our ability to consistently execute is proven, and I just wanted to reflect on that. It's a little bit ironic because very little of what we talk about internally or with our customers is about looking back. I focus my comments today on our strategy because it's working extremely well and will continue to serve us well as we pursue our ongoing goals of superior growth and performance. The same strategy that enabled these past 16 quarters of outsized double-digit EPS expansion is the same strategy that frames our long-term potential. We will continue to set lofty goals, and we fully expect to reach them. Indeed, we are in pursuit of our 2015 targets, yet our quarterly expectations of our sales have never been higher. I believe, and our team expects, that the best is yet to come at PolyOne. We expect to deliver double-digit growth organically, while we also expect to achieve incremental growth through the accelerated integration of our recent acquisitions, including Spartech, which Bob Patterson will elaborate on in just a few moments. But first, I'll now hand it over to our Chief Financial Officer, Rich Diemer, who will review our financials. Rich?

Thank you, Steve, and good morning. It's my pleasure to provide more detail on our third quarter performance, which continues the great results we saw in the first half of 2013. We reported third quarter revenue of just over $1 billion, up $300 million and 43% from $708 million last year. Adjusted net income was $35.5 million, versus adjusted net income of $24.8 million for the third quarter of 2012. Adjusted EPS expanded 29% to $0.36 versus $0.28 last year. Top line growth was driven by the acquisition of Spartech, as well over -- as well as year-over-year improvement in organic revenue. Overall, Spartech contributed $264 million in revenue and $16.2 million in operating income, or $0.04 per share of accretion. Organic revenue increased nearly 4% versus the prior year, driven by gains in transportation, consumer and appliances. As for the tax line, our pre -- special [ph] tax rate in the third quarter was 35.8%, down from 36.4% in the third quarter of 2012, driven principally by income mix. Special items in the quarter were principally related to restructuring costs to support our North American manufacturing realignment announced in July. And the premium that we paid to repurchase approximately $45 million of our higher coupon debt, partially offset by the favorable resolution of commercial litigation in which we have an interest. Net special items totaled $10.5 million after tax or $0.11 per share to our earnings per share for GAAP purposes. From a cash perspective, we continue to maintain strong liquidity, with an ending cash balance of $323 million. Taking into account our undrawn asset-based revolver, our liquidity totaled over $630 million. This financial flexibility has allowed us to employ cash in the most effective ways for our stakeholders. Specifically, we utilized our strong liquidity to accomplish the following. First, we continued our share repurchase plan. During the quarter, we repurchased 877,000 shares at an average price of $27.97. For the year, we have repurchased just under 4 million shares at an average price of $24.89, and we are 38% complete towards repurchasing the 10 million shares issued in connection with the acquisition of Spartech. Second, as previously mentioned, we repurchased $44.7 million at par value of our debt on the open market, primarily consisting of our 2020 senior notes. We were able to take advantage of our strong liquidity to retire higher coupon debt and lower future interest expense. Even with these cash flows, our leverage remains about 2x net debt to EBITDA, a very comfortable level for us. We also, again, delivered world-class performance as it relates to working capital. For the third quarter, working capital was 11% of sales on a trailing 12-month basis. Importantly, with our early integration successes, we are beginning to see improvement in the former Spartech's working capital levels. We expect continuous improvement in that regard as we implement operational excellence programs to improve their processes. Finally, CapEx in the third quarter was $15 million, with the largest investments supporting our Specialty Platform growth, including investments related to our GLS facility in McHenry, Illinois, in addition to starting to fund our North American manufacturing realignment. By nearly every measure, we had a great third quarter, and we intend to keep the momentum going through the end of 2013 and building towards our 2015 EPS targets and beyond. And with that, I'll turn the call over to our Chief Operating Officer, Bob Patterson.

Thanks, Rich, and good morning. It was, indeed, a very strong quarter, and I have a number of highlights to review with our investors today, beginning with our Specialty Platform. During the third quarter, Specialty revenue increased 82% to just under $600 million, driven by the acquisitions of Spartech and Glasforms, as well as organic growth from Color and Engineered Materials. Global Specialty Engineered Materials sales were up 38.2% versus the prior year, primarily due to the acquisition of Spartech and Glasforms. Organically, revenue increased 4%. While revenue growth was most heavily influenced by our recent acquisitions, operating income growth was almost entirely organic. Our mix improvement strategy continues to pay off, as operating income in Engineered Materials increased 20% to $15.7 million versus $13.1 million in 2012. The performance of our Engineered Materials segment was not limited to one region. We delivered double-digit revenue growth in North America, Europe and Asia on gains in consumer, electronics, wire and cable. Notably, our Asia Engineered Materials business increased revenue 15% and more than doubled operating income over the prior year, as we continue to expand our Specialty offerings in the region. Our second Specialty segment, Global Color, Additives and Inks, increased revenue to $219 million or 15% on strong performances by ColorMatrix, North America and Asia Color, as well as the addition of Spartech. Operating income increased 54% to $28.7 million versus the prior year. Approximately 75% of the year-over-year growth in operating income was organic. And for the second quarter in a row, Global Color delivered return on sales greater than 13%. In fact, driving these outstanding results was a very strong quarter from ColorMatrix, which not only grew revenue by 11%, but increased operating income 47% over the prior year. Finally, our third Specialty segment, Designed Structures and Solutions, delivered sales of $187.8 million and operating income of $10.9 million, as our integration efforts begin to take hold. While we didn't own DSS last year, we do track our year-over-year profitability expansion. And operating income from this segment increased 82%, and return on sales increased from 2.7% to 5.8%, again, as our integration work gains traction. Since we acquired Spartech, we have had a keen focus on implementing and executing our four-pillar strategy, the same strategy that underpinned PolyOne's own transformation. In July, we announced our North American asset realignment, and these plans are well underway. While these types of actions are never easy, we are seeing positive responses from our customers, who will benefit from improved quality, service and on-time delivery. And one of the first opportunities we saw in implementing our four-pillar strategy at Spartech was improving product quality and safety. In addition to introducing our no-surprises pledge to our new plants, associates and customers, we're also introducing several initiatives aimed at improving our internal efforts in this regard. I'm sharing this with you today because it demonstrates, first, that we take quality and service personally, and it's a commitment we make to our customers. Second, it illustrates that while strategy is important, execution matters more. And there are a lot of things that we do every day to improve customer service and differentiate ourselves from our competitors. This is part of our value proposition, and we are training our newest sellers from Spartech to communicate this with our customers, using our proprietary EVE tool. We can lower our customers' total cost of production through reduced product returns, lower scrap rates and/or improved throughput time on their machines, just to name a few. And during the third quarter, we realized $0.04 of accretion from Spartech. Just like our legacy businesses, the fourth quarter will seasonally be weaker than the third for -- however, we do expect them to continue to be accretive for the balance of the year. And for the full year 2013, we now assume we will deliver between $0.08 to $0.09 of accretion from Spartech, up from the $0.01 to $0.02 we originally estimated. Our synergy capture is ahead of schedule. And now, we expect to deliver $65 million in synergies or profit expansion, related to the acquisition in calendar year 2015. We previously estimated we would deliver this amount by the end of year 3. Assuming we buy back all the shares in connection with the deal, this will result in $0.50 of accretion to EPS in 2015. Shifting to our distribution platform, sales increased 8% to $275 million, driven by higher raw material costs and expansion in transportation, electrical and building and construction. Due to the increases in raw material costs and unfavorable mix, operating income increased only slightly from last year to $16.6 million. Moving to PP&S, I'd like to take the opportunity to welcome Michael Garratt, who joined us in August as the new President of this segment. Michael has extensive experience in the industry, including 15 years combined with Dow and its elastomers joint venture with DuPont. Most recently, he led the turnaround of a Berkshire Hathaway business, and these experiences make him uniquely qualified to drive continued success in this platform. As for PP&S results, sales increased 13% versus 2012, driven by the acquisition of Spartech and year-over-year improvement in healthcare, appliance and electrical. And despite a very competitive vinyl market, PP&S grew profitability 16% versus last year and delivered a return on sales of greater than 8% for the third consecutive quarter. Regionally, I mentioned we saw growth in our Engineered Materials business in Asia, and this was true for Color as well. In total, PolyOne sales in Asia for the third quarter expanded 11%, driving operating income growth of 40% over the prior year. Much of this continues to be mix improvement, as we expand our Specialty offerings in the region. And while sales were organically flat in Europe, operating income grew 18%. This quarter's growth is due to new business gains and improved mix, and we believe there are early indications that the economic slowdown there is decelerating. In fact, we were very encouraged by the level of enthusiasm and engagement with customers at the K Show earlier this month. This is the plastic industry's largest trade show, held in Dusseldorf, Germany. During the show, we had the opportunity to showcase some of PolyOne's latest market-leading solutions and technologies like bio-based, environmentally friendly applications, materials that enable lightweight-ing, such as for automotive applications, anticounterfeiting technology and ballistic protection materials, to name a few. These solutions help our customers grow by addressing global trends and are geared toward multiple end-use industries. Importantly, many of these technology offerings represent specialty formulations that others simply cannot deliver to their customers. And as customers consider these solutions, we will be there with the right formulations and offerings to give them an edge, not only improving their product appeal and functionality, but also their profitability. This concludes my prepared remarks on the third quarter, and I'll now return the call back over to Steve Newlin for some closing comments.

Well, thank you, Bob. It's great to look back and see how far we've come. But for me, it's even more exciting to think about where we intend to go. The disciplined execution of our strategy and a long consistent track record of organic earnings growth and successful integrations have powered PolyOne to levels that some previously could not have imagined. But we certainly did, and we delivered. And that's something we expect to continue doing well into the future. As we look to the remainder of this year, I remind our investors that, seasonally, our fourth quarter is our slowest. But that doesn't change our expectations for double-digit adjusted EPS growth over the fourth quarter of last year. And we look forward to sharing those results with you in January. Our view for 2014 and beyond promises to be more of the same year-over-year strong double-digit growth, as we continue to successfully march toward our aggressive 2015 goals. And with that, we have time for questions.

[Operator Instructions] And the first line of question comes from Frank Mitsch of Wells Fargo Securities.

When you're talking about GSAM [ph], I thought you were saying -- or GSEM, I guess, more appropriately, I thought you were saying something about double-digit revenue growth in various geographies. But I thought you were referring to that organically. Was that organic growth that you were talking about, where you've been able to drive sales that much? Or was that inclusive of, obviously, the acquisitions that you've done?

I was specifically referencing Asia when I made that comment on the call.

Organic growth in Asia was up double digits?

Correct.

All right, great. And overall, it looked like pricing and mix was off a little bit. What do you attribute that to?

Well, the primary -- the effective dilution to EBIT margins in the quarter, really, is bringing in Spartech. Organically, margins improved to about 10.7% for the quarter. So organically, things continue to go on the right direction, and we have improvements in mix and price.

But you do have -- okay.

But what we see is the Spartech effect coming in, and overall, bringing margins down.

Okay, great. So organically, pricing and mix was up, but because of the inclusion of these other businesses, it's trending lower. Okay. Super. And then Rich, the pace of share buyback slowed down here in Q3 versus Q2. How should we be thinking about that, looking out?

Frank, we told The Street, and we still stick with the 18 to 24 months, our intention to buy back all the shares issued over that period of time. We also said we would be opportunistic. So we're ahead of schedule for what we've committed, and our full intention is to keep with what we told you in terms of the buyback.

And we're 38% there -- Frank, this is Steve. We're 38% there, and we expect to continue kind of at the pace that would get us done, and we won't have to go into overtime like the Jets did this past week.

The next question comes from Laurence Alexander of Jefferies.

I guess 2 questions. First, could you talk a little bit about what you're seeing sequentially in your markets in Q4? And secondly, as you look out to 2014 and 2015, what are the big swing factors on your free cash flow bridge, if any, besides working capital swings?

Laurence, this is Bob. I guess, what I would say, first of all, is that there's only so much we can say about the fourth quarter at this point. There's really nothing to report that I'd say is unusual about the month of October. So potentially, that's good news. As Steve mentioned in his prepared remarks, we'll continue to believe we'll get double-digit EPS expansion in the fourth quarter, and we certainly believe that's the case. Your second question, I believe, relates to cash flow for 2014 and '15. And I'd say, probably, the biggest thing to think about is that we do have to fund the North American manufacturing alignment. And Rich can provide some additional details on capital expenditure expectations for '14 and '15.

So Laurence, I would tell you as it relates to CapEx. This year, we're actually -- based on what we've forecasted, or what I've talked about on CapEx, we believe now we're going to come in around $70 million. Let's call it $70 million to $75 million, which will actually preserve our normal CapEx spend. That does include some CapEx for the North American realignment. But we typically run 2/3 CapEx to D&A. If you look out to next year, we're not going to be 2/3 CapEx to D&A. We'll probably be close to 1x CapEx to D&A. So let's call that $110 million, $105 million to $110 million is our current view of that. The other big swing, though, and it's bigger than CapEx, would be as it relates to pension funding. So for the last 2 years, we funded somewhere in the range of $60 million, $65 million. We will have a much lower commitment to pension funding. Doesn't mean to not do more discretionary, but literally, that drives up to something from a rhetoric [ph] point of view between 0 and 10. So you will have a big positive there, as it relates to the future free cash flow.

And then I guess, just to clarify on October, I guess, are you seeing the normal pre-Christmas kind of volume bump? Or is it -- or when you say October, it's just the sequential acceleration from September to October is normal, but September was a bit weaker?

Yes, I think, that's -- we have seen this phenomena, I think, for 4 quarters, running now, Laurence, that the last month of each quarter has been soft. And the first month has been pretty strong. So we would put October in that category. But just remind you that Q4, for us -- our core legacy business, as well as in the Spartech business, is always a slower quarter. So there won't be sequential growth in Q4 versus Q3.

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

In terms of Spartech, you've noted that you're going to get the integration synergies sooner. Can you maybe elaborate what areas you're feeling better about? What -- what's going better that you're going to get the EPS accretion sooner than later?

Yes, I think the first thing I'd say is that we're really pleased with the Spartech associates and their willingness to embrace customer-centric selling skills and how they interface with the customer. We've been very pleased, really, to find the level of technology that they have. It's confirmed what we believed going into the deal, and that their value proposition was always stronger than what they had in the marketplace. So I'd say that we're starting to realize value from those communications. Plus, we're a little ahead on the schedule with respect to getting the manufacturing realignment underway and reduction of administrative cost. So at this point, we're still staying with the $65 million number, but it seems to be coming in a little earlier this year.

And then, could you just maybe give us a little bit of color. I recall the way Spartech went to market over the years changed quite a bit, maybe going to market via end market, via type of resin, a lot of different ways. Can you give us a better feel of how you're doing? It sounds like it's a little bit more successful, just a little background there.

Well, as much as we can, we want to have a direct interface with our customers, and that we want to do so around the value-based proposition. I'd tell you, the biggest, single difference I'd cite is the frequent use of our EVE tool to capture the overall value proposition that we deliver. And I don't think there was a very good formulaic way for communicating that in the past. And now that there is -- a great example of that is that in our packaging business, we provide a lot of design services to our customers that we weren't appropriately capturing value for in the past and that, maybe, was underappreciated.

Okay. And one real quick one on Spartech. When you think about the long-term potential, I think, initially, you thought 8% to 10% in terms of getting your operating margins in that range. Do you feel better about that range? Could it go higher? What's the longer-term potential, given things have gone so well?

Yes, Mike, this is Steve. And I would say that we always establish that as a near-term goal, never an end goal. And we believe that any specialty business, if you categorize it as such, can get into the high teens or even the low 20s long term. It doesn't even seem like that at the front end. But when you're talking with people who, 6 years ago, had a Color business that had a negative return on sales, and it's now up into the low to mid teens. So it certainly can be done if you're thoughtful about your approach and successful with your execution. So I would expect it to get well into the teens over the next 5 to 7 years. I think what's really happened here is, our pace has picked up. We haven't changed our $65 million number. And we don't intend to because we see opportunities for investment. So to the extent that we can beat that $65 million, it may well all land back in terms of investment for growth. And so until we really have a better understanding of that, we really just have focused on accelerating the process. It has gone more quickly than we expected. I think a lot of that was due to the preplanning that was done, as well as the people that we put on this integration team, and in addition, the Spartech associates who have really embraced this opportunity for a fresh start and have hopped on board. And things are going really rapidly and successfully there.

The next line of question comes from Kevin Hocevar of Northcoast Research.

I'm wondering if -- so for ColorMatrix, it sounds like you had a nice turn around. Because, I believe, second quarter sales and earnings, I think, relatively [indiscernible] year-over-year. And then here, in the third quarter, you saw a nice revenue and very strong operating income growth. So I was just wondering if you could comment on what kind of changes. Is it easier comps or pick-up in end markets, or what led to that improvement?

From an end market demand standpoint, we did see stronger performance in Europe. As you recall, I think from the second quarter, we've mentioned a little bit of cooler weather that we thought drove some unseasonably low sales for that time period. We don't like to cite weather, but we believe that was a reality. And -- but I think we're also just seeing some really good traction with respect to new product introductions and how we're going to market with our services. And that wasn't just contained to Europe. That was also a really good quarter for North America and in South America.

Okay. And then just in terms of the $2.50 goal for 2015, I'm wondering if you could comment on how much of that is kind of from organic growth and future acquisitions, as opposed to your margin enhancement goal -- hitting your margin enhancements goals and from current acquisitions. So I guess, how much is from organic growth and maybe M&A yet to come?

Well, we don't have the specific bridge that we've publicly stated in terms of how we've got -- get to the $2.50 in 2015. But clearly, the primary drivers are to get inside and/or to the high end of the margin targets that we have for all of our businesses. With the additional information that we've cited today about the $65 million of synergies for Spartech, that certainly helps us and gets to the higher end of those -- that margin range for them. Those are the key drivers and underlying the EPS accretion is, of course, buying back the shares associated with Spartech and to offset future equity dilution. Though, if it -- so, I mean, this really is the same key drivers, Kevin. Steve?

Organic growth, Kevin, is the preponderance of it. And of course, we've been very transparent with our expectations around the Spartech acquisition number. I would argue that even a portion of the Spartech acquisition, a good portion of that, you have to consider, at some point of organic. At some point, you kind of have difficult lines of demarcation between what was acquisition and synergy and what was organic growth because we're improving that business each and every day. But overwhelmingly, organic growth is going to drive the bridge from where we are at the end of this year to the end of 2015, with our $2.50 expectation.

The next line of question comes from Dmitry Silversteyn of Longbow Research.

Just -- I have a couple of questions, if I may. The Engineered Materials margins being down year-over-year, that's primarily the impact of Spartech, correct, or was there some lag on raw material pass-throughs in there?

No, Dmitry, you have it absolutely right. It is fully the impact of Spartech and how that dilutes these margins, because all of our organic margins improved.

Dmitry, this is Rich. I would just add to that. There was about $36 million of Spartech-related revenue in the EM revenue, and a very, very small amount of OI. So that'll help you gauge it, I think.

Okay, Rich, that's very helpful. You did mention that raw materials were a problem in the distribution business -- not a problem, but it's required some pass-throughs and impacted margins. As you look out -- with Europe starting to show signs of, at least, bottoming out, if not climbing its way back up, growth in the U.S. is continuing. Are there raw materials pressures as we look forward towards the end of 2013 and getting into 2014? And how would you -- if there are, how would you sort of feel about them versus the previous inflation cycles that we've had over the last, well, let's say, 3 to 4 years?

Yes, Dmitry, I think that we're looking at sort of flat to modest increases in Q4. It's a little less transparent when you look out to 2014. But I think that the way we view this is, in Europe, especially, I mean, we -- these are Specialty businesses, we don't have the same challenges of getting recovery and margin on increased cost, whatever source they may come from, particularly raws, in the Specialty business because the uniqueness. And it just -- this just, again, kind of shows the difference in the model. With distribution, it's a little more different. You have some cups [ph] pricing out there, and as inflation happens, you're going to have a little bit of margin dilution. And that's very uncharacteristic of the businesses that we have in Specialty. And it's -- frankly, it's one of the reasons that we've driven so hard to improve the Specialty base.

Sure, sure. Okay. And then on the PP&S part of the business, you brought in a new manager. The business seems to be functioning pretty good in the environment that we have it right now. Sort of what's your longer-term strategy for that? Is that still probably more and more likely a source of funding than a target for growth? Or has that thinking changed overall with respect to either the ultimate decision or the time frame of that decision? Can you talk a little bit about the PP&S as a strategic platform for you?

We continue to believe that there is a pretty significant growth opportunity in that platform and that we can actually innovate with -- in the Vinyl space, particularly in places like healthcare. And we have some pretty new and unique solutions to present to that market that we think have long-term potential. We've always talked about our connection to housing. It's not as strong as it once was, but it's still part of that business, and we think there's upside from it going forward. It's a business that at present doesn't require a lot of additional investment to achieve that growth. Mostly, it's around new product introductions. So we still think quite favorably of PP&S.

I look forward to you meeting -- for all of you, all the analysts who cover us, meeting Michael. He's an impressive gentleman. He's been in the space a long time and he's got some, I think some ambitious and creative goals for that business as well. We were really happy to be able to attract him and fill the big shoes that Rob has left behind. So we think that there's a lot of opportunity that goes beyond just the housing recovery in that space. But we will say that the limits on the return on sales are lower than we'll find in our Specialty business.

Right, right. But I mean, if you look at the return on investment capital, and the return metrics of that nature, I'm assuming they still would be very attractive from that business?

Yes, sir.

Yes.

Okay. And then just a final followup. With the strategy in PP&S, it sounds like you're a little bit more sort of engaged with having this business as a longer-term part of the portfolio. You mentioned the globalization opportunity for Spartech once the integration is completed. Is the -- are you looking at that globalization of PP&S as well? Or is that going to stay primarily a North American business?

So I think the only exception to moving outside North America are very specific, well-defined markets in China. Honestly, there are other opportunities, but they're not as attractive as what we find in Specialty, and they're not going to provide as good of a long-term return. So when you have to sort of pick and choose your investments, we think we're being wise to choose to put those more in the Specialty arena. That's not to say that we couldn't succeed, but I don't think to the same degree that we have and we'll continue to with our Specialty investments.

The next line of question is from Mike Ritzenthaler of Piper Jaffray.

With regard to the plant closures and the migration of capacity to other locations, do you have a sense of how many products will have to be tolled? And is there a measurable drag on the operating margins as that tolling increases?

With respect to the -- I'm assuming you're talking about the manufacturing realignment we announced back in July. And the intention there is that we're not tolling that business. We are requalifying it at existing PolyOne facilities or other legacy Spartech facilities. So I don't know the total number of products impacted offhand, but the intention is not to take that outside from a tolling standpoint.

And tolling will actually go down, Mike, and I think that the concern that you sort of -- the implicit concern about margin erosion due to that -- I think that you have to kind of look at our history here. We are margin-expansion oriented. We've done that now for 6 years in a row. We have no intentions of changing that. That's a great opportunity for us. And it has to do with innovation, manufacturing efficiency, appropriate pricing and competing where you have advantage and can win. So those are some of the elements that will drive margin expansion. I think you just have to -- I'm going to use this opportunity, not just with you, Mike, but with everyone, to reiterate, when you bolt on $1 billion worth of revenue to a company that has much lower margins than ours have been, there's a dilutive effect. But we will fix that with time, and all of our core businesses have increased -- all of our core Specialty businesses have increased gross margins and operating margins.

Okay. Yes, that makes sense. And I guess, as a follow-up, is there any sense as to how much more might need to be done on the rationalization side at this point, kind of 6 to 7 months into the acquisition?

We believe that the actions that we have underway right now are the right ones to do from a rightsizing perspective and to improve quality and service. At this point, we don't have any expectations of others. But I think that can happen in the future. So at this point, we think what we've announced is appropriate and will allow us to deliver the $65 million in 2015.

I think that we shouldn't lose sight, Mike, of the fact that we are consolidating for efficiency purposes, and that doesn't just mean cost savings. We are going to be improving and already have started improving quality. We're improving delivery times, safety. So there's a lot of reasons for us to make these changes. And it isn't only on the cost side.

The next line of question comes from Rosemarie Morbelli from Gabelli & Company. Rosemarie J. Morbelli - Gabelli & Company, Inc.: I was wondering, regarding the housing, you are usually towards the end of a new building or a new house. Have you seen already an impact? Is it too early, and then you could have a big bump in 2014?

Well, I'll certainly take the first effort at this, Rosemarie. One is that, I'd like to point out that while housing starts are up 20%, the vinyl industry reports that those sales are up roughly 4% to 5%. And in fact, it's an interesting dynamic this year in that certain segments of the vinyl in terms of window profiles, frames, et cetera, are actually down. So that indicates that new construction is, in fact, consuming less of those materials that we've historically participated in. And that may be as a result of an increase in multi-family home construction versus single-family home construction. And I think that's what's really taking place this year. Despite that, our PP&S segment continues to improve its margins and had an over 8% return on sales. So I think we're participating selectively where we think that we should. But we remain, overall, very optimistic about the housing market for the next few years and perhaps, beyond, and that we'll be able to participate in that uptick.

Yes, a lot of our applications are sort of late cycle in the construction cycle of a home. For example, window profiles would be one example. Wire and cable and electrical boxes go in a little bit earlier, but still after framing. And then of course, you have decorative trim, which is one of our applications as well. But I think, overall, there are changes in the composition of new construction starts, and I think that you'll find that there's more multi-family being done. And when you have multi-family, you don't have as many windows and window profiles, et cetera. So we're focused more on profitability and profitability growth within the business and the things that we can control. Of course, we'd like a housing pickup to continue, but I think we're in good position to grow our business irrespective of what goes on in that end market. Rosemarie J. Morbelli - Gabelli & Company, Inc.: Okay, that is helpful. And looking at another industry, which is electronics, are you seeing any change in the markets?

So we had pretty good performance in both electrical and electronics for the quarter, so those were up -- organically, they were up mid- to high-single digits, depending on which one you segment. And we see some pretty solid performance in that arena. Rosemarie J. Morbelli - Gabelli & Company, Inc.: Is that because of the new products you are introducing? Or is it because the demand in the marketplace is actually growing?

I think it's our participation in the market and selecting areas where we have better chances to compete. I mean, global personal computer shipments declined 8.6% in the quarter. And it's 6 quarters in a row that those shipments have declined, yet our business is growing. And it says something about where we're going, what applications, the Specialty applications that we're pursuing. Same thing with Printing. Printing hardware is in decline, and that's an area in the past we've participated in. But this is not an area that we're focused in right now.

I mean, I would add that the area where we have seen the greatest growth in -- from a segment standpoint, is within Global Specialty Engineered Materials, and that is new product driven.

Yes.

And so these are things like tablets and smartphones and applications there, and moving more into those and away from PCs and printers. And our teams are working to capitalize on these trends, and they diversify our offerings to these applications. And that's, I think, what's driving our growth. Rosemarie J. Morbelli - Gabelli & Company, Inc.: Okay. And if I may ask 2 quick questions. Regarding the K fair in Germany, did you close any orders? How long does it take before you actually see a pickup? And then lastly, the $2.50 for 2015, do you need any help from the -- an economic recovery versus what it is today in order to get there?

First, with respect to the K Show. I'd say we had a great interaction with customers. One of the best things about those shows is just the opportunity to showcase our new product introductions, as well as spend time with those customers with a number of people from our different businesses. So certainly, we identified orders for closure. I couldn't give you order of magnitude on that right now, but we did see a lot of really good signs for new business. And I think the most important part coming out of that show was just the overall level of enthusiasm and encouragement that we have from our customers in Europe. And then lastly, with respect to the $2.50, when we announced that in 2012, we did say that we needed to have mid to high-single-digit-type revenue growth, and that, that comes partially from some level of uptick in the economy. So for example, we assume that housing starts would get back to 85% or so of their median level. So we do need some benefit from an economic standpoint, but no where near as much as just margin expansion will get us.

We have time for one more question.

We've got a couple more. Let's go.

Or 2.

The next line of question comes from Saul Ludwig [ph], Saul Ludwig Consulting [ph].

You sort of touched on Vitality Index, and you've done that many times, and that's moving in the right direction. Either in current business or what happened at the K Show, is there any 1 or 2 products that really jump out in terms of consumer excitement that are beginning to have traction that -- sort of stand out from the ongoing product evolution process, but any particular product that really made a difference?

Saul [ph], there are several. I mean, we have a -- ColorMatrix has introduced product called Excelite, and it's a liquid foaming solution for vinyl building and extrusion applications. That was rolled out at the K Show. And this helps customer reduce density, and that means they can reduce total system cost without compromising any of the mechanical properties or any surface aesthetics. So that's an example of one. Versaflex, which is a Consumer Electronics application. These are thermoplastic elastomers that enable the OEMs to differentiate their devices through design and performance and market-driven aesthetics. And it's very important in a fast-paced environment like this. So this new TPE technology takes on several of the challenges that today's designers have, including feedback, and they can pursue high-end phone and tablet cases, and they have vibration-dampening properties to improve device performance and comforts. So a lot going on, on that front. And then another area that we're excited about, that customers are excited about is our Percept application, and that's an authentication technology. What that's all about is brand protection and avoiding fraud and security issues. And it draws from covert, overt and forensic techniques. This really enables our manufacturers to protect their products from counterfeiting and from billions and billions of dollars of unauthorized distributions that go on. So it's a very customizable set of technologies that helps customers reduce revenue and mitigate their risks and really protect their share. So, I mean, those are some of the top of my head that I think are important ones to discuss.

One more question, Bob.

The next line of question comes from Christopher Butler, Sidoti & Company. Christopher W. Butler - Sidoti & Company, LLC: Bob gave us a lot of good details earlier, but I don't know that I heard the organic operating income growth, just from the Specialty Platform. Could you give us that figure, please?

Yes. From a Color standpoint, that was actually just below 40%. And then for Engineered Materials, it was 13.6%. Christopher W. Butler - Sidoti & Company, LLC: And the healthcare, could you give us an update on your progress on your healthcare end markets and your emphasis there? I heard you mention it in PP&S, but are you still seeing the same growth in the Specialty side? Or is that starting to play out due to the success that you've had over the last couple of years?

Well, healthcare sales were up 13%. Gross profits were higher than that. And Specialty healthcare growth was over 36% for the quarter. So we're really pleased with the investments we've made and the payoffs that we're beginning to realize and have been realizing in our healthcare sales. Christopher W. Butler - Sidoti & Company, LLC: So it sounds like you're still positive on runway to come then on that front?

Well, definitely. I mean, we had a record gross margin level in healthcare in this past quarter. So we're very well positioned and excited about a lot of opportunities in healthcare, Chris.

All right, thanks, Anette. And this concludes our Third Quarter 2013 Conference Call. We thank you, all, for your continued interest in PolyOne and for joining our call today. Thank you.

Thank you for joining us today, ladies and gentlemen. You may now disconnect. Thank you.