OMNOVA Solutions Management Discusses Q3 2013 Results - Earnings Call Transcript

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OMNOVA Solutions (NYSE:OMN)

Q3 2013 Earnings Call

September 30, 2013 11:00 am ET

Executives

Kevin M. McMullen - Chairman, Chief Executive Officer, President and Chairman of Executive Committee

Michael E. Hicks - Chief Financial Officer and Senior Vice President

Analysts

Roger N. Spitz - BofA Merrill Lynch, Research Division

David L. Begleiter - Deutsche Bank AG, Research Division

George D'Angelo

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

Rosemarie J. Morbelli - Gabelli & Company, Inc.

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the OMNOVA Solutions Third Quarter Earnings Discussion Call. [Operator Instructions] As a reminder, today's conference is being recorded. I would now like to turn the conference over to our host, CEO, Kevin McMullen. Please go ahead.

Kevin M. McMullen

Thank you, and good morning. Thanks for joining us for our conference call to discuss third quarter 2013 results. Joining me today is Mike Hicks, our Senior Vice President and Chief Financial Officer. I'd like to turn the call over to Mike to make comments on forward-looking statements.

Michael E. Hicks

Thanks, Kevin. During this conference call, OMNOVA representatives may make forward-looking statements, as encouraged by the Private Securities Litigation Reform Act of 1995. All statements in this conference call and in subsequent discussions with the company's management, other than historical information, are forward-looking statements.

These statements represent management's current judgment on expectations for future results and other matters. A variety of risk factors highlighted in the company's Form 10-K and in our most recent earnings release could cause business conditions and the company's actual results to differ materially from those expected by the company or expressed in the company's forward-looking statements.

In addition, certain financial measures referred to during this call are non-GAAP financial measures. For an explanation or reconciliation of these non-GAAP measures, see our most recent earnings release. Kevin?

Kevin M. McMullen

Thanks, Mike. In our third quarter, income from continuing operations improved on both a sequential basis and compared to last year. As anticipated, higher volumes, a better mix of business and our focus on reducing costs have driven increasingly stronger results throughout the year after a slow start to 2013. The third quarter marked the best volumes of the year for Performance Chemicals. Year-to-date volumes increased in 7 of 10 of our Specialty Chemical product lines, led by coatings, nonwovens and antioxidants. In addition, Engineered Surfaces reported its highest quarterly operating profit since the year 2000. OMNOVA had a strong positive cash flow, which allowed the company to reduce net debt by $22.4 million in the third quarter. It was another good quarter for our Asian operations in both business segments. At our newest chemical plant in Caojing, China we continued to increase utilization levels to supply products used in tire cord and other fabric-reinforced rubber applications. In addition, we completed construction of new styrene butadiene latex capacity at the Caojing plant and began production and customer qualifications during the quarter. At our Engineered Surfaces facility in Asia, we picked up new businesses for OEMs seating applications in the fast-growing automotive sector. I will provide more details later in this call on the many positive developments that drove the improvements in our third quarter financial performance, but first, I'd like to summarize our consolidated third quarter results as reported in our earnings release.

Third quarter net sales were $261.2 million, down $27 million from the third quarter of last year. The year-over-year sales decline was driven primarily by lower volumes of 3.5% and reduced pricing of 6.5%. Gross profit in the third quarter of '13 was down $3.1 million from the previous year, primarily due to the lower volume and pricing. However, gross profit margins improved to 20.9% versus 20.1% in the third quarter of last year on a stronger mix of sales and cost-reduction actions. Adjusted income from continuing operations was $9.1 million, up $1.4 million -- up $1.4 million, or $0.19 per diluted share, in the third quarter of 2013 compared to $7.7 million, or $0.17 per diluted share, in the third quarter of 2012. Also, these results continue the trend of sequential improvement with a $2 million increase when compared to this year's second quarter. SG&A expense was $28.5 million in the third quarter of 2013, a reduction of $1.9 million from the same period last year. This year-over-year improvement was due to lower employee expenses and a reduction in discretionary spending.

Interest expense was $7.7 million in the 2013 third quarter, down $1.1 million from the third quarter of last year. The decline was primarily due to lower borrowing spreads as a result of the March 2013 term loan amendment that reduced the floating rate pricing of this by 125 [ph] basis points as well as lower borrowing in our foreign operations. Income tax expense for the third quarter of 2013 was $3.4 million, a 27.4% effective income tax rate. In the third quarter of last year, income tax expense equaled the same amount, $3.4 million, but at a 33% effective tax rate. The lower tax rate for this year's third quarter was due primarily to higher income in our foreign jurisdictions, where the rate is lower than the U.S. statutory rate. The company estimates its full-year 2013 effective tax rate will be approximately 30%.

Cash tax payments in the U.S. over the next few years are expected to be minimal, as the company has $114 million of U.S. federal net operating loss carryforwards and $90 million of state and local tax net operating loss carryforwards with expiration dates between 2022 and 2033. OMNOVA's trailing month adjusted EBITDA, as defined by our Term Loan Credit Agreement and presented in our earnings release financial tables, was $93.6 million at the end of the third quarter. We are solidly in compliance with our debt covenants. Net debt, as presented in our earnings release, decreased $22.4 million from the second quarter of 2013 and ended the third quarter at $299.8 million. The decline was due primarily to improved profitability and lower working capital.

Turning now to the business segment results, beginning first with Engineered Surfaces. Third quarter net sales were $62.1 million, a 10.6% decrease, or $7.4 million lower than the third quarter of last year. Volumes were strong in Laminates and in the China Coated Fabrics automotive market. The overall sales decline was due primarily to weaker demand in global films and lower sales of Coated Fabrics in the U.S. market and for the furniture market in China. The latter is a result of a conscious decision to shed certain low-margin businesses in the Chinese residential furniture sector. In addition, sales results for the Engineered Surface segment reflect a variance from a large, onetime order in 2012 for Laminates for a major refurbishment of a national retail chain. Adjusted segment operating profit for the Engineered Surfaces segment was $5.2 million in the third quarter of 2013. Our efforts to improve the profitability of the Engineered Surfaces business, and the Coated Fabrics product line in particular, have shown good progress as this was the highest quarterly adjusted operating profit for this segment since the year 2000. Sales of Coated Fabrics were $26.5 million, down $4 million from the third quarter of last year. As I mentioned, new automotive wins with leading Chinese OEMs helped to partially offset lower sales in the China furniture market and overall softness in the U.S. market. OMNOVA's China operations began shipments of Coated Fabrics for seating applications for a new model with a major Chinese OEM and our Coated Fabrics business in Thailand was awarded seating contracts with 2 large Japanese automakers.

In addition to the increased sales of Coated Fabrics into the Asian automotive market, OMNOVA further broadened its penetration into other transportation categories. During the quarter, our Coated Fabrics were specified into another major U.S. mass transit seating application in the Northeast. Building upon our success was the San Francisco Bay Area Rapid Transit and other municipal transit systems.

Sales for the Laminate product lines, which includes Performance Films, were down year-over-year. Sales were $35.6 million in the third quarter, a decrease of $3.4 million. Sales were strong, however, in residential and commercial construction-related markets for products that go into kitchen and bath, specialty and home furnishing applications. With the resurgence in the construction market, we are seeing increased sales of laminates into housing. Our laminates are used in a number of applications, including Kitchen and Bath cabinets, increasingly popular luxury vinyl tile flooring, home furnishings and specialty acrylics for bath surrounds. In addition, our laminates are used in a number of surfaces for recreational vehicle interiors including countertops, dining surfaces, cabinetry, ceilings, trim and moldings. In the third quarter our surf(x) three-dimensional laminates were selected over high-pressure laminates for the highest-selling unit of a major RV manufacturer. Sales are expected to ramp up as we move into 2014. Our surf(x) 3D Laminates offer enhanced durability and provide design flexibility by replacing old-fashioned edge banding with more functional and attractive rounded edge profiles.

This was the second full quarter since the completion in February of transitional activities related to last year's divestiture of our commercial wallcovering businesses. The Columbus, Mississippi site had produced wallcovering for the U.S. market. In the third quarter of 2013, the company sold the Columbus site and certain buildings and equipment for $4.2 million in cash and notes and recorded a gain on asset sales of $1.4 million. OMNOVA will continue to lease a portion of the site for warehousing to support our ongoing Coated Fabrics business.

Turning now to Performance Chemicals. Net sales were $199.1 million in the third quarter, down $19.6 million from the same period last year. The sales drop was driven by a much lower raw material input cost, which resulted in lower index-based pricing in the Performance Materials product line, formerly known as Paper and Carpet Chemicals. Also, we are experiencing competitive price pressures in certain markets. Pricing in the third quarter of 2013 was down 8.9%. Volumes decreased only 0.5% year-over-year -- volumes decreased only 0.5% year-over-year but increased on a sequential basis, up 5% from the second quarter of 2013. This year's third quarter marked the highest quarterly volumes of the year for Performance Chemicals. Increased volumes resulted from new business wins and a strengthening of key markets, such as construction. Performance Chemicals generated $19.3 million in adjusted segment operating profit in the third quarter compared to $22 million for the same period last year. Higher operating profit in the Specialty Chemicals product line partially offset a profit decrease in Performance Materials due to the lower volumes. However, sequentially, adjusted operating profit for the Performance Chemicals segment improved by $0.5 million from the second quarter of last year -- sorry, from the second quarter of 2013, building on a $3.7 million increase between the first and second quarters of this year. Sales of Specialty Chemicals were $124.4 million in the third quarter as compared to $127.3 million for the same period in 2012. Lower pricing was partially offset by higher volumes, primarily in coatings, nonwovens, antioxidants and elastomeric modifiers. The coating volumes were up 24% during the third quarter. Our Pliolite resin polymers that go into intumescent coatings have been particularly strong. These intumescent, or fire-resistant, coatings can provide hours of protection during a fire.

It has been another strong year for our chemicals sold in the oilfield drilling applications. We are well positioned with a number of proprietary, high-performance chemistries in both liquid and dry form. Our dry polymers are particularly well-suited to meet challenging handling requirements that are typical, as oil and gas exploration expands to increasingly rugged operating environments in North America and around the world. China is a major market for release coatings used in specialty tapes, where our ability to provide tailored levels of release is a key differentiator for OMNOVA and our customers. Our release coatings business in China is up 74% year-to-date, with new products developed specifically for the Asian market. Utilization levels continue to grow at OMNOVA's newest Specialty Chemical plant in Caojing, China, after coming online just 2 years ago. Initially, this plant was focused primarily on serving the tire cord adhesive market. During our third quarter, we completed construction of new styrene butadiene latex capacity at the site, which will diversify our China manufacturing capabilities with new chemistries and increase our ability to serve the fast-growing Asian markets with numerous products we had previously imported from the United States. Customer qualifications for these new products are in progress.

Sales in Performance Materials, formerly Paper and Carpet, were $74.7 million in the third quarter of 2013 compared to $91.4 million in the third quarter of last year. The sales decline was driven by lower year-over-year volumes and reduced pricing. We continue to develop technologies that focus on growth opportunities in Performance Materials, including the packaging and carpet markets. These technologies include bio-based copolymer hybrid chemistries, as well as ethylene-based emulsions, to deliver greater customer value.

During the third quarter, OMNOVA announced an investment to redirect excess North American styrene butadiene latex capacity at our plant in Mogadore, Ohio to the production of styrene acrylic and other specialty emulsion polymer chemistries. The project will allow OMNOVA to optimize our existing assets and provide significantly greater flexibility to respond to the company's changing business mix with a wide range of polymers in our Mogadore site. At the same time, this project will improve styrene butadiene capacity utilization.

During the third quarter, the multiyear decline in industry carpet demand continued its slow turnaround. While demand was still down year-over-year, customers tell us they are cautiously optimistic that the long-awaited upturn in carpet demand is likely this year as the housing market strengthens. Importantly, carpet producers appear to be pulling away in consideration of inferior alternative backing adhesives and staying with styrene butadiene polymers for their carpet backing. One segment in carpet that has been growing is carpet tile, and OMNOVA's developing high-performance products for this application.

In summary, OMNOVA's third quarter results reflect sequential and year-over-year improvement. This is the result of the gradual strengthening of our key markets and the actions we have taken to reduce costs and focus on higher-growth, higher-margin applications and geographies. As we move forward to finish out the year, while global market conditions remain uncertain, we are encouraged by the following continuing positive signs and actions: the rebound in the housing market appears to be sustainable and should have a positive impact in Laminates, Carpet Chemicals and other applications; oil and gas drilling continues to be a strong -- continues to be strong and is expected to remain robust for the foreseeable future; OMNOVA's expanding our offering of high-performance chemistries that provide value to customers who are increasingly drilling in difficult conditions in the ocean and on land. More broadly, the company has a strong pipeline of new products. We are making investments that will help right-size our capacity and drive profitable growth. These include the announcement in the third quarter that we are redirecting excess North American styrene butadiene capacity to the production of a broader range of chemistries in our Mogadore, Ohio plant in order to meet the changing needs of our markets and customers. This investment is in addition to a project completed earlier in the year to develop the capability to produce high-performance hollow plastic pigments used in packaging, coated paper and other Specialty Chemical applications, while reducing styrene butadiene latex capacity in North America. Our 2-year-old Specialty Chemical plant in Caojing, China is making a solid contribution to our results. The third quarter completion of styrene butadiene capacity in Caojing will open doors to serving a much broader range of markets in China and greater Asia with in-region manufacturing. At the same time, OMNOVA's Engineered Surfaces business in China and Thailand have become a strong supplier of choice for Coated Fabrics that go into automotive seating for the fast-growing Asian transportation market. The sale of our commercial wallcovering business and the related consolidation of manufacturing has improved the profitability of our Engineered Surfaces segment. The company has done a good job of controlling cost and taking actions to reduce waste and streamline our operations. We are on track to achieve the $8 million in ongoing annual cost reductions that we announced at the beginning of the year.

And after significant volatility in raw material costs for most of 2013, those costs have stabilized and are expected to remain stable for the rest of the year. As we close out 2013, the company expects that fourth quarter results will be significantly above last year's fourth quarter and similar to our third quarter of 2013. Upside opportunities for the fourth quarter include higher volumes from housing-related markets and oilfield chemicals, while there are risks of lower-than-expected volumes in Europe, competitive pricing pressures in certain Performance Chemicals markets and slower ramp-up of new customer shipments in North America. As a result, we believe that full-year 2013 adjusted income from continuing operations will approximate 2012 levels. The company also expects that we will continue our strong cash generation in the fourth quarter.

With that, Mike and I would now be happy to answer any questions that you might have. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from the line of Roger Spitz, Bank of America.

Roger N. Spitz - BofA Merrill Lynch, Research Division

Can you give an updated guidance on the 2013 CapEx and for whatever we were thinking for 2014 CapEx, should we be adding $10 million that you brought up on the press release to whatever number that might have been for the movement of emulsion capacity to Mogadore from Akron?

Michael E. Hicks

Yes. This year, Roger, we're looking at about $30 million of CapEx for 2014. We'd be looking in the $35 million to $40 million, including the repurposing of SB Latex in Ohio. That excludes -- some of you may have seen we do have an announcement out that we're going to go to a new corporate headquarters in the end of next year. That excludes capital associated with that, as we're wrapping up financing and grant packages with state and local government. But from an operations basis, we're looking at $35 million to $40 million of capital and anything that we would be doing with the corporate headquarters would be cash-flow neutral or slightly better than this year from an operating perspective.

Roger N. Spitz - BofA Merrill Lynch, Research Division

I see that SG&A was down a bit this past quarter. Is that a good run rate going forward?

Michael E. Hicks

We've taken headcount out throughout the year, not a lot in the third quarter, and so some of that reflects the lower headcount as part of the SG&A piece. Also, management incentives are down so I think on a net basis as we go forward here, somewhere in the $28.5 million to $29 million appears to be a good run rate going into next year.

Roger N. Spitz - BofA Merrill Lynch, Research Division

And lastly, can you say what the SB Latex capacity that you put in, in Caojing, China was and if it's focused mainly on the coated paper market?

Kevin M. McMullen

It's focused primarily on specialty -- various specialty markets that we have been serving, some of which we've been serving through export from here and some pulp production. Initially, we will not focus on coated paper in China. In time, we may pursue that. Certainly, it offers the opportunity to do that but initially we will focus on more specialized applications.

Operator

And our next question is from the line of David Begleiter with Deutsche Bank.

David L. Begleiter - Deutsche Bank AG, Research Division

Kevin, Engineered Surfaces, best profitability since 2000. What's the potential for further profit increases in '14, and what would you think about incremental margins in the segment on higher volumes?

Michael E. Hicks

I'll start out, just to give some background that we did, as suggested on our last call, get our operating profit margins up to 8.5% -- 8.4%, 8.5% on an adjusted basis, which is the best that we expect that kind of performance in the fourth quarter roughly based on existing volumes. We have a goal to get to above 10%, and that would require us to get additional volumes globally. And again, I think with 40% of Engineered Surfaces involved in the housing and refurbishment market, we feel that's achievable sometime maybe towards the end -- on a quarterly basis, sometime toward the end of next year and on a full-year basis, hopefully going into 2015. Kevin?

Kevin M. McMullen

I would agree. We continue to focus on double-digit operating profit for that business, making good steps in that direction but we have more work to do. I think Laminates will continue to lead the way. We see a number of opportunities continue to be available to us on Laminates as we expand that business, and so we're well positioned there. I think Asia will be another contributor but I think, as Mike said, it will be probably the latter part of next year that we achieve that double-digit goal.

David L. Begleiter - Deutsche Bank AG, Research Division

Understood. And maybe just then on the SB Latex business, Kevin, can you compare and contrast the carpet versus the paper markets, what you're seeing?

Kevin M. McMullen

Well, we -- from a coated paper standpoint, we think that publication papers will be in decline for the foreseeable future just because of electronic media, whereas carpet -- but on the other -- the other part of the paper category is packaging, which we think is growing here in North America and will continue to grow. And there's a number of opportunities for us there. Carpet, on the other hand, has been a long drawn-out cyclical decline but we do believe it we'll recover. We do believe there are signs of its recovering now. As I mentioned in my comments, the industry people we've talked to think that this year will be the year that it goes positive versus prior years, but with what's been going on in housing and both new construction as well as refurbishment, carpet is well off of its highs but we do believe it's going to rebound. And I think the other thing that we're encouraged by is we see evidence that carpet customers are moving away from lower-performance backing adhesives in favor of the higher performance styrene butadiene latex, which is a positive development force as well.

David L. Begleiter - Deutsche Bank AG, Research Division

Lastly, you mentioned some competitor pricing in Performance Materials. Can you comment a little more on that issue?

Kevin M. McMullen

Yes. I think with what's going on in the industry and with demand having been off for several years and so forth, I think the utilization levels may be contributing to that and -- but we're certainly working our way through it. We are very focused on making acceptable returns in all the businesses we're in, and we'll continue to focus on that. Yet at the same time, we're also committed to our market share position in these markets where we have leading positions. So we'll be very focused on technology and continuing to bring new value to our customers and hopefully in earning attractive returns in doing that.

Operator

And our next question is from the line of Laurence Alexander with Jefferies.

George D'Angelo

This is George D'Angelo on for Laurence. Can you discuss what aggregate sales are for the growth products that you guys listed as a category, like how fast are they growing and where you see margins in relation to the corporate average?

Kevin M. McMullen

So I think in general, the margins are higher in most of those categories than certainly our corporate average and just looking at the quarter, I'd say across the categories that we referenced, growth was in the probably the -- on aggregate, high single-digit. But we mentioned coatings in particular, specialty coatings was up 24%, so that was one of the stronger ones, but I would say high single-digit overall.

George D'Angelo

And also, could you guys revisit balance sheet targets for next year, particularly where you see debt-to-EBITDA going?

Michael E. Hicks

Debt-to-EBITDA this year should be below 3x as we drop off a very weak fourth quarter last year and add what we think to be similar numbers here for Q4. And as we get to the end of 2014, we expect net-debt-to-EBITDA to be lower, probably in the -- just above 2x at the end of next year.

Operator

Your next question is from the line of Michael Sison with KeyBanc.

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

In terms of Performance Chemicals, when you think about the changes you're making at Mogadore, in the past, we've talked about sort of 9%, 10% operating margins in the low end, which you're at now given tough conditions, it's great. But what could the upside be potentially once some of the changes are made over there? Is it higher than what we thought in the past, in the midteens?

Michael E. Hicks

Well, I'll start answering that question. If nothing else changes, we'll reduce our operating cost in 2015 by $4 million or $5 million just because we'll have better utilization and more efficient capacity in Mogadore. I think once we get past that event, which is something we can control, the margins in SB Latex will be somewhat driven by our ability to introduce new technologies and to grow share but also, we'll be impacted a bit for a while at least by the amount of excess capacity that some of our competitors continue to have. But the goal is to definitely have that going forward above 10%. The Chemicals business and what was still volumes that were off of historical levels because, again, we still haven't seen a rebound in some of the markets, our margins were 9.7% in the third quarter. So our goal in the 11% range as we go forward here I think is reasonable. Kevin?

Kevin M. McMullen

Yes. I would agree and certainly with our chemicals business, with volumes off as far as they've been and us having almost 10% now, we will certainly be looking at more solid double-digit goals as we go forward. As we get stronger volume improvements and as we make some fundamental improvements to our infrastructure and our footprint, we would hope to drive solid double-digit operating profit. I think our business mix from that standpoint will continue to improve as well, which will be a key part of it as we look to higher margins.

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

Okay. And then how much capacity will you have in the acrylics side, post the changes, how big is that business now and will you have to consider more expansion as the years go if this business continues to grow?

Michael E. Hicks

Yes. Acrylics represents about 22%, 23% of our Chemical business and I think we'll be running the acrylics business globally in the 75% to 80% capacity range. The total for the business is lower because of the lower SB Latex capacity, so I think we're fine for a few years and we've got some of that capacity in the U.S. We are adding capacity right now, which will be up in France in the February-March time frame, so I think we're fine for a little bit. But in the future again, we've got a history of being able to convert these reactors and if we need more capacity in North America in particular, we'll just take additional SB Latex reactors and convert them.

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

Okay. And your balance sheet's in pretty good shape. Is this an area, Kevin, that may be opportunistically looking for some bolt-on acquisitions on the acrylics side?

Kevin M. McMullen

Yes. We are and will continue to look for those kind of bolt-on acquisitions that would help accelerate some of our growth there, give us access to broader geographies and also broader markets. So yes, that continues to be a focus for us.

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

Then on the flip side given how well Engineered Surfaces has -- is performing, do you want to get bigger there or is this an area that you're just going to keep it the same size and continue to improve profitability?

Kevin M. McMullen

Yes. Well, our focus for our team is -- has been and will continue to be to get to that double-digit operating profit milestone and so that's our focus from an internal operating standpoint, we'll remain focused on that. Should there be opportunities that come up that makes sense, we'll take a look at them, but our primary focus is improving profitability there and growing our Laminates business more rapidly because we see lots of opportunities there, which would help our overall contribution as well. So right now that's the focus.

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

Okay. And last question. When you look to 2014, you've got a lot of -- some of the things under your control. What do you think needs to happen to get earnings sort of back on the growth trend as we head into next year?

Kevin M. McMullen

Well, I certainly think one of them is volume growth and that will be a key part of it. We've addressed our cost position again. We've restructured our manufacturing footprint. But I think volume growth would be a key part of it; leveraging new products that we have; leveraging products that we have in the market today at new applications. We're finding a number of opportunities where we have the products and we're just using them with new applications will be a key part of it. And continuing to benefit from some of the inherent market growth in some of our businesses like oilfield chemicals, where I think we can grow our position and our share, but we'll benefit from a lot of strong market growth. I think next year we'll benefit from continued housing and construction growth both in Chemicals and in Engineered Surfaces. So I think all of those things will contribute to getting back to the profit growth that we're all driving for.

Operator

We'll go to the line of Rosemarie Morbelli with Gabelli & Company.

Rosemarie J. Morbelli - Gabelli & Company, Inc.

Kevin, you talked about needing to grow Laminates faster. How are you planning in doing that? Is it a question of adding to your sales force? Is it a question of going into new markets? Is it that your end markets are growing? Could you give us a better feel for how you're planning in doing it in order to get to your 10% margin?

Kevin M. McMullen

Yes, well, our Laminates business is solidly contributing to that goal today, so that is -- but from a growth standpoint, we believe our Laminates business has the opportunity to grow at an even faster rate and that will come from many of the things that you mentioned. Increased sales coverage will be part of it, a more focused effort to drive material substitution in some of our key markets, where, for instance, in several of our markets, we are seeing success in replacing more expensive, high-pressure laminate with our material that gives not only a better overall system cost and life cycle cost, it also gives higher performance. So more durability, less cracking that high-pressure laminates suffer from and also design flexibility to have three-dimensional surfaces and edges. And so for all those reasons, we're seeing opportunities to substitute our material for these other materials and that will help drive growth. We see flooring as a growing market for the use of our material and a category that's been growing pretty rapidly called luxury vinyl tile, retail display. With the housing market rebounding, the use of laminates in cabinets and bath surrounds will be areas that we will grow. And, again, that will come from using our core technology to serve these other markets that are growing and, I think, strengthening our sales effort. I think we're becoming much more effective at selling at the end-user level and then working through the channel. So we're working with end users to get specification and then working through all of the intermediaries that are in that value chain, if you will. I think we're getting much more effective at doing that. We'll continue to enhance and accelerate that.

Rosemarie J. Morbelli - Gabelli & Company, Inc.

And then if I look at your comments regarding the structural improvement you are making in Performance Chemicals, other than the $4 million to $5 million of operating income benefit from moving capacity into China, can you share with us a little more detail as to what else you are doing, what would be the contribution and the timing of that contribution?

Kevin M. McMullen

So we're adding capacity in China while we are redirecting our capacity in North America, from a big-picture standpoint. And the redirecting of our capacity in North America is taking underutilized assets that are serving the North American styrene butadiene latex market and repurposing them for hollow plastic pigment, which we did earlier in the year, and now for some acrylic technology, which we've announced here earlier in the quarter. And so all of those will continue to improve our utilization. In the case of Asia, it will allow us to grow our business there more rapidly, where we were exporting from here or using toll producers, so it will allow us to grow there more rapidly in the case of here we will expect over the course of 2015, as we wrap up this latest project, to save about $4 million to $5 million in operating cost here as a result of some of the work we're doing to consolidate assets here. So those are all parts of the process of getting the right manufacturing in the right locations to serve growing markets and leverage our technology.

Rosemarie J. Morbelli - Gabelli & Company, Inc.

And then if we look at pricing versus raw materials, I understand that you are getting some competitive pressure but raw material costs are stabilizing. So if you didn't have the competitive pressure, would you still have to give back some of your previous price increases in order to give back to customers what they gave you when raw material costs were going up?

Kevin M. McMullen

Yes, I think in a portion of our business we, by design, have index-based pricing where raw materials drop and with a fairly short lag, we have pricing changes for our customers. And so that is the contractual agreement that we have, and so that would be there no matter what. But I think in certain markets where we're seeing some competitive price pressure, we're having to move more quickly on pricing actions than maybe we had in past times.

Rosemarie J. Morbelli - Gabelli & Company, Inc.

So you anticipate that to continue through the first half of 2014, the pricing pressure?

Kevin M. McMullen

We will see. I think part of it depends industry demand because I think there's some slack capacity in certain parts of our markets that is contributing to that. And if industry demand picks up, I think that situation could improve so.

Rosemarie J. Morbelli - Gabelli & Company, Inc.

And then lastly, if I may, could you talk about -- I mean, you seem to be quite cautious about Europe and yet we are reading some articles saying, well, it is at bottom; some are seeing a little improvement. What do you hear from your customers?

Kevin M. McMullen

I'm sorry, did you say carpet?

Rosemarie J. Morbelli - Gabelli & Company, Inc.

No. Europe.

Kevin M. McMullen

Europe. I'm sorry. So Europe is obviously a difficult one to read. I was just over there last week with our team and I think there are some positive signs. Certainly, Europe still has challenges. My sense is that the general take is that people feel like the worst may be behind us but it's going to be a gradual improvement if that's the case. I don't think -- I don't see many signs that it's going to be a V-shaped recovery from where we've been, but I think there are some signs that maybe the worst may be behind. It will be in a gradual improvement mode from here. So I think given everything that Europe has been through and all the challenges that it has, caution is not a bad perspective to take on it, given everything that's going on there.

Operator

[Operator Instructions] And there are no other questions in queue. Please continue.

Kevin M. McMullen

Okay. Well, thank you all for joining us for our third quarter conference call. Operator, if you wouldn't mind giving everyone the replay instructions and we'll look forward to joining all of you again in our fourth quarter.

Operator

Certainly. Ladies and gentlemen, this conference will be available for replay after 1 p.m. Eastern time today until October 21 at midnight. Also an audio replay will be available on the OMNOVA Solutions website, www.omnova.com, until noon Eastern time on October 21, 2013. That does conclude your conference for today. Thank you for your participation, and for using AT&T Executive TeleConference service. You may now disconnect.

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