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A. Schulman (NASDAQ:SHLM)

Q2 2013 Earnings Call

April 09, 2013 10:00 am ET

Executives

Jennifer K. Beeman - Director of Corporate Communications & Investor Relations

Joseph M. Gingo - Chairman, Chief Executive Officer, President and Member of Executive Committee

Joseph J. Levanduski - Chief Financial Officer and Vice President

Analysts

Rosemarie J. Morbelli - Gabelli & Company, Inc.

Kevin Hocevar - Northcoast Research

Michael J. Sison - KeyBanc Capital Markets Inc., Research Division

Dmitry Silversteyn - Longbow Research LLC

Christopher W. Butler - Sidoti & Company, LLC

Robert Felice - Gabelli & Company, Inc.

Operator

Good day, ladies and gentlemen, and welcome to the A. Schulman Fiscal 2013 Second Quarter Conference Call. My name is Sue, and I'll be your operator for today. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. I would now like to turn the call over to Ms. Jennifer Beeman. Please proceed, ma'am.

Jennifer K. Beeman

Thank you, Sue. Good morning, and welcome to A. Schulman's Second Quarter 2013 Conference Call. I'm Jennifer Beeman, Director of Corporate Communications and Investor Relations for A. Schulman. By now, you all should have received a copy of our press release, which was issued last night.

Joining me today is Joe Gingo, Chairman, President and Chief Executive Officer; and Joe Levanduski, Chief Financial Officer of A. Schulman.

Before we begin, I'd like to remind you that statements made during this conference call, which are not historical facts, may be considered forward-looking statements. Forward-looking statements involve risks and uncertainties that could cause actual events or results to differ materially from those expressed or implied. In addition, this conference call contains time-sensitive information that reflects management's best analysis only as of the date of this live call. A. Schulman does not undertake any obligation to publicly update or revise any forward-looking statements to reflect future events, information or circumstances that arise after the date of this call.

For further information concerning issues that could materially affect the financial performance related to forward-looking statements, please refer to A. Schulman's quarterly earnings releases and periodic filings with the Securities and Exchange Commission.

I'd also like to remind you that for purposes of this phone call, we use non-GAAP measures of net income, excluding certain items or adjusted net income, as well as net income per diluted share, excluding certain items. These financial measures are used by management to monitor and evaluate the ongoing performance of the company and to allocate resources. You can find a reconciliation of these non-GAAP measures to the nearest comparable GAAP results as an attachment to our second quarter earnings release.

We will now begin with comments from Joe Gingo, then Joe Levanduski will review our financial results, and then we'll open up the call for your questions. Now I'd like to turn the call over to Joe.

Joseph M. Gingo

Thank you, Jennifer. And I would also like to thank all of you for joining us this morning. Before I comment on our results, I would like to give you a brief update on our offer to acquire Ferro Corporation.

As you know, on March 4, we made a proposal to the Ferro Board of Directors to acquire all of the outstanding shares of Ferro stock for a per-share consideration of $6.50. The offer price as was presented included an immediate cash payment of $3.25 for each Ferro share outstanding, plus $3.25 worth of A. Schulman common stock.

Our offer was quickly dismissed by the Ferro Board without the opportunity for us to negotiate price or deal structure, despite our expressed willingness to adjust our offer upon customary due diligence.

Since we've announced our offer, we have had many conversations with Ferro shareholders, and the overwhelming majority of those shareholders strongly stated that Ferro's Board should have engaged us in discussions. Many of the shareholders is specifically indicated they would communicate that message to Ferro's Board. We have also spoken with our own shareholders, and we have been encouraged by their strong statements of support for our commitment to grow.

As we recently announced, we've hired Morrison & Company and Squire Sanders to assist us in our pursuit of Ferro. We will continue to meet with Ferro shareholders to gauge their sentiment and are eagerly awaiting the outcome of Ferro's annual meeting on May 15.

Hopefully, if new Board members are elected, they will be willing to proceed to due diligence. We have also undergone a few key organizational changes at A. Schulman. Bernard Rzepka, who many of you have already met, was named the Executive Vice President and Chief Operating Officer. In this new position, Bernard will implement corporate strategy and growth plans within our global operations. Bernard's outstanding track record in leading our European Middle East and Africa region, despite difficult economic conditions, makes him well qualified to head our global operations. I know Bernard is up for this opportunity.

We will report -- he will report directly to me and will be relocating to our global headquarters in Akron, Ohio. Related to Bernard's move, Heinrich Lingnau will replace Bernard as Vice President and Chief -- and General Manager of our EMEA region. Heinrich will keep his current responsibilities as Masterbatch Solutions Business Unit Leader for the short term. Heinrich is an experienced and well-respected leader in our organization, and we know he will continue to achieve operational excellence.

I also wanted to point out that last week, the Board of Directors and I negotiated an agreement that in the event of a transformational acquisition, such as the recently proposed Ferro acquisition, the Board could exercise the option to extend my appointment contract as Chief Executive Officer for up to 2 years.

Now turning to our fiscal 2013 second quarter, we continue to experience a difficult global economic landscape. For the past several quarters, we've told you we will control what we can control, and that if Europe, which is 65% of our overall revenue, stayed close to the prior year's results, growth in our Americas and Asia Pacific segments should help to offset any weakness. This was not the case in the second quarter.

For the previous 9 months, we saw increased stability in our European markets, which enabled greater visibility into our customers' order patterns. This was the situation at the end of the first fiscal quarter, but volatility returned during our fiscal second quarter. We saw European customers de-stocking in December, which was followed by a very strong January, only to move into a very disappointing February, when renewed customer cautions lead to volume and price pressures.

We believe that competition for remaining volume is fierce, but we are successfully defending our leading market positions in key markets, such as niche automotive, food packaging and agricultural films. In order to combat these forces, we have taken decisive action.

Since 2010, we have implemented a series of cost reduction programs in Europe. We've closed 2 plants and rightsized another 2. Over the past 3 years, these actions have provided over $6 million in annual run rate savings, with an additional $2 million projected by the end of this fiscal year.

This was prudently done to compensate for the persistently poor economic environment we were experiencing in Europe. Unfortunately, yet more action is needed in light of this new wave of uncertainty. We have begun another study to evaluate SG&A reductions in the region.

While these actions are never easy, I am confident that we have a solid team that can effectively implement such programs in Europe. At the same time, our European team has been concentrating their growth effort on new geographic markets, such as the Middle East, Turkey and Russia. In fact, we've established a sales office in Russia to expand our reach into this growing market.

We have also begun restructuring efforts in Brazil and we'll consolidate 2 existing facilities into 1 new facility. These actions are aimed at streamlining our cost structure, which will allow us to create a single, efficient facility to better serve our markets in the region.

The consolidation is expected to be completed by the end of fiscal 2014 first quarter, and once fully implemented, will generate savings of approximately $1.4 million on an annualized basis.

On a positive note, I am very pleased to announce that our Indian facility is now up and running as of last week. Our new facility will manufacture our Masterbatch products to better serve the local packaging, appliance and consumer product markets.

Initially, its capacity is projected to be 12 million pounds annually. I will be there at the end of the month to congratulate the team and look forward to the progress that we will continue to make in the region.

In terms of raw materials, it appears that producers are attempting to increase prices. However, the lack of demand is holding prices flat to slightly down in all of our major raw materials globally. The only exception is in our additive raw materials, where prices are increasing and therefore, putting some pressure on our Masterbatch margins.

Although we are not encouraged by the global economic environment and its impact on the plastics compounding industry, as we have successfully demonstrated in the past, we will aggressively manage what we can control while driving growth from new products and value-generating acquisitions, including expansion into adjacent markets.

Our strong balance sheet and liquidity also provide us the ability to explore transformational acquisitions, such as our recent offer to acquire Ferro. We intend to transform A. Schulman beyond plastics into a premier specialty chemical organization.

While we anticipate the second half of the year to improve from our first half, the current weak global demand indicates caution. Therefore, we are prudently revising our guidance for the full year fiscal 2013 adjusted net income, which we now expect to be in the range of $2.08 to $2.13 per diluted share.

With that, I'd like to turn the call over to Joe, who will provide you with more detail.

Joseph J. Levanduski

Thanks, Joe. Net sales for the 6 months period ending February 28, 2013, grows to approximately $1.1 billion from $1 billion a year ago. This improvement resulted from a 3.6% increase in volume, partially offset by an unfavorable impact of foreign currency translation. Incremental net sales from the Elian and ECM acquisitions were $33.7 million for the 6-month period.

Year-to-date, net income was $23.6 million or $0.79 per diluted share, up from $22.7 million or $0.77 per diluted share for the first half of last year. The increase was primarily due to a net favorable impact of certain tax valuation adjustments and the contribution of recent acquisitions, offset by challenging performance in our EMEA and Brazil operations, plus increased SG&A investments, such as our ongoing marketing initiatives and our investment in the global ERP projects. Foreign currency translation had a nominal impact on net income.

Excluding noncash asset impairment charges, restructuring and acquisition-related costs and a favorable impact due to tax-related matters, adjusted net income for the first 6 months was $22.6 million or $0.76 per diluted share, compared with adjusted net income of $26.5 million or $0.90 per diluted share for the same period a year ago.

Adjusted gross profit was relatively flat at $134.1 million in the first half of fiscal 2013, compared with $134.6 million a year earlier. Contributions from our recent acquisitions were offset by increased pension expenses, primarily in our EMEA segment, and the impact of the current global economic climate and competitive pricing pressures on our operating results.

SG&A expenses adjusted for certain items for the first half were $101 million, up from $96 million from -- for the prior year period. The increase was primarily due to an incremental impact of $4 million from recent acquisitions and $900,000 of bad debt expense.

Operating income before certain items was $33.1 million for the 6-month period, compared with $38.7 million a year ago. The decline primarily resulted from the current global economic climate and competitive pricing pressures, which offset the positive contributions from our recent acquisitions.

For the quarter ending February 28, 2013, net sales increased to $522.4 million, compared with $495.9 million a year ago. The 5.3% increase resulted primarily from incremental net sales of $15.4 million from the Elian and the ECM acquisitions, along with the 1.8% gain in volume and a $5.6 million favorable impact of foreign currency translation.

Net income was $11.8 million or $0.47 per diluted share, compared with $9.1 million or $0.31 per diluted share from the prior year second quarter. Foreign currency translation positively impacted net income by $400,000 for the fiscal 2013 second quarter.

Excluding noncash asset impairment charges, restructuring-related and acquisition-related costs and a $7 million favorable impact due to tax-related matters, adjusted net income for the second quarter was $8 million or $0.27 per diluted share, compared with $11.2 million or $0.38 per diluted share for the prior year period.

Gross profit for the quarter was $62.9 million, excluding the effect of certain items, compared with $65.1 million a year ago. The decline in gross profit was a result of competitive pricing pressures and increased pension and manufacturing costs.

SG&A expense adjusted for certain items for the quarter was $50.8 million, compared with $48.8 million a year ago. The increase was primarily attributable to an incremental impact of $1.9 million from recent acquisitions and higher bad debt expense of $400,000, partially offset by a decrease in incentive compensation expense.

Operating income for -- before certain items was $12.1 million for the second quarter, compared with $16.4 million for the prior year period, primarily due to the decrease in gross profit and increase in SG&A expense.

Foreign currency translation positively impacted operating income by $600,000. As Joe mentioned, during the second quarter, we initiated restructuring activity to consolidate 2 manufacturing facilities in Brazil into a single, new manufacturing facility. As a result, the company recorded $300,000 of pretax employee-related restructuring costs and $300,000 of noncash accelerated depreciation in the second quarter of fiscal 2013.

For the remainder of fiscal 2013, we expect to recognize additional employee-related restructuring and accelerated depreciation charges, totaling approximately $1.5 million associated with this consolidation.

The company expects to save $1.4 million on an annualized basis when this plan is fully implemented. The company's total income tax benefit for the 6 months ended February 28, 2013, was $900,000 for an effective tax rate of negative 3.9%, compared with a positive 19.5% effective tax rate for the prior year period. The change was driven primarily by benefits from tax law revisions in Germany and the resolution of uncertain tax positions in various jurisdictions.

These benefits were partially offset by no tax benefits being realized for losses in the U.S. and certain foreign countries, as well as the establishment of a Brazilian valuation allowance against certain deferred tax assets.

The reversal of the tax valuation allowance in the EMEA related to the German tax law change was offset by the Brazilian valuation allowance established in the second quarter, having a net favorable impact on net income of approximately $7 million or roughly $0.24 per diluted share.

Turning now to our second quarter results by business segment. In our EMEA segment, net sales were $342.2 million, an increase of $9.6 million or 2.9% from $332.6 million a year ago. The 2 primary factors for the increase in sales were $6.2 million in incremental net sales from the Elian acquisition, along with $5.8 million positive impact to foreign currency translation.

Volume decreased 1.8%, primarily due to the specialty powders and distribution services product families. However, price per pound increased 4.7%.

EMEA gross profit was $39 million for the quarter, down $1.1 million from a year ago, as the impact of the Elian acquisition was more than offset by the increasingly competitive business environment and incremental pension expense. Foreign currency translation positively impacted gross profit by $700,000.

Operating income for the EMEA segment was $11.5 million, a decrease of $3.8 million from the prior year quarter. This decrease was primarily due to a $2.7 million increase in SG&A expenses, driven by legislative increases for compensation and benefit expenses, increased bad debt expense, incremental expenses from Elian, IT spending and a $400,000 favorable impact from foreign currency translation.

In the Americas, net sales for the quarter were $144.2 million, up $14.6 million or 11.2% from the prior year period. Volumes increased in all product families in the Americas segment, and price per pound increased in the custom performance color and Masterbatch solution product families.

Incremental net sales from the ECM Plastics acquisition were $9.2 million, while foreign currency translation negatively impacted net sales by $400,000. Gross profit for the Americas segment was $18.5 million for the quarter, a decrease of $1.2 million or 5.9% from the prior year period.

The decrease was primarily due to an unfavorable mix in the specialty powders product family, combined with competitive price -- pricing pressures, primarily in Masterbatch solutions and portions of engineered plastics and specialty powders.

Segment operating income for the Americas was $5.8 million for the quarter, up from $5.3 million a year ago. This increase was primarily due to a $1.7 million decrease in SG&A expenses resulting from our restructuring initiatives and cost control efforts.

In the Asia Pacific segment, net sales was $36 million in the quarter, compared with $33.7 million a year ago. The increase was primarily due to increase price per pound for Masterbatch solutions and specialty powders, which more than offset the lower volume and more competitive business environment.

Asia Pacific gross profit was $5.4 million for the quarter, which was relatively unchanged from the prior year quarter. Gross profit was negatively impacted for the quarter, primarily due to the delayed startup of our India plant. Operating income for Asia Pacific was $2.2 million for the quarter, compared with $2.5 million a year ago.

The decrease was principally due to a $300,000 increase in SG&A expenses mainly related to the establishment of our regional office in Hong Kong.

Taking a look at our balance sheet and cash flow. As Joe mentioned, we continue to have the financial strength and liquidity to pursue value-generating acquisitions, as well as transformational opportunities, such as Ferro. We will continue to financially support organic growth strategies and our continuous dividend payment policy.

Cash and cash equivalents decreased to $79.7 million from $124 million at the end of fiscal 2012. The decrease was driven primarily by the ECM acquisition, capital expenditures and dividend payments. Combine these 3 uses of cash and cash equivalents, totaled $61 million. They were partially offset by a $14 million increase in net borrowings at our revolving credit facilities.

Total working capital days were 68 at February 28, 2013, compared with 71 days at February 29, 2012. Our net availability under our credit lines is $218.5 million.

That concludes my prepared remarks. Now I'd like to open the call up for questions.

Jennifer K. Beeman

Thanks, Joe. Sue, can you open up the line, and we'll take our questions now?

Question-and-Answer Session

Operator

[Operator Instructions] The first question comes from the line of Rosemarie Morbelli of Gabelli & Company.

Rosemarie J. Morbelli - Gabelli & Company, Inc.

[indiscernible] the last quarter, it sounded as though things were getting better in February.

Joseph J. Levanduski

Excuse me, Rosemarie, you were kind of breaking up at the beginning of your question. Could you please restart?

Rosemarie J. Morbelli - Gabelli & Company, Inc.

Sure. Okay. When you reported the second quarter -- the first quarter, rather, it sounded as though business had improved in February, which was the last month of your quarter. So could you give us a better feel for what actually happened during that month because that seems to be where the issue was?

Joseph M. Gingo

Rosemarie, it's best -- you're exactly correct. Here's what we experienced. December was a typical December. I don't view it as much different than any December. It's a year-end. It's the holiday season for the Western world. Very, very difficult. January was very, very strong for us. And we had a strong order pattern, and I'm talking particularly in Europe. We had a strong order pattern going into February. So when we were talking about our numbers, we were looking at a very strong January and the outlook for a very strong February. And those orders, Rosemarie, just went away. Basically, what occurred was they were either decreased dramatically or actually, withdrawn or postponed. And that did not occur until, I'd say, about the 2nd week of February. We did not start to see that happen. And I would be frank with you, it was a surprise.

Rosemarie J. Morbelli - Gabelli & Company, Inc.

Okay. And could you give us a feel for what you are seeing now in March? Is it still deteriorating? Is the volatility diminishing somewhat?

Joseph M. Gingo

I would say it's soft. I don't know that it's deteriorating any further, but it's surely not increasing. And Rosemarie, I would attribute -- I would relate this as follows: About a year ago, we were experiencing -- around the time at the Greek crisis and the Spanish crisis, we were seeing a lot of uncertainty in the European market, and a lot of customers were very cautious about everything. I would say for almost 9 months, that went away. Despite what you read in the papers and everything that you were seeing, I think there was a lot of confidence and nothing happening with the euro, and we saw very steady market conditions. What occurred now, and it might be due, and I'm speculating here, it could well be due to the Italian elections. It could be due to Cyprus, it could be due to a number of things, but we've seen the uncertainty creep back in, and people are now again uncomfortable with what's happening. Personally, I believe that will settle out, but it's going to take a while.

Rosemarie J. Morbelli - Gabelli & Company, Inc.

And if I may continue on this, can you give us a better feel as to which areas, markets, end markets have been deteriorating in Europe?

Joseph M. Gingo

Well, I think, Joe referred to it specifically. The biggest deterioration we saw was in our distribution and our specialty powders business. Actually, our other 2 businesses, although slightly less volume, we saw good margins because obviously of the lower raw material prices, Rosemarie.

Rosemarie J. Morbelli - Gabelli & Company, Inc.

So distribution. It is mostly that expectation follow-up prices have put a damper on the orders?

Joseph M. Gingo

Yes. I think that and demand, Rosemarie, both. I think it's purely both things, and I think this is why the raw material suppliers are not getting their price increases in. Because despite announcing them, there's no demand to support them.

Operator

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

Kevin Hocevar - Northcoast Research

Could you give us a sense for what are your expectations for the operating profit per pound this year? It's been down the first 2 quarters of the year. Do you think that, that can flatten out or increase in the back half of the year, given kind of your outlook for the year? Or should we still expect this to kind of be down as we go throughout the year?

Joseph J. Levanduski

Well, I think when you look at our pattern, the second half is normally stronger than our first half, and you see that in our guidance when you do the math. I think our operating profit per pound should level off, if not improved slightly as we go through the balance of the year as a result of that.

Kevin Hocevar - Northcoast Research

Okay. And in terms of -- did -- was there any impact in -- I know in North America, polypropylene prices came up pretty sharply to start off the year, and has since been coming back down. So did that factor in at all in terms of the gross profit per pound in the Americas? And if so, now that it's been coming down here, would you expect that to kind of reverse in this in the third quarter?

Joseph M. Gingo

I think -- actually, Kevin, I think you're right. That's what we -- one, yes, it did have an impact on the gross profit per pound. And two, with it coming down, we'd expect to have some improvement. Of course, with it coming down as well, Kevin, our customers are going to expect that we're going to pass that onto them. Our goal always is to be a little slow in that.

Kevin Hocevar - Northcoast Research

And in terms of the different platforms, it sounds like most of the weakness was in the specialty powders, maybe in Masterbatch solutions. But in terms of the color business, it didn't sound like there was much weakness in that, Is that correct? Was that actually pretty strong during the quarter, I guess, kind of excluding the contributions from the acquisition?

Joseph M. Gingo

No, color was strong. Globally, the acquisition then, and our other standing entities, were strong. Color was very strong. And actually, Masterbatch margins held up well for us too, as did EP. The biggest problems that we saw were specialty powders and distribution.

Operator

Your next question comes from the line of Mike Sison, Private Investor.

Michael J. Sison - KeyBanc Capital Markets Inc., Research Division

And Joe, could you give us a little bit of background regarding the sort of the new growth strategy and sort of transforming Schulman into a specialty chemical company, where I think in the past, it was sort of you saw a really good opportunity for plastics in North America for the next couple of years in terms of acquisitions. What sort of led sort of the fundamental change in where you think Schulman should go over the next couple of years?

Joseph M. Gingo

Okay. Actually, a great question, Mike. First of all, I still believe there's -- there is very good growth for us in the U.S. and -- but that mostly comes from the weak position we held. So there is room for us to expand in the U.S. Obviously, there's growth potential in Asia and Latin America as well. But I feel that the maturity of the plastics market in the world today, with the exception of Asia, makes us look to other areas of specialty chemical. Again, I personally do not want to see us get into an area where I'm competing with our customers, and I'm going to try to avoid that. But also, Mike, I've actually have gone out into some of the larger people in my plastic space, and at this point in time, they're not for sale. So I'm looking at other opportunities and looking at where there would be synergies in terms of markets. For example, in Ferro's case, I think we've pointed out that in 2/3 of Ferro's markets, we overlapped. So I'm not going to just go out and look for things to look for things, but if they provide us a benefit, like consolidation of the plastics part of Ferro, the opportunity for market -- a cross-market selling, that's where we're going to focus. Joe, would you like to add something to that?

Joseph J. Levanduski

I'd just add, one of the things that we are going to focus our attention on, Mike, as we're doing with Ferro is looking for opportunities that complement our core competencies. We're an attribute provider, and so is Ferro, and so are other specialty chemical companies that are out there. So I think as we look at how we're going to drive value to our shareholders, that's what we're going to be sticking very closely to, is to look at how we could expand the value proposition.

Joseph J. Levanduski

But Mike, I would say this. I am still looking for and actively pursuing bolt-on applications in the plastics industry around the world.

Michael J. Sison - KeyBanc Capital Markets Inc., Research Division

Got it. And then, when you think about what to look for, you've seen other companies sort of take one route, Ashland taking out a very high margin business, Eastman taking out [indiscernible] and then, the turnaround situation. And Ferro seems to me to be more of a turnaround situation than the other route. So when you think about what you want to buy in specialty chemicals, are you more comfortable buying a turnaround and fixing it? Or if there's an opportunity to buy a -- what's already a really good business might cost you more, is that something you would entertain as well?

Joseph M. Gingo

Well, of course, you'd entertain it. I think -- but you have to look prudently at what you're going to spend for something. If you -- I think there's this advantage inherently in a turnaround in the sense that you can bring value to both shareholder groups at the end of the day, not just your shareholder group, but the company you're acquiring because there's obvious reasons why there's value there. So I think that's probably the easier one but if an appropriate one came up that was a high-margin business and we could get it for a realistic price, I would not turn away. Let me say this. As I pursued opportunities like that, and I have, they're asking for multiples that are very extreme. And I don't see how I can justify to my own shareholders to make those kind of purchases and tell them, "Well, I can return it in 5 or 6 years". We still have hurdle rates that we want to look at and we want to get a benefit at both sides of the argument, both sides of the agreement -- the -- both companies as soon as we can. But Mike, you're always open to opportunities, and I surely would look at them. But I'd have to say to you, I think that when there is an opportunity for a turnaround, there is probably more value for both shareholders.

Michael J. Sison - KeyBanc Capital Markets Inc., Research Division

Okay. Last question on sort of this topic. In terms of Ferro, they came out, raised their outlook yesterday and their 2015 outlook. I know you'd haven't had a lot of time to take a look at it but when you take a look at what you have given us in terms of what you felt the additional synergies would be and look to what they have, do you have any thoughts on the changes there? And I understand it's -- it would be easier if you got to look at the inside, but...

Joseph M. Gingo

Well, I mean, that's for sure. But let's talk pretty straight. Obviously, a big part of my synergies comes from consolidation of the plastics operations of both companies. I don't think that's in their number. Obviously, a consolidation of corporate headquarters is in our number, and I don't think that's in their number. The other part is primarily in the fact that of at -- what we could do from a purchasing standpoint, and I'll give you some examples. Because purchasing is a function of volume and how much you buy. We buy a lot of the same pigments that Ferro buys, they use them in ceramics and we use them in plastics. We know they buy a significant amount of TiO2. There are other raw materials that we know they buy. We also know we've seen a huge advantage from indirect savings like logistics cost, things of those sorts and then -- those are just size-related. So when I look at our 35 million, and obviously, as you've said, I can only do that from the outside, I think, if Ferro saves 50, we add 35 to it. If Ferro saves 70, we add 35 to it. If Ferro saves 100, we add 35 to it. We might be able to do better than 35 if I could get in there and look. And I would have more confidence, obviously, in their 50 or 70 or whatever if I had the opportunity to go in and look. But I'm giving them credit for what they're saying but I don't think it affects my 35 whatsoever.

Michael J. Sison - KeyBanc Capital Markets Inc., Research Division

Got it. And then just one question on your outlook for the second half of the year. Clearly, your second half has to be stronger than the first half, that's not unusual for you. But in terms of volumes, what are you looking for? What do you need to get in terms of volumes, generally speaking, in Europe to sort of hit that range?

Joseph M. Gingo

Well, I -- let me talk in general, and Joe might give you a little more thought on specifics of it. But right now, what I'm looking for in Europe is consistency and returning to what I've seen the prior 9 months where the order pattern was stable. You'd note that we have cost reduction programs in place and we're looking at further ones. By the way, forget the European economy. You'd have to be doing that from a demographic standpoint no matter what. The European population is aging. There is -- got a replace birth rate that is lower than the existing one. So you'd be doing these cost savings no matter what. We're accelerating them. I'm more looking for stability that I can predict what's coming next month because then I could schedule my plants. I can watch my manufacturing costs better. I could control my SG&A a little bit better because what can sometimes happen, we had a little bit of a buildup in inventory at -- in the end of the second quarter. That was because everything looked very strong for February. So we built up in anticipation of that, based on solid -- on orders and it didn't materialize. Some I'm looking more for stability than any specific number but maybe, Joe, you might want to elaborate on that?

Joseph J. Levanduski

Yes, stability would be good. I think, obviously, when we're looking at the second half of '13 compared to the second half of '12, to get away from the first half, second half comparison, we're not looking at overall heroics to try to drive the forecast that we have in our model. Third quarter is normally our strongest and it was the strongest last year and we expect it to be the strongest this year. Fourth quarter, we expect to see modest improvements over volume over the prior year quarter in Europe and abroad. So I think we're not looking for heroics, Mike. It's, I think, modest increases in volume and driven by more focused cost control efforts and our ability to drive synergies.

Operator

Your next question comes from the line of Dmitry Silversteyn of Longbow Research.

Dmitry Silversteyn - Longbow Research LLC

Just a couple of questions, follow-up, very good questions that were preceded me. When you -- you mentioned that there is a little increased competition, I think, you said in powders and some other areas of Europe. Was that limited to Europe? Or did you see sort of competition in other regions and other markets starting to affect pricing? And sort of how do see these trends going forward? I mean, is this the beginning of something that can get worse or is this a sort of temporary as people scramble for volume and that may not be a change in the sort of the permanent change in market dynamics?

Joseph M. Gingo

Dmitry, I think it's more of the latter than the former. I think what we're really seeing now -- we're seeing competitive pressure around the world. What we're seeing now but is a more widespread pricing pressure in terms of most of the players being involved. I've said it in the past, for example, let's look at Europe. In the past, we saw significant pricing pressure in the southern part of Europe. We didn't see that much in the North. That pricing pressure has spread north. And I think it's pure and simple, a lack of demand. People have the capacity, they're attempting to fill it. One of the things that we've always tried to do is downsize our capacity so that it matches demand. And I know a lot of people don't like that because they say, "Well, growth could come back tomorrow and you're not ready". Well, first thing I preferred that route than having the extra capacity because you tend to fill that extra capacity no matter what. But I think that right now, it's an issue of too much capacity in the market for the demand. I think it's global but I think it depends. In other words, I think it's more severe in Europe, less severe in the Americas and the least severe in Asia, particularly for us, because in the Asian market, we're almost 100% niche. And we have very little things even in broad markets. That's why you see our best margins, our best price per pound in the Asian markets. So there, when the contraction went from about 14% growth to 7% growth, we did not really experience contraction in the Asian market. In fact, we put a second line of EP in. We're putting a line in India. Our line in Malaysia, second line in Malaysia, is getting filled. But I think if you were a commodity player in Asia, you might be seeing it more than I am.

Dmitry Silversteyn - Longbow Research LLC

How much of your Asian businesses is Australia? Can you talk to that?

Joseph J. Levanduski

Very little is in Australia at this point in time. It's primarily focused in -- China, Indonesia, Malaysia is our strong pockets.

Joseph M. Gingo

Most of our Australian business, Dmitry, was in the roto-compounding area. And you might be aware -- remember they had the drought and they did the government incentives. And so we've downsized Australia. We have one small plant in Australia. So it is really not significant to us today in terms of our total Asian market.

Dmitry Silversteyn - Longbow Research LLC

Okay. And -- but that brings up the second question that I had, Joe, and that is, Europe, it is what it is. In the U.S., in Americas, it sounded like you're -- you've done a really good job in getting nichier after getting smaller and now driving profit. But it doesn't look like there is much organic growth left, certainly not outsized organic growth that can be talked about in the sort of in the mid-to high single-digit range. So it sounds like, from your comments even on today's call, that Asia still remains where your greatest opportunity is, and yet, it remains a very small business in the overall company revenue, and it really hasn't grown actually, from what I'm looking like, it looks like it shrunk over the couple of years as a percentage of total sales. So I know you're looking at transformational acquisitions in different markets. But are there opportunities to get significantly bigger in Asia either organically or through acquisitions? And is that sort of your last growth leg left for the business?

Joseph M. Gingo

Well, I still think we have some opportunities in the U.S.A. I still strongly believe that, Dmitry, but only because of where we started from, okay? It's not because that I think the U.S.A. is going to grow dramatically. I think that where we started from, we're going to be able to gain some position in the U.S.A. But you're right. I mean, I think Asia is the big growth opportunity. I mean, look 3/5 of the world's populations sits out there. And we're looking for acquisitions in Asia. We are strongly pursuing them. They're a little more difficult to come by, only, Dmitry, because the companies you tend to run across really would take -- you almost feel like when you -- after you go visit a plant, you might as well build a greenfield, if you know what I mean. I mean -- so, but no, we're actively pursuing that strategy. In fact, part of the reorganization that we just did is directed toward that. I am going to -- I was fundamentally running operations and running the strategy and looking after acquisitions. With Bernard coming aboard, Bernard is going to focus on our operations, and I'm going to focus much more in the strategic direction and M&A and take a more intense look at opportunities globally. But Asia is really very, very high on my list. I did secure the services of a consultant. It was Rob Henske who is now with Roland Berger and we have just completed a thorough analysis of opportunities in Asia. And we just, by the way, ended that discussion last week with our Board. And I will be actively pursuing those opportunities, Dmitry.

Dmitry Silversteyn - Longbow Research LLC

Okay, all right. Good to hear, Joe. And then final question just to sort of close the loop on Ferro. Maybe a soft question but difficult to answer but how long are you prepared to wait for the -- for Ferro's Board to come around or I mean, sort of what's the next step forward for you guys outside of kind of waiting for the shareholders to put some pressure on the Board?

Joseph M. Gingo

Well, actually, I think the real -- the key event in mind in the timeline, unless Ferro picks up -- Ferro's Board picks up the phone and calls me, is the May 15 annual meeting. As you're well aware, there's a proxy battle. The people that hold the proxy slate have stated that they felt their -- our offer was on the low side. But they felt that we should have had discussions, that Ferro's Board should have discussions. I think, and I said it in my speech, if that slate does well, I'm very hopeful that that slate is going to convince the other members of the Board that they should at least talk to us and entertain a real analysis and an offer. As you can -- as I said again in my speech, it -- we didn't really get a chance to talk about how would we profile the offer, shares and cash. We did not get a real chance to say after due diligence, that the offer might be increased. So my hope is just to get in the door. My next critical event, barring a phone call, is the May 15 annual meeting.

Operator

Your next question comes from Christopher Butler, Private Investor.

Christopher W. Butler - Sidoti & Company, LLC

If we're looking at your adjustments to your guidance. You took out $0.04 to $0.06 rather -- if you're looking at the top or bottom end of the range. How should we think of that as over the course of this entire year? Did you miss your second quarter expectations by $0.04 to $0.06 and you're holding the rest of the year constant with where you expected it previous? Or should we be thinking in other terms?

Joseph J. Levanduski

Yes, no, I think you stated it quite well. The adjustment was due to the second quarter results. We still feel confident in our fourth -- second half forecast. If there's any sense of caution, it's the things that we can't control, which right now is the currency. You've seen the exchange rate in euro drop from the $1.35 rate to $1.28, it's now at $1.30, $1.31. So I think that's probably a concern, as you look at our forecast. But assuming stability in the exchange rate, I think we're comfortable with our second half forecast, Chris.

Joseph M. Gingo

But I think, Chris, you really hit it right on the head. I mean, and actually, it really boiled down to February. As I said to you, after January, we were extremely comfortable with the second quarter. You might call us naïve, but we were. And February was a significant disappointment to us.

Christopher W. Butler - Sidoti & Company, LLC

And with the currencies, should we be looking at the current exchange rate as kind of the middle ground of your guidance? And can you remind us again exactly what a penny for -- means for your net income?

Joseph J. Levanduski

The exchange rate that we have in there is about $1.30. That's what we're kind of using as our average right now. For every penny that we're talking about, we're probably talking about $250,000 to $300,000 on the bottom line.

Joseph M. Gingo

Annually.

Joseph J. Levanduski

On an annualized basis.

Robert Felice - Gabelli & Company, Inc.

And how much savings do you think you're going to be able to get from Brazil in the back half of this year? Or is that something that's going to be more 2014?

Joseph J. Levanduski

That's more of 2014. It should be consolidated in the first quarter. And obviously, once the consolidation kicks in, that's when the efficiencies and the synergies will be recognized.

Joseph M. Gingo

I would anticipate that the $2 million we're anticipating for Europe will come about in the second half of the year. We're looking at another plan in Europe over and above that. We're actually calling it Plan C. I don't think that would come back -- come into play until the first quarter of next year. Probably be implemented over the second half, but carried out and benefits come to us in the second quarter. And we have not announced any type of savings from that plan at this point.

Christopher W. Butler - Sidoti & Company, LLC

And just finally, could you talk to the specialty powders business? It seems that when you've talked about each of your regions and some of the difficulties, specialty powders has come up, whether it's product mix or volume. Is this particularly challenging? Is it something that needs review at some point? Or where exactly is this business?

Joseph M. Gingo

Actually, you're correct that -- in your analysis of specialty powders. Specialty Powders business is really divided into 2 segments. There's roto-compounding, which is the largest volume business and truthfully then the specialty powders, which are oftentimes not even plastics. They can be waxes, they can be silica. So those materials tend to be very profitable in that second category, but low volume. It's not large volumes. And when you have a spike in volume in one of those areas, you can get into a mix issue because the volume percent -- even though the volumes are small, the margins are very, very good. So that fluctuates. The roto-compounding business is very much tied to the economy. It is directly tied to the economy, and that's what we're seeing around the world, unless there are initiatives. Example, Brazil. Actually, our roto-compounding business in Brazil is doing very well because the Brazilian government has announced the Water for Everyone program. You can recall in the ICO days when Australia was doing very well. There was an incentive for water tanks. So the roto-compounding business tends to be very much similar to a distribution business with the exception that you add color and you grind. So it's very tied to the economy, because the -- actually, what I'd call the specialty powders business is the more refined part of that, that's an area that we are attempting to grow. And one of the things we've done, for instance, we put a new line into our facility in Montreal, France, which is dedicated to metal coatings. So that is the type of thing that we want to expand in. And we want to enrich the entire mix of our specialty powders business much more into the specialty area. And I'm not saying go away from the roto-compounding, but let's say, not expanding.

Operator

Your next question comes from the line of Rosemarie Morbelli of Gabelli & Company.

Rosemarie J. Morbelli - Gabelli & Company, Inc.

I was wondering, Joe, you made the acquisition in Brazil close to 2 years ago now, if my memory serves me right. Why the sudden decision to combine the 2 plants when the Brazilian economy is actually doing fine?

Joseph M. Gingo

No, first of all, Rosemarie, the Brazilian economy has been suffering. In fact -- and I can say this from a lot of industry standpoints, I have associations with other industries. Brazil -- that Brazil is struggling right now...

Rosemarie J. Morbelli - Gabelli & Company, Inc.

I guess, I'm thinking of the World Cup and the Olympics.

Joseph M. Gingo

Yes. And Rosemarie, I hope they do something for us, okay? We haven't seen it yet. No, it's really quite simple. The facility we bought in Brazil was located, adjacent -- the owner -- they were in the garments business. And for some reason, they were in the plastics business. And it was an adjacent building. We had a 2-year lease on the building. The lease is expiring. We had always intended to consolidate to one facility. The location was in downtown São Paulo, which is really not adjacent to the markets we're in. We -- São Paulo, the state of São Paulo is our biggest market but the markets are primarily outside the city of São Paulo. So this was really something that we had anticipated having to do. We had our roto-compounding facility in the Americana region of São Paulo state. And we will probably be relocating somewhere in the vicinity of Companhias Americana [indiscernible] where we will locate not only our roto-compounding, but we will locate our EP and our Masterbatch business. But Rosemarie, I think from the start, we realized that after that lease was up, we would be moving.

Operator

[Operator Instructions] Your next question comes from the line of Matthew Dobson [ph] of J West LLC.

Unknown Analyst

Can you talk a little about your order weakness? Was it mainly in Europe or was it broad-based?

Joseph M. Gingo

I think, for the second quarter, definitely, I think was Europe. I mean, we saw some fluctuations in other places. But I'd have to say predominantly it was Europe and predominantly, it was the month of February. So it was -- we saw some weaknesses in February globally, but not significant other than Europe.

Unknown Analyst

And has that trend continued into March?

Joseph M. Gingo

I think, again, March is generally a better month than February. But I would have to say the softness, the softness trend has continued. And I think that's a global trend. I don't see any -- I'm not seeing robust growth really anywhere. I think there is softness in most of the markets that we're looking at right now. A lot of uncertainty is still out there.

Operator

I would now like to turn the call back to Jennifer Beeman for closing remarks.

Jennifer K. Beeman

Sure. Thank you, Sue, and thank you all for your questions. And that actually concludes our call for today. Thanks so much and look forward to updating you next quarter.

Operator

Thank you for joining today's conference. That concludes the presentation. You may now disconnect. Have a very good day.

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