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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

Bernard Rzepka - Chief Operating Officer and Executive Vice President

Analysts

Rosemarie J. Morbelli - Gabelli & Company, Inc.

Peter J. Cozzone - KeyBanc Capital Markets Inc., Research Division

Dmitry Silversteyn - Longbow Research LLC

Christopher W. Butler - Sidoti & Company, LLC

A. Schulman (SHLM) Q3 2013 Earnings Call July 2, 2013 10:00 AM ET

Operator

Good day, ladies and gentlemen, and welcome to the A. Schulman Fiscal 2013 Third Quarter Conference Call. My name is Matthew, and I will be your operator for today. [Operator Instructions] As a reminder, this call is being recorded for replay purposes.

And now, I'd like to turn the call over to Jennifer Beeman. Please go ahead, ma'am.

Jennifer K. Beeman

Thank you, Matthew. Good morning, and welcome to A. Schulman's Third 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 Levadunski, Chief Financial Officer of A. Schulman. Also on today's call is Bernard Rzepka, our Chief Operating Officer. As you may know, Bernard recently served as Vice President and General Manager of our largest segment, EMEA. Bernard spent 5 years at ICI Advanced Materials before joining A. Schulman in 1992. He has a variety of technical and commercial management positions with A. Schulman and had been leading our EMEA segment since 2008. As COO, Bernard now has the responsibility of implementing our corporate strategy and growth plans within our global operations. We are very pleased to welcome him to this call today.

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 our 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 financial 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 third quarter earnings release.

We'll now begin with our prepared remarks, and then we'll open up your call for questions. Now I'd like to turn the call over to Joe Gingo. Joe?

Joseph M. Gingo

Thank you, Jennifer, and thank you, all, for joining us this morning. To begin, I would like to provide an update on our offer to acquire Ferro Corporation.

First, let me state that our offer of $6.50 per share was rejected by Ferro's board outright and had expired some time ago. On May 30, Ferro formed the strategic committee, and we have given Ferro's board ample time to come back to us to initiate a discussion. At this time, this has not happened. So we have decided to look elsewhere for acquisition opportunities.

Given our strong balance sheet, solid cash flow generation and our leverage of less than 1, we have the wherewithal to execute our bolt-on acquisition strategy in our specialty plastics business, as well as exploring opportunities for transformational acquisitions that will transition us into a premier specialty chemical company. I am also encouraged that today, our M&A pipeline remains active and full.

As part of our growth strategy, we have previously announced that we have reached an agreement in principle to acquire Network Polymers, a leading U.S. provider of thermoplastic resins and alloys. We expect to finalize this transaction within the first quarter of fiscal 2014. Network Polymers will strengthen our U.S. business position in niche engineered plastics and provide greater penetration in key markets such as Building and Construction, Agriculture, and Lawn and Garden, is an excellent strategic and cultural fit.

Network Polymers offers a broad spectrum of custom resins and alloys to meet customer-specific product designs and manufacturing requirements. It is the exclusive producer of the Centrex ASA family of products, as well as the Diamond Polymer brand of thermoplastic products. Network Polymers also brings strong technical expertise and a seasoned sales force that will help to leverage existing A. Schulman products and expertise to a wider customer base. This acquisition will be another step in our continued efforts to transform our U.S. business from what used to be a commodity engineered plastics producer to a supplier of custom performance colors, Masterbatch solutions, niche engineered plastics and specialty polymers. We are happy to have their talented team on board and look forward to their contributions.

In the meantime, we are working tirelessly to implement our global growth playbook, leveraging new and existing products into new geographic markets, exploring opportunity in adjacent markets and improving the profitability of our product mix. Bernard will have more to say about this later.

Now turning to our disappointing third quarter. We saw yet another quarter of inconsistent order patterns and lack of month-to-month visibility in our European markets. As you know, over the past few years, we have worked hard to transform the Americas and Asia Pacific segments. Consequently, their improved performance should offset the European climate in past quarters. Unfortunately, this did not happen during our fiscal 2013 third quarter, and I'd like to provide you with some insight into why.

As we previously announced, because of the current Brazilian economic conditions, we are in the midst of restructuring in Brazil. And during the quarter, we began streamlining our costs by consolidating 2 existing facilities into 1 new facility. The cost and disruption this consolidation had in the region and to our customers was greater than anticipated. In essence, orders to serve our Brazilian customers, we had to provide products out of our Mexican facility, which increased our operating results in the region and resulted in longer lead times for our customers and some lost sales for us. Barring any unforeseen startup complications, we believe this is a short-term issue given that the new plant in Brazil is expected to be operational in the first quarter of fiscal 2014.

Third, in Mexico, our operating costs also increased as we anticipated stronger local market demand that did not fully materialize. These costs are being addressed as we speak. Given our actions, we will have realized better alignment of our cost structure in Latin America during our next fiscal year. Globally, our Specialty Powders business has been under continued pricing pressure. As you know, we've previously announced our intention to sell our rotational compounding businesses in Brisbane, Australia. In June, we began downsizing the capacity of our Grand Junction, Tennessee facility to better align capacity with demand. Bernard will provide more detail on these restructuring activities in a moment.

Given these factors, we felt it prudent to adjust our earnings guidance to between $1.70 and $1.80 per diluted share for our fiscal year ending August 31, 2013.

For now, I'd like to turn the call over to Joe, who will provide you with more detail on our financials.

Joseph J. Levanduski

Thanks, Joe. Good morning. And first, let's look briefly at our 9-month results, but I will focus my comments on the third quarter.

As a reminder, our Brisbane, Australia business is being treated as a discontinued operation and therefore, all financial results and metrics in my comments today will be for continuing operations.

Net sales increased $32.5 million to $1.6 billion. This increase was a result of incremental net sales of $43.5 million from the Elian and ECM Plastics acquisitions, offset by foreign currency translation, which had a negative impact of $13.5 million on net sales.

Operating income before certain items was $55.4 million, a decrease of $11.5 million from a year ago, primarily due to lower volume and anticipated increased SG&A expense, partially offset by the impact of the ECM acquisition.

Year-to-date, net income was $33.9 million compared with $40.2 million from the same period last year. Adjusted net income was $37.6 million or $1.28 per diluted share compared with $47.4 million or $1.60 per diluted share a year ago.

Now going on to the quarter's results. Net sales were down $14.5 million to $548.6 million compared with $563.1 million a year ago. However, ECM Plastics positively contributed $9.8 million in incremental net sales in the quarter. The decline in net sales was due to a decrease in price per pound and unfavorable mix. Additionally, we experienced a negative impact of $1.9 million in foreign currency translation.

SG&A expense was $51 million for the fiscal 2013 third quarter compared with $48 million a year ago, excluding certain items. This increase was primarily due to $1 million from the incremental net expense of recent acquisitions; $600,000 in bad debt expense, primarily in EMEA and Latin America; and an increase of $500,000 in pension expense.

In addition, the company invested in infrastructure related to the newly established regional headquarters in Hong Kong and the new manufacturing facility in India. Foreign currency translation negatively impacted SG&A expense by $1.2 million.

Operating income before certain items was $22.1 million for the third quarter, a decrease of $6 million from a year ago, primarily due to a decrease in gross profit and the increase in SG&A expense. Net income for the third quarter was $10 million or $0.34 per diluted share compared with $17.3 million or $0.50 -- $0.57 per diluted share for the prior year's quarter. Adjusted net income for the quarter was $14.8 million or $0.50 per diluted share compared with $20.7 million or $0.70 per diluted share a year ago.

Turning now to our third quarter results by business segment. Net sales in EMEA were $362.8 million for the quarter, a 5.5% decrease from $383.9 million for the prior year quarter. Volume declined due to the economic environment. Price per pound decreased across nearly all product families due to EMEA's competitive landscape. This pressure was most apparent in our distribution and specialty powders product families. Gross profit was down $1.9 million from a year ago.

Operating income for the EMEA segment was $20.2 million, a decrease of $3.2 million from the prior year quarter. The decrease in operating income was primarily due to a decline of $1.9 million in gross profit and an increase of $1.3 million in SG&A expenses.

In the Americas, net sales for the quarter increased $5.5 million. ECM's net sales accounted for $9.8 million of the incremental revenue, offset by reduced volume in the Engineered Plastics and masterbatch solutions product families.

Foreign currency translation favorably impacted net sales by $600,000. Gross profit declined 6.9% due to an unfavorable mix in the specialty powders product family, combined with increased costs in Latin America. This was partially offset by the positive contribution of ECM Plastics.

Operating income for the Americas was $5.3 million for the quarter compared with $7.9 million a year ago. SG&A expenses increased $1.1 million, primarily due to increased bad debt expense and incremental expenses from ECM Plastics.

In our APAC segment, net sales were $33.2 million for the quarter compared with $32.2 million a year ago. Price per pound increased across all product families, which more than offset the decrease in volume. Gross profit for the Asia Pacific segment was $5.7 million for the quarter, up from $5.3 million a year ago, primarily due to increased profit levels in the Engineered Plastics product family.

Operating income for Asia Pacific was $2.7 million for the quarter, compared with slightly under $3 million a year ago. This increase was primarily due to expenses related to our new regional office in Hong Kong and our new manufacturing facility in India.

Taking a brief look now at our balance sheet and cash flow, we believe we are in a strong financial position to continue to pursue our acquisition and organic growth strategy. As of May 31, 2013, the company was in a net debt position of $98.1 million, compared with $85.8 million on August 31, 2012. Cash increased to $130.1 million at May 31, 2013, from $124 million at the end of fiscal 2012, driven primarily by operations.

For the first 9 months, net cash provided from operations was $52.6 million compared with $34.5 million for the prior year period. Partially offsetting this was cash consumed for the acquisition of ECM Plastics, expenditures in capital projects and dividend payments.

Total working capital days were 57 at May 31, 2013, compared with 58 days at August 31, 2012, and 59 days at May 31, 2012. The net availability under our credit lines was $184.3 million.

That concludes my prepared remarks. And now, I'll turn the call over to our COO, Bernard Rzepka, who will spend a few minutes on our restructuring activities during the quarter and our organic growth initiatives. Bernard?

Bernard Rzepka

Thanks, Joe, and I'm happy to join you this morning. I have met some of you before, but look forward to meeting many of you in person, as I'm convinced that Jennifer will make sure that happens.

Since I've been in this role for 3 months, I've spent a lot of time traveling to our global facilities, meeting our local teams and listening to what challenges we face, both externally and internally. In all of my visits, I've communicated my top 3 priorities: safety; smart sales; and savings. So we all understand how we must successfully drive profitable growth at A. Schulman by focusing on what really matters.

I've encountered talented and dedicated associates everywhere and reaffirmed my belief that we have plenty of opportunities to grow profitably in all regions. Speed of execution will be critical to our success.

Now I will provide details around some of our activities. As we told you in late May, we felt it was necessary to continue with our restructuring efforts, or Plan C, in Europe given the economic environment. These were headcount reductions, primarily administrative and back office, and not closer to plant oppositions that impacted our ability to serve our customers for capacity needs.

Year-to-date, we have recorded $3.7 million of pretax employee-related restructuring costs, and the company has a balance of $1.4 million accrued for employee-related costs associated with this event. The company expects to recognize additional pretax employee-related cash charges of approximately $2.1 million during the remainder of fiscal 2013. As a result, our Plan C is expected to generate approximately $4 million in annual run rate savings.

The Brazilian restructuring is underway, and the consolidation of 2 facilities into 1 is expected to be completed by the end of fiscal 2014 first quarter. Year-to-date, we have recorded $600,000 of pretax employee-related restructuring costs and $600,000 of accelerated depreciation included in cost of sales during the 9-month period. We expect to recognize additional pretax employee-related and other cash charges in -- of approximately $1 million during the remainder of this fiscal year. Once fully implemented, we expect to generate savings of approximately $1.4 million on an annualized basis.

We are implementing restructuring plans in the U.S. Specifically, we focus on optimizing specialty powders capacity. We have chosen to relocate a portion of the Grand Junction, Tennessee facility's grinding business to other A. Schulman facilities within the U.S. The Grand Junction move is expected to generate $1.5 million to $1.7 million in annual run rate savings in fiscal 2014. We expect to reduce headcount by approximately 25 in that facility, and to recognize charges of approximately $900,000 related to restructuring costs and accelerated depreciation during the fourth quarter of fiscal 2013 and the first half of fiscal 2014. We are working hard to ensure that there are no interruption in service to customers resulting from this action. And we will continue to proactively manage our product mix and cost structure so that we are positioned for profitable growth in the U.S.

Now I want to talk about our focus on profitable growth. You have heard us mention our growth playbook in the past. And in May, we held our second annual growth summit in Boston in order to promote profitable organic growth across our regions and our businesses. We gathered our global key commercial business and technical leaders and focused on the acceleration of our global strategic marketing efforts. These efforts were focused on: strategic pricing; new product innovation; cross-regional corroboration; new market opportunities; as well as developing partnerships with key innovative suppliers and academia.

Our teams spent valuable time with thought leaders at MIT on topics such as innovating with our customers and growing in our market. It was time well spent, and we have already seen value through increased cross-development activities in our business units.

I would like to mention a new product that is a good example of this effective cross-development between our product segments. We have recently introduced new halogenated flame-retardant products in EMEA that we have transferred from our Engineered Plastics to our masterbatch business. This technology has thus far experienced a good reception in the marketplace. Because all polypropylene plastics are hydrocarbons, they are combustible. However, the increased ignition-resistant polybatch flame-retardant masterbatches makes the polymer particles visible to ignite. Our products have flame-retardant properties and also demonstrate outstanding temperature control. These products are cost effective and sustainable and are widely used in automotive, building, household appliances and textile applications.

The ability to leverage our flame-retardant expertise and application know-how between our businesses make this product possible. We look forward to sharing many more examples of this cross-consolidation in the future.

In May, we participated in CHINAPLAS, the second-largest international plastics trade show in the world and the largest in Asia. We have significantly increased our investment in the show to promote greater participation in this growing market. Therefore, we hosted a large customer event, which included customers from all of our product families, which encouraged further cross-business unit sales. We demonstrated to over 600 booth visitors that we have innovative solutions that address their market needs.

In terms of raw materials, it appears that all of our major raw materials are expected to stay relatively flat, with only slight increases, possible during the summer months. In addition, we continually look for alternative sources to remain competitive. And as you can see from our strong balance sheet, we are focused on effectively managing our cash flow from operations.

That's all from my side, and I will turn it back to Joe Gingo.

Joseph M. Gingo

Before we open up the call for questions, I'd like to strongly restate that these third quarter challenges are temporary, and we have solid action plans in place, and we will resolve them during the coming quarter. We look forward to significant earnings growth in fiscal 2014.

Globally, we continue to focus on aligning capacity with demand, shifting to a higher value-added product mix and optimizing our cost structure. On the positive side, we are seeing encouraging volume improvement in Asia, and we have approved an additional masterbatch line in China, as well as a color line in Malaysia to keep pace with demand.

With a strong balance sheet, solid cash flow generation and a distinctive market position, I am confident that we can achieve our strategy to become a premier global specialty chemical company through organic growth, as well as acquisitions. Consistent with our past practice, we will continue to opportunistically provide additional value to our shareholders through share repurchases and dividends.

With that, let's open up the call for your questions.

Jennifer K. Beeman

Thank you, Joe. Matthew, can you open up the line for questions?

Question-and-Answer Session

Operator

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

Rosemarie J. Morbelli - Gabelli & Company, Inc.

I have a question for Bernard. Do you have an operating margin target, let's call it, over the next couple of years? I mean, your operating margin is, for the company as a whole, reasonably low. Could you give us a better feel as to what you think can be achieved?

Bernard Rzepka

Yes, I believe that we can increase it, and that's part of my job and of the team, and this is the certain direction where we want to move significantly.

Rosemarie J. Morbelli - Gabelli & Company, Inc.

Do you have a number that you are targeting and that you can share?

Bernard Rzepka

10%.

Rosemarie J. Morbelli - Gabelli & Company, Inc.

10% of the operating level. And that -- is that -- does that include the distribution margin, which obviously, is always lower than the rest of the operation?

Bernard Rzepka

It's for the entire company, for the entire operation.

Rosemarie J. Morbelli - Gabelli & Company, Inc.

Okay. And then I was wondering that -- Joe Gingo, because of the seasonality in the fourth quarter, on a sequential basis, what needs to happen for you to reach the bottom of your range?

Joseph M. Gingo

Rosemarie, I think that we've taken the seasonality into account as we look at our range. I think what I have to avoid is just the general economic crisis, global kind of crisis or specific regional ones. But based on what we're seeing right now, I think our guidance is reasonable. You may notice that we widened it more than we have usually, probably a little bit because of what we saw in the third quarter. But right now, I'm comfortable with our guidance, and we have included seasonality in our decision-making process.

Rosemarie J. Morbelli - Gabelli & Company, Inc.

And except for the higher cost in Brazil, Joe, where was the biggest surprise regarding the results in the third quarter?

Joseph M. Gingo

The biggest surprise to me was actually Latin America just in general, not just Brazil, but Mexico. And as you might, and I know -- excuse me, might is a wrong word -- as you know, Mexico, along with Europe, has been the strength of this company and in gearing up to handle the Brazil situation, because we had to supply products out of Mexico. That affected our Mexican operations as well. And I think that was my biggest surprise. The fact that I encountered difficultly in Brazil? I encountered more than I expected, but I expected difficulty. But I did not expect that significant of an impact on Mexico.

Rosemarie J. Morbelli - Gabelli & Company, Inc.

And the business that you have lost because of the lag in delivering the products, is that something that you can start recouping in the first quarter of next year?

Joseph M. Gingo

Well, I believe so, Rosemarie. In fact, I think we'll start some recouping in the fourth quarter. Most of that was because we couldn't make a delivery, not -- we still can make -- we didn't lose the customer. In general, let's say say they ordered 100%, and we provided 80% instead of the 100%. But in no case that we lose the customer because of this, but we didn't meet all we could have possibly met in terms of deliveries.

Operator

Your next question comes from the line of Peter Cozzone of KeyBanc Capital Markets.

Peter J. Cozzone - KeyBanc Capital Markets Inc., Research Division

Looking out to 2014, what type of volume growth would you need to see in Europe to generate the outlook for strong earnings growth that you noted in the release? And in addition to the cost savings, are there any other factors under your control that can drive earnings improvement next year?

Joseph J. Levanduski

Well, I think there's a few things. Obviously, we're still in the midst of our budgeting process for 2014. So we're not going to be in a position today to talk about guidance for next year beyond the comments that Joe Gingo made. But I believe, as it relates to Europe, again, we are seeing things and signs of positive news coming out of Europe in some of the industrial manufacturing statistics. Sentiment from our customers, I think that they're positive. Obviously, we're still sensitive to the instability of order patterns that we've experienced in the past. So we're, I won't call it gunshot, but we're being very sensitive to that. But I do think that we should see volume improvements in Europe next year. I think from a perspective of what else we have working for us, obviously -- Joe and Bernard both mentioned our organic growth playbook, and things that we've been working on for a while now are starting to materialize our cross-selling efforts and others, that will benefit us. And I also think -- and we've talked about the acquisition pipeline that's coming into play. The acquisitions are such in terms of Network Polymers coming out of the first quarter, India coming up and operational, on a full-year basis working through the start-up pains. All these things will be positive to our net income number.

Peter J. Cozzone - KeyBanc Capital Markets Inc., Research Division

Okay. And then in terms of some of the improving sentiment and the indicators that you noted, has that shown up at all yet in order books for June? And maybe could you just touch on how volumes trended as the quarter progressed in 3Q, maybe on a regional basis? And again, how kind of things are shaping up here in early 4Q?

Joseph M. Gingo

Actually -- this is Joe Gingo. We'll start with Europe. Fundamentally, we suffered a very difficult March in Europe. And actually, the trend we saw in April and May was encouraging to us, as our early indications of June. So again, we've seen a lot of instability in Europe, and we've had good months followed by very bad months. But if I look at the trend right now, it's at least on a forecasting basis, it's looking more positive than it has. I've been burned in the past on that, so I'll be careful. But right now, it's looking pretty good. I think in terms of the Americas, I think the situation in Latin America is really one that we mishandled. It's not a demand issue, other than Brazil. Brazil is a demand issue, but I don't believe Mexico is. Mexico was the manufacturing issue, an issue we got in with our plant cost. But I don't believe it's a demand issue in Mexico. Brazil's economy is still, as you know, just by reading the papers, there's a lot of difficulties going on there. There's no doubt that Asia has slowed. There's no question about it, but it's still growing at a really respectable rate compared to the rest of the world. So I anticipate that -- and especially in our area, as we mentioned, we're putting a line, a Masterbatch line into China, putting a color line into Malaysia. In the high-end niche part of our business, we're seeing good strength in Asia. The U.S.A. for us has been a little bit of inconsistency. Not as volatile as Europe, but we've had good months followed by bad months. If you look at the numbers, again, the economic numbers, you will note the downturn in May, upturn in June. So I think we're seeing the instability because I think the economic markets have not got back to their traditional growth patterns. But I'm encouraged particularly, at this point by Mexico and by Europe; Asia; and I think the U.S. is going to be okay for us; and my biggest concern on the economic front would be Brazil.

Peter J. Cozzone - KeyBanc Capital Markets Inc., Research Division

Great. And then just lastly, on a sequential basis here, your full year outlook would imply a potential for sequential decline in earnings in 4Q and thus likely operating profit per pound as well. Can you bucket -- you touched on this, I think, a little bit on Rosemarie's question -- but can you bucket the factors driving the potential decrease on a sequential basis versus the third quarter? How much of that is still lingering effects from these issues, and how much of it maybe just seasonality?

Joseph M. Gingo

Actually, I'll start by saying the bulk of it is we have to fix the problems we have in Latin America. And we have made, I think, a significant management change that is going to help us resolve that problem. Gustavo Perez had run our Mexican operations for us and our Latin American operations. And then as Gustavo moved up to run the Americas for us, he did -- had done a very good job for us. With this problem that we've experienced in Mexico and Brazil, we've had Gustavo to take a dual role. And Gustavo is now focusing his attention on straightening out the ship in Mexico and Brazil. And I'm absolutely confident that he's going to do it. He's going to need a quarter to do it, and that's reflected in our numbers. Let me ask Joe to comment on any other items that he thinks are going to reflect that forecast for the fourth quarter.

Joseph J. Levanduski

Yes, I think as we look at the range that we have out there, which, as Joe mentioned earlier, is a little bit wider than what we have historically used. And squeezing out what we have done for the first 9 months, our range is $0.42 to $0.52. Last year, our fourth quarter EPS on a continuing operation basis was roughly $0.48. Our goal is always to beat the prior year numbers. Obviously, the last 2 quarters, we've struggled with that for the reasons that we've explained on this call. I think as we look forward to the fourth quarter of this year, the challenges that we've had at some of the specific events as we have gone through, the consolidation efforts in Brazil and some of the challenges that have taken place in Mexico as a result of that, are broken out some positive system. Obviously, we're very proactive in terms of adjusting our cost structure. And I think these things will continue to benefit our fourth quarter results. So while our range of $0.42 to $0.52 is wide, I think we're all focused on, more the top side of the range and the bottom side of the range.

Operator

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

Dmitry Silversteyn - Longbow Research LLC

A couple of questions, if I may. You sort of, I guess for the third quarter in a row, talk about unforeseen issues, but then things are getting better. And it sounds like some of the unforeseen issues you're experiencing is your previous quarter's expectations that things are going to get better. If I remember correctly, inventory adjustments were -- and under absorption of fixed cost was an issue with the second quarter? You have a similar situation in Mexico where you've ramped up production in anticipation of a market coming back but it didn't come back. Sort of what gives you confidence -- and I know you're being cautious with your confidence, Joe -- but certainly, for the third quarter in a row you're telling us that we've got the right level and we're now looking for a more normal operating season in the fourth quarter. And that's what's going to be behind part of the trade. Can you sort of give us some confidence...?

Joseph M. Gingo

Well, I think it's very careful question, Dmitry. And I don't come back to the instability. When we look at the last quarter, again, we're seeing things coming up. And then they didn't -- March was a horrible month, as I mentioned. March was just a very horrible month. So much so that even though we had a very decent recovery in April and May, we couldn't overcome it. It was literally that deep of a drop, yet, the prior month, had been good. So right now, right today, when I go out to my business units and they look at their sales, those sales are down. They're in the order book. Now the question that is a very valid question, will they materialize? Because we've seen in the past that as we go into the month, some of those sales just drop off. I am comfortable regarding the costs. I think the situation with regard to what we've done in costs is very solid and very straightforward, not worried about it at all. The disruption that has occurred in Brazil was really, and I will take it on myself, unexpected to the extent it occurred. It's being addressed, and we've got action plans that are going to handle it. If you want to -- if you say, well, what worries me most now, Dmitry? It's the sale, not the cost.

Dmitry Silversteyn - Longbow Research LLC

Okay. All right, that's fine. I guess I would also follow up on the Specialty Powders business and you're trying to sell the roto-molding operations in Australia. It sounds like the U.S. operations for Specialty Powders isn't particularly strong either, and causing you to consolidate some manufacturing. Sort of what happened into this market between the time you acquired ICO and now, when this was the jewel of ICO, if I recall? And now, it's one quarter after another quarter of restructuring. And now, it seems to be spreading to regions beyond the Australian water tank market.

Joseph M. Gingo

I think a couple of things, and we can go back to Europe. Because remember that very early on in ICO -- in Europe, we restructured ICO. We shut down the Italian plant. And what I found is that ICO had excess capacity, just bad excess capacity. And we took the first step in Europe. We had so much going on in the U.S.A. with Nashville, with Bellevue. It didn't seem prudent to me to attach the ICO footprint in the U.S.A and just put -- you can only do so much. And Nashville was big, Bellevue was big, Grand Junction is quite small, if you even look at the numbers associated. Now of course, it affects the people associated, so let's not downplay that. But -- so I think the Grand Junction move, I have envisioned from the start, it was a timing issue. ICO just -- it has not optimized capacity much as we had. If you look at Asia, everything has been Australia, everything we've done. And we thought we had the problem resolved with the first shutdown -- we had 2 plants there -- we thought we had the problem resolved with that first one. When we saw that this is still continuing, we just decided to bite the bullet and just get out of it. Specialty Powders in and of itself, our other materials that we do besides roto-compound are doing exceptionally well. We're doing very good in those fields. What I see in roto-compounding is roto-compounding is unbelievably tied to the economic condition because it's the low end of the product mix. From -- if I look at my margins, if I -- distribution is my lowest, but roto-compounding has always been the second lowest. So the Specialty Powders part of it, the non-roto-compounding is very good or doing very well in Europe, other than just pure economic cycle. And in the U.S., we're doing well other than the economic cycle. But I think roto-compounding is more affected by the cycle than is my masterbatch, my colors or my EP business. Now distribution tends to look like roto-compounding. I don't know if I explained that well enough, Dmitry?

Dmitry Silversteyn - Longbow Research LLC

You did, Joe. That was very good. And then one final question, if I may. In your press release and on the prepared remarks today, you talked about the strength of the balance sheet as a positive for the company, as a sort of a way for you to bridge some of the operating issues and cost issues you seem to be having in 2013. But then, at the same time, you're talking about still being involved in some sort of an M&A that goes beyond kind of a bolt-on deal that would certainly stress your balance sheet. So how do you -- should we feel about the strength of your balance sheet in a positive way that, that you have the cash to do whatever you need to do to bridge the operating issues? Or should we start getting worried about your balance sheet because you're about to stress it by making a deal, if it's not Ferro, it's somebody else?

Joseph M. Gingo

Well, Dmitry, I think one of the reasons we backed away from Ferro is that -- what we saw there is we thought the $6.50 was an extremely reasonable offer and it was worth the conversation. We're not going to overpay for something. It's really and truthfully just that simple. And I think that what we've done with regard to Ferro is a great example of that. We're just not going to overpay. And so I think, yes, we'd have to finance it. But I'm going to let Joe comment a little bit more about that.

Joseph J. Levanduski

Yes, I think as we went through the Ferro exercise, it's a good exercise for us to do internally to see what sort of environment it is and how responsive the markets would be in terms of financing a larger transaction, and I think we were very successful. As we went through the original offer, we had 2 firm bank commitment letters. And I think the strength of our balance sheet and our historical prudence on managing working capital on the cash position lend itself to that. We would never put ourselves in a position where we overstress our balance sheet. Obviously, our net leverage position has always been low. Right now, it's below 1. I think we have plenty of flexibility, and that provides us options. And I think we would have been very prudent with those options as well. It's a very nice market right now. It's starting to change a little bit, but obviously, it's something that was working in our favor as we went through that process. And it was something that we'll consider as other opportunities of larger size come through. Right now, our pipeline is very active, and we continue to use our balance sheet wisely.

Joseph M. Gingo

And I think, Dmitry, to your point, when -- at $6.50, we did not feel that we were stressed at all. If we were a little bit above that, we would have not felt stressed at all. But with some of the numbers that were being thrown around, there was just no way we were going to put our balance sheet in that kind of position.

Dmitry Silversteyn - Longbow Research LLC

Don't get me wrong, I'm not upset that you're deciding to move on from Ferro. I'm just trying to sort of understand kind of the riskiness of the company going forward between, frankly, financial performance that leaves a lot to be desired, offset by the strength of the balance sheet. But then that strength can disappear tomorrow when you come out with $1.5 billion acquisition announcement or something like that. So that was sort of the genesis of the question. But you...

Joseph M. Gingo

I appreciate that.

Operator

[Operator Instructions] And your next question comes from the line of Rosemarie Morbelli of Gabelli & Company.

Rosemarie J. Morbelli - Gabelli & Company, Inc.

Joe, either one of you. I was wondering if you could give us a feel for the EBITDA of Network Polymers. We know that they had some $53 million in revenues, but what about EBITDA?

Joseph J. Levanduski

We haven't provided the operating metrics of the business. And given the fact that we haven't closed on the deal, I would like to further pass on answering that question. To be quite frank, I think we have to be sensitive to the fact that until we take formal ownership of it, I don't want to be disclosing data outside of our confidentiality agreement.

Rosemarie J. Morbelli - Gabelli & Company, Inc.

Okay. And then generally speaking, do you have a feel that there will be synergies? I am assuming that their margin is probably pretty similar to yours. Maybe I am wrong, if you could correct me, if that is the case. But do you see a major improvement in margin? Or is that business better than yours and therefore, it will be additive right off the bat?

Joseph M. Gingo

First of all, Rosemarie, this is Joe Gingo. Their business, at this point in time, is similar to our's in the EP end of our business. EP margins are one of our better margins. However, they also have a distribution arm, and those margins are more typical of this distribution. But overall, I believe there will be a margin improvement. They don't have a roto-compounding segment. So I think, overall, we will get a benefit out of the acquisition. But the biggest benefit to me, Rosemarie, is this: In Europe, we have a full line of engineered products. We go from ASA, polycarbonates, nylons across the board. We can supply anything. Well, if you might recall when we started here, the only thing we could supply was polyethylene and polyolefins, which is the lowest end of the low. And we've shifted that to where we put our own capacity in on nylon, and we have a very robust nylon EP business today. It turns out that the one area that Network's not in is nylon. But they already had the styrenics and they're already in polycarbonates. And what that's going to give us is really a footprint that looks much like our European footprint in engineered plastics. I think that's going to be a real avenue for growth because most of our customers don't want to just talk nylon. They want to talk the entire range of engineered plastics. Network Polymers will allow us to fill out our engineered product family. So that's what I'm excited about, Rosemarie. Our salesmen are going to be able to call in the same customers, both the prior-Network salesman and our A. Schulman salesman that exist today and sell a total array of products.

Rosemarie J. Morbelli - Gabelli & Company, Inc.

So Joe, why could -- if you have all of those product lines in Europe, why couldn't you be cross-selling? I mean, why didn't you bring them into the U.S. the same way you did with masterbatch?

Joseph M. Gingo

Well, I didn't have the facilities, Rosemarie. I had 2 choices: In masterbatch, I did a greenfield. That was after. We built our own flank. In EP, we transferred -- well, actually, really, we shut down equipment in Nashville and Bellevue -- and built up a nylon technology. Obviously, I can also build an ASA technology. I could build a ceramic technology because I already have the technology via transfer, just as you said. But when something like Network becomes available to you, which has all these, you already have your capacity in place. You're not going greenfield. And now what we'll do between Network and the A. Schulman operation in Europe is transferring technology and products so that -- Network runs some products we don't run in Europe and as well as we run products in Europe that Network doesn't run. So we will be able to transfer the technology. But you're right, Rosemarie, I could have greenfield it. It would have taken longer. I would had the site for market share. I'm not going to fight for market share because I have market share as soon as I acquire Network.

Rosemarie J. Morbelli - Gabelli & Company, Inc.

Okay, now that is very helpful. I appreciate it. And one last quick question, what kind of a tax rate are we expecting for the full year and for 2014?

Joseph J. Levanduski

2014 is to be determined as we go through our budgeting process. I think for the fourth quarter, and where we finished the third quarter will probably be very similar on a non-GAAP basis, around the mid-20s.

Rosemarie J. Morbelli - Gabelli & Company, Inc.

Okay. Well, in order to get to that $0.50, you'll have a tax rate of about 19% for the 9 months.

Joseph J. Levanduski

On a non-GAAP basis, our year-to-date was slightly above 20%.

Operator

Thank you for the questions, ladies and gentleman. I would now like to turn the call over to Jennifer Beeman for the closing remarks.

Jennifer K. Beeman

Thank you, Matthew, and thank you, all, for your questions. And that concludes our call for today. Oh, Matthew, I do see a follow-on from Chris Butler.

Operator

Okay. Chris, you're on. I'll get you through now, please proceed.

Christopher W. Butler - Sidoti & Company, LLC

If we're looking at your roto-molding business in Australia, the discontinued business that declined fairly significantly here in the quarter, could you talk to that, and how you think that business is going to play out here over the next couple of quarters until you actually get to sell it?

Joseph J. Levanduski

From a discontinued operation, obviously, the financial results of that business unit will fall. It will be operating results of the segment, it will be consolidated as a discontinued operation at the tax line. Obviously, as we move forward, we continue to operate the business as usual and keep our employees, just as possible, focused on the operating results of the business and positive cash generation. And that's really what we're focused on right now.

Christopher W. Butler - Sidoti & Company, LLC

And it's probably in your filings, but what's the revenue from that business and annual revenue?

Joseph J. Levanduski

Yes, it was about $25 million.

Christopher W. Butler - Sidoti & Company, LLC

And with greater losses, are those, in any way, attributed to the -- your sale? And how would that impact your ability to sell this business?

Joseph J. Levanduski

No. I think there were -- obviously, as we treated it as a discontinued operation, and our 10-Q discloses this is in greater detail. There were impairment charges that were taken as a result of that business unit being treated as a discontinued operation. Again, it's also below the operating income's number. So as we've talked about, our income from operations, our EPS numbers that we've been talking about today, these are all for our continuing operations. So the discussions that went on today with Joe and Bernard were focused on continuing operations and excluded the discontinued operational results in Australia.

Joseph M. Gingo

Chris, Joe Gingo. I think the way you might want to look at this is that there's going to be consolidation in the roto-compounding business in Australia. We have chosen not to participate in that consolidation. As we look at the market, we don't see a lot of long-term growth, but we have other places that, as I mentioned, in Asia, like our masterbatch line in China, color line in Malaysia, where we think is a better use of our cash. And there are interested buyers right now in that operation who feel that consolidation is the way to go in Australia. We've just chosen that is not the best use of our money.

Christopher W. Butler - Sidoti & Company, LLC

I appreciate that. And if we're looking at the price per pound decrease that you saw in the quarter, could you talk to that in relation to raw materials and the competitive environment?

Joseph M. Gingo

Well, I'd say that in terms of what we're seeing, Bernard mentioned it, we're seeing flat in terms of raw materials right now. And it's really funny, but volatility actually helps you more than flat. Because as prices rise, you're able to increase your prices even though that your pace is not as fast as your raw material price. And then, as prices fall, you're able to slow them down as you get more margin. And what we're seeing right now is flat. I mean, it's extremely difficult to get price today, and because there's nothing indicating that there's going to be increase in raw material. Second, because there's really weak demand globally -- versus what historically it has been and, obviously, capacity was always built up on the historic basis -- you're seeing some of your competitors being extremely aggressive on pricing. So I think pricing pressure right now is a significant issue for us. And I think the way we're overcoming it is moving to higher value-added products and walking away from the lower-end businesses. Which is costing us something on the volume line.

Christopher W. Butler - Sidoti & Company, LLC

And just finally, with the increased credit line, are you going to pay that down relatively quickly, or not as concerned because of low interest rates?

Joseph J. Levanduski

Well, first, the interest rate climate is very attractive. Obviously, we're more constantly looking at our capital structure. But we have plenty of availability, as I mentioned in my comments. And we continue to generate very positive cash flow from operations.

Jennifer K. Beeman

Thanks, Chris. So Matthew, if we have no further questions at this time, I think we'll conclude our call for today.

Operator

Okay, thank you. There are no more questions. So ladies and gentlemen, thank you for joining today's conference. This concludes the presentation. You may now disconnect. Have a very good day.

Jennifer K. Beeman

Thank you.

Joseph J. Levanduski

Thank you.

Joseph M. Gingo

Thank you.

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