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A. Schulman (NASDAQ:SHLM)

Q1 2014 Earnings Call

January 07, 2014 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, Principal Accounting Officer and Vice President

Bernard Rzepka - Chief Operating Officer and Executive Vice President

Analysts

Rosemarie J. Morbelli - G. Research, Inc.

Kevin Hocevar - Northcoast Research

Dmitry Silversteyn - Longbow Research LLC

Christopher W. Butler - Sidoti & Company, LLC

Saul Ludwig

Operator

Good day, ladies and gentlemen. Welcome to the A. Schulman Fiscal 2014 First Quarter Conference Call. My name is Cecilia, and I'll be your operator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Ms. Jennifer Beeman. Please proceed.

Jennifer K. Beeman

Thank you, Cecilia. Good morning, and welcome to A. Schulman's First Quarter 2014 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; Bernard Rzepka, Chief Operating 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 can materially affect 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 first quarter earnings release.

We will now begin with comments, and then we'll turn the call over for questions. I'd now like to turn the call over to Joe Gingo. Joe?

Joseph M. Gingo

Thank you, Jennifer. Thank you for joining us this morning, and first, I'd like to wish you all a Happy New Year.

Now let's turn to our excellent fiscal 2014 first quarter. I'm pleased to report that we started off our fiscal year with strong results, and I'm tremendously proud of our accomplishments.

On a consolidated basis, we delivered a 10% increase in net sales and a 13% increase in gross profit. All of our businesses saw improved net sales over the prior year. During the quarter, we successfully capitalized on operational efficiencies in Europe, increasing gross profit by 18%, with a 7% increase of pounds sold. We also benefited from previous restructuring efforts in Latin America and Europe. Additionally, we experienced solid contributions from our Perrite acquisition globally, which accounted for 6% of our top line.

On the topic of bolt-on acquisitions, this morning we announced the acquisition of Prime Colorants, a significant manufacturer of custom colors and additive concentrates in the southeastern area of the United States. This latest acquisition is part of our ongoing strategy to grow our custom color capabilities in the United States, as well as further transform our U.S. operations from commodity products to a business focused on specialty products and services.

As you know, color remains an area of opportunity for us in the U.S., and the acquisition of Prime will enable us to serve customers better by offering color expertise in an area of the country where we are not previously located.

As we've done with other color acquisitions, we intend to leverage our broader portfolio through existing color sales. We have maintained a strong working relationship with Prime for many years, so we know their associates will be a good cultural fit with our organization. For 38 years, Prime has provided pelletized color concentrate and dry powder color expertise to customers in the automotive and building and construction markets. Prime also provides an entry point for A. Schulman in the liquid color market. We're excited to have them join our team.

This added capacity will also complement our recent acquisition of the Perrite Group, which brought us additional color capabilities in Malaysia, and strengthened our niche engineered plastics business in Europe. As I mentioned earlier, Perrite has already been a strong contributor to our results, and the integration has moved quickly.

Let me also remind you that we closed on the acquisition of Network Polymers in early December. This transaction, which we announced in May, was yet another step to strengthen our U.S. business by expanding our capabilities in engineered -- niche engineered plastics.

Before I turn the call over to Joe and Bernard, yesterday, we announced that Jim Irwin has joined us as Senior Director of Corporate Business Development. In this newly created position, Jim is responsible for all aspects of mergers, acquisitions and divestitures globally. Jim will report directly to me. Not only will Jim target strategic transactions, but he will aid in the quick and effective integration of acquisitions, which is equally critical to us as we drive the acquisition strength -- synergies to the bottom line. Jim comes to us from Cliffs Natural Resources, where he served in various M&A and business development roles of increasing responsibility.

Prior to joining Cliffs, Jim spent 14 years as an M&A advisor and investment banker at KeyBanc Capital Markets. We're excited to now have a dedicated resource focused on this critical aspect of our strategy, and we believe Jim's outstanding mix of corporate and client advisory experience will provide further strength to our team. Our M&A pipeline is active, and Jim is the right fit to help us pursue both our bolt-on and transformational acquisition strategies. We welcome Jim to A. Schulman.

Now I'd like to turn the call over to Joe Levanduski for more detail on the first quarter results. Joe?

Joseph J. Levanduski

Thanks, and good morning, everyone. Let's begin with our fiscal 2014 first quarter's results on a consolidated basis. Net sales increased $53.3 million or 10% to $585.4 million. The Perrite acquisition contributed incremental net sales of $34.5 million during the quarter.

Additionally, we saw an increase in volume in nearly all businesses. Net sales also were positively impacted by improved mix of product sales and an $11.3 million positive impact of foreign currency translation.

Gross profit, excluding certain items for the company, was $80 million for the quarter, up from $70.6 million for the first quarter of fiscal 2013. Excluding the foreign currency impact, gross profit increased by $7.8 million compared with the year ago, which reflects the improved product mix and benefits from prior restructuring initiatives.

SG&A expenses, excluding certain items, increased $6 million compared with the prior year quarter, primarily due to incremental SG&A expense from recent acquisitions, as well as continued investment in our global marketing initiatives and the usual compensation and benefit cost adjustments. SG&A expenses represented approximately 9.5% of net sales for the quarter.

Operating income before certain items was $24.5 million, an increase of $3.4 million or up 16% from the prior year period. The increase was primarily due to the improved gross profit across all segments and the contribution of our Perrite acquisition.

Net income, on a GAAP basis attributable to the company's shareholders, was $15.1 million for the first quarter of fiscal 2014 compared with $11.8 million for the first quarter of last year. The current year includes a $3 million gain on the sale of assets related to the Australian discontinued operation.

Foreign currency translation had a positive impact of $600,000 on net income for the current year quarter. Net income on a non-GAAP basis from continuing operations was $16.7 million or $0.57 per diluted share compared with $14.6 million or $0.50 per diluted share a year ago, which excludes the impact of the discontinued operation.

Now turning to our business segments. In EMEA, net sales increased 11.7%, largely due to the Perrite acquisition. Sales and volume also benefited from greater demand in the German automotive market and contributions from new customers gained through acquisitions. Specifically, the custom performance colors, or CPC business, experienced increased sales and volume as they continue to gain market share within the EMEA region. EMEA gross profit increased $7.9 million to $51.9 million, mainly due to the incremental contribution of Perrite, improved product mix, savings from prior restructuring initiatives and foreign currency translation.

In the Americas, net sales decreased 2% compared with the prior year period, due to the negative impact of foreign currency translation and a reduction in pounds sold, primarily driven by the engineered plastics business, as we continue to execute our strategy to increase our specialty product sales and reduce less profitable commodity sales.

As a result of this strategy, we saw an increase in the Americas gross profit despite declining net sales. Gross profit was $21.4 million for the quarter, an increase of $400,000 from the comparable period last year. The benefits of prior restructuring initiatives and improved mix were partially offset by $300,000 negative impact of foreign currency translation.

As we anticipated, net sales in APAC increased by almost 50% as a result of the Perrite acquisition. Gross profit for APAC was $6.6 million, an increase of approximately 19% from a year ago. While gross profit for the region benefited from the positive contribution of the Perrite acquisition, the gross profit percentage, as expected, declined as a result of a more expanded product mix as we grow sales in this critical region.

Looking at our balance sheet, our strong financial position continues to support our strategy of acquisitions and organic growth. At the end of the first fiscal quarter, after the acquisition of the Perrite Group, the company was in a net debt position of $138.3 million compared with $81.8 million on August 31, 2013.

Working capital, excluding cash, was $258.5 million as of November 30, 2013, an increase of $16.9 million from the fiscal 2013 year-end. The primary reasons for this change included increases in accounts receivable and inventory brought on by the Perrite acquisition. The translation effect of foreign currencies, primarily the euro, increased accounts receivable by $6.9 million, inventory by $6 million and accounts payable by $6.1 million.

On an average basis, our working capital of 58 days as of November 30, 2013, represented a decrease of 3 days from November 30, 2012. The net availability under our credit line, which now includes our new recently expanded credit facility, was $384.4 million at the end of the fiscal 2014 first quarter compared with $198.3 million at the end of fiscal 2013. We anticipate using our new credit facility to continue our active campaign of acquisitions and supporting our internal marketing initiatives.

That concludes my prepared remarks. And now I'll turn the call over to Bernard.

Bernard Rzepka

Thanks, Joe, and good morning and Happy New Year to all of you. We continue to make good progress on our top 3 priorities: safety, smart sales and smart savings, as we drive profitable growth by focusing on what really matters.

First, I would like to update you on our restructuring efforts in Americas, specifically in Brazil. Our new plant in Brazil is now operational, but we are not experiencing a pickup in the Brazilian economy to significantly help with volume. We are in the process of finalizing our restructuring actions, so when we do experience any uptick in the local economy, our footprint rationalization will allow us to cost effectively capitalize on our opportunities. We still expect to see the majority of our estimated $1.4 million of synergies starting in the second half of this fiscal year.

Conversely in Mexico, which is a major component of our Americas operations, we are seeing strong demand, which we believe will continue into the second quarter. In the U.S., we have worked hard to transform our business and we'll continue to grow significantly. Through acquisitions, such as Network Polymers, we have expanded our portfolio with a broad spectrum of custom products to meet customers' specific design and manufacturing requirements, which now includes styrenics and its blends.

Our U.S. EP business is now starting to more closely mirror our successful EMEA EP business. While we experienced a decline in EP sales during the quarter, we know we are beginning to see the transformation in improved gross profit for the entire Americas region.

In the APAC region, our profitability has historically been the highest in the company by design. We began the business as purely niche-focused and kept it as such for several years. As we move to expand our top line growth, we'll pursue a wider mix of business. While we still maintain strong margins in the region, this mix shift will somewhat deafen[ph] our margin when compared with previous quarters as Joe Levanduski just mentioned. However, we're encouraged by the demand, and in the past year have significantly improved our regional footprint. For example, we have added an EP line and ordered a masterbatch line in China, as well as a color line in Indonesia.

Our team in EMEA has quickly and effectively driven purchasing synergy from the recent Perrite acquisition. EMEA also continues to benefit from our prior restructuring efforts. And as we have stated before, we expect approximately $4 million in savings, with the majority occurring during this fiscal year.

Our business in EMEA truly exemplifies our concept of smart sales by the way they approach purchasing synergies. We believe you cannot attain smart sales if you do not buy smart and link the 2. Smart sales also means that we focus on our strengths: service, speed and customer-specific solutions.

As you may have noticed, we have added a lot more emphasis on color on a global basis. In EMEA, we have gone from a 3% market share in color to 9% in a matter of a few short years. In fact, we have taken proactive steps to further grow our color business not only in EMEA, but globally. This is illustrated by today's announcement of the Prime acquisition in the U.S.

Lastly, we continue to drive profitable growth through our sales and marketing initiatives, including a focus on pricing and new products. Using EMEA as our pilot, we are aggressively rolling out new tools and training related to value pricing. This approach is not just to raise prices, but to better capture the value of our services and to identify areas of price leakage.

As far as new products, in the United States, we recently introduced our new Polyflam, our flame-retardant product, for use in industrial battery housings. This product is durable, with ignition and high-temperature resistance and is environmentally safe.

In Mexico, our POLYnnova Innovation Center have fostered the development of a new and improved antimicrobial additive that is highly durable, easily processed and can be used in multiple applications, such as flexible and smart packaging and medical devices. This is a good example of how an improved product can reach a new market for us, such as medical.

Now I would like to turn the call back over to Joe Gingo.

Joseph M. Gingo

Thanks, Bernard, and I wanted to briefly update you on raw materials. For now, our raw materials remain flat, with the exception of slight increases in polypropylene globally; and recently, polyethylene in EMEA. But as you are aware, suppliers are pushing hard for increases. If demand strengthens significantly, which would be a good problem to have, they truly may be able to get these increases, and then it will be a matter of how fast we pass them along. While we've typically been successful at keeping pace with rising costs, there usually is a slight lag, which could put short-term pressure on margins. Therefore, while we are encouraged by our excellent fiscal first quarter performance, we believe it is wise to approach the rest of the year with cautious optimism. As our markets remain competitive, the visibility of future demand is limited, and the cost of our raw materials may possibly increase.

That said, the positive impact of our marketing initiatives, cost-control efforts and the solid contribution of our recent acquisitions provide us with the confidence to raise our expectations for 2014 adjusted net income guidance to a revised range of $2.13 to $2.18 per diluted share.

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

Jennifer K. Beeman

Thank you, Joe. Cecilia, can you open up the call now for us?

Question-and-Answer Session

Operator

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

Rosemarie J. Morbelli - G. Research, Inc.

I was wondering if -- given the fact that you -- I mean, you sound as though you're anticipating some potential cost increases on your raw material side. The lag used to be somewhere between 6 and 9 months, if my memory serves me right. Have you been able to put in place some tools that will shorten the timing of that lag?

Joseph M. Gingo

Rosemarie, actually in the areas of masterbatch and color and especially powders, the lag is much shorter than that. In the area of -- let's say, 1, 2, 3 months, it really -- in the area of engineered plastics is the area where we used to be as much as a year lagged, and we've been able to shorten that to a 3- to 6-month time frame, but there's always been a slight lag in all of the markets we've been in.

Rosemarie J. Morbelli - G. Research, Inc.

Okay. And I was wondering if you could talk about the order book in each region, and whether you have seen any change in the order pattern?

Joseph M. Gingo

I'm going to let Bernard answer that question.

Bernard Rzepka

No, we didn't see any. So as Joe said, it's -- we have a visibility of 4 to 6 weeks. That's what customers do, and we believe that this will continue during the course of 2014. Nobody sits nowadays or like to sit on a lot of stock, so they order, and we have to deliver and we have to be very flexible to meet the demand at the time our customers need it.

Rosemarie J. Morbelli - G. Research, Inc.

Bernard, in addition to the improvement in the German automotive market, what are you seeing in the whole of Europe, if you look at the different markets served? Are you seeing some improvement or is it just bouncing at the bottom? Could you give us a better feel for what is going on, what you see, what you hear there?

Bernard Rzepka

What we currently see is that, as we all know, from a very low-level in Europe, we see a slight improvement, and we are hoping -- and that's one part of why we are cautious. We're hoping that this will continue during the spring and into summer of this year.

Operator

We have a question from the line of Kevin Hocevar, Northcoast Research.

Kevin Hocevar - Northcoast Research

On Europe, I was curious, you achieved a gross profit per pound, $0.166. It's the highest it's been in a very long time. I'm wondering how sustainable that is. Was there anything quarter-specific that benefited that? Or can we kind of expect this high level of profitability to continue?

Bernard Rzepka

Yes. It's Bernard speaking. There's probably 2 things which you see. A, as you now, and both Joe and I mentioned it, we worked very hard, since now years, on moving the company more into added-value products, which means that we proactively as well leave certain markets and customers. That's one thing which you see and one reason why we focus so much on the color market.

Joseph J. Levanduski

Yes. I think, Kevin, one of the other things is, as you know, Bernard and the team in EMEA, when Bernard was in charge of EMEA back then, worked very hard on rationalizing our cost footprint; and as we've been saying all along, with slight increases in GDP growth in Europe. And we hope that we'll continue to see slow and steady growth in Europe, we'll be able to pull through more to the bottom line as a result of those prior actions, so we're confident in the footprint that we have.

Kevin Hocevar - Northcoast Research

Okay. And I had -- curious, when looking in the Q, it looked like specialty powders saw sales increase 16%. So I was just wondering, was there anything you saw in that product family that really improved during the quarter? Because I know the rotational products have been a little bit soft the last several quarters. So I was wondering if you saw any change there.

Bernard Rzepka

Yes, that's what we saw. I mean, it came from a very, very low business level. The business suffered during a couple of months in Europe, and the market is coming now slowly back. And additionally, our -- the U.S. worked very, very hard to capture new customers and to move as well in this segment into added-value markets.

Joseph M. Gingo

And we saw -- we did see recovery in that added-value area. We saw -- and that was not just Europe, that was actually in the Americas as well.

Kevin Hocevar - Northcoast Research

Okay. And then just finally, you've got a couple of acquisitions here now, Perrite, Network Polymers Prime Colorants, all contributing to 2014 results. I was wondering if, on a consolidated basis, how much of the EPS growth in 2014 should we expect to be from these acquisitions versus the other restructuring and just organic growth? I wonder if you can kind of give us a sense for the M&A portion of that.

Joseph J. Levanduski

We don't break out, obviously, operating performance by individual acquisitions. However, we always look for accretive acquisitions, and all of our acquisitions are accretive in our forecast models. What we're -- what I do want to remind you is, as we set our original guidance, as we walked into the year, given the timing of the Network acquisition, both the Perrite Group and the Network acquisition, for 9 months at that point in time, was built into our original guidance for the year. The Prime acquisition, which we just announced today, while relatively small in size, wasn't factored into the original guidance, but the EPS contribution won't be that significant for the balance of the year. So as we look at the current year or the current quarter, our Perrite acquisition probably accounted for about $0.02 of EPS for the quarter.

Joseph M. Gingo

Kevin, the other thing that becomes difficult with time is one of our philosophies on all of these acquisitions is to sell our entire portfolio of product through, like for instance, the color acquisition. So we can see an increase in sales in what might be considered an acquisition that is actually from our core products that are produced in other locations. So it becomes dilutive in terms of our being able to analyze it.

Operator

We have a question from the line of Dmitry Silversteyn, Longbow Research.

Dmitry Silversteyn - Longbow Research LLC

Couple of questions. When you talked about the softness in the Brazilian market after the restructuring and the new plant being up online, which particular markets are you seeing as underperforming? And sort of what's the outlook for that? I think there was some comment about once the volume does come back, you should get good leverage in your lower cost structure. But what are we waiting for in Brazil? Or what are we -- should we be paying attention to there?

Joseph M. Gingo

Right now, Brazil is really one of the weaker markets in the world. If you -- and in general, most of the reading that I've done said that the BRICs are fairly soft compared to what they have been, and that definitely includes Brazil, India. And now that they've included another I, with Indonesia, we see that softness in the BRICs. And I really wish, Dmitry, I could give you a better feel when I think that's going to come back, because it does not seem to be market-related, it seems to be country-related. The softness is pretty much across the board as far as we can see. We're not seeing any individual market being worse off than any other.

Dmitry Silversteyn - Longbow Research LLC

Okay. So it's not like we should be looking at autos or building materials, it's really across the board?

Joseph M. Gingo

It's across the board. I mean, we're seeing it in our engineered plastics business, which does reflect into the automobile and electronics. We're seeing it in our masterbatch business, and we're actually seeing it even in our roto-compounding business.

Dmitry Silversteyn - Longbow Research LLC

Got it, got it. Then a question on -- switching geographies in Asia-Pacific region. I understand the strategy of moving into higher-volume businesses and markets, which would be dilutive to margins. But as we look to model out the impact of that, is this something that sort of will take place from now on going forward? Sort of what's the -- are we expecting margins in that region to come down to sort of the mid-single digits that we're seeing in EMEA? Over the next 2, 3 years, how should we think about the -- offsetting the growth in volumes with some margin compression?

Joseph J. Levanduski

Yes. I think our strategy going forward in APAC is similar to what you're seeing in the first quarter. We have discussed previously our goal of taking it from a pure niche play to a more broader product portfolio, similar to our makeup and consistency of EMEA. And so as we continue to do that, we anticipate to see margins continue to migrate towards, call it, the EMEA-type margins.

Joseph M. Gingo

Well -- but with 2 distinctions: We're not a big player in distribution or specialty powders, roto-compounding in Asia. So I don't think, Dmitry, that you'll go to the EMEA margin but you'll be lower than where you are, because as you're well aware, probably our lowest margin is in distribution. Our second lowest margin is in roto-compounding.

Dmitry Silversteyn - Longbow Research LLC

Okay, okay. So maybe 1 point to 1.5 points downside from sort of where you ended 2013...

Joseph M. Gingo

That would seem to me to be a logical supposition.

Dmitry Silversteyn - Longbow Research LLC

Got it. Okay, very good. And then another question, if I could. Just refresh our memory on what the foreign exchange sensitivity is to the euro of your earnings.

Joseph J. Levanduski

Yes. From a P&L EPS standpoint, the FX really didn't have a significant impact on our EPS. It contributed about $0.02 positive to the EPS number on a non-GAAP basis. If you think back to the average rate for our first quarter of fiscal '13, it was roughly about $1.29 back then. And this first quarter, the average rate was nearer to $1.35. Obviously, it's trading, I think, today around about $1.36. So second quarter of last year, the average rate was around $1.33. So we're not seeing it's going to have a significant impact on our bottom line results going forward. But if I knew where the currency were headed, I probably wouldn't be here, I'd be making money somewhere else.

Dmitry Silversteyn - Longbow Research LLC

Joe, but my question was, can we think about this -- for every $0.05 move, where there's going to be that much of an impact on EPS or something like that?

Joseph J. Levanduski

Yes, I think when you're going up about 300 -- you're probably going up about $300,000 on the EPS impact for every $0.01 change, give or take.

Operator

The next question comes from the line of Christopher Butler, Sidoti & Company.

Christopher W. Butler - Sidoti & Company, LLC

If we're looking at the U.S. business, North American business and the 3% decline in volumes, how much of that can be attributed to the engineered plastics business?

Joseph M. Gingo

About 100%. No, and I think we'll capture that a little bit in our conversation. But frankly, this was pretty straightforward. You might recall that a year ago, we sold our Bellevue facility. That was the last remaining heritage facility we had. It was very much dependent into volume products into the automotive market, more commodity-based. And really, what happened is the natural reflection of what we wanted to happen over this entire period of time. Bernard made the comment, our EP business in the U.S., especially now with Network being involved, is much more reflective of our European EP business, and Bellevue was the last plant, that was the legacy plant. So almost all of the change, both in the gross margin improvement and in the loss of volume, came as a result of the move away from automotive commodity into much more niche engineered plastic business.

Christopher W. Butler - Sidoti & Company, LLC

And so if we're thinking of this by region, you said Mexico was strong, Brazil was weak, does that mean that sort of this flat growth was what we saw for the U.S. part of the business?

Joseph M. Gingo

Yes, yes.

Christopher W. Butler - Sidoti & Company, LLC

And looking at the operating profit per pound, can we attribute the decline there specifically to Brazil? Would you have been up if not for the South America portion?

Joseph J. Levanduski

Yes. The operating profit per pound, I think was -- is kind of flat. It's more currency-driven than anything else.

Christopher W. Butler - Sidoti & Company, LLC

And so as we see some of the improvements in South and -- South America and strength in Europe, do we start to -- do you expect to see improvement there as we go along? I'm just -- I think I'm just a little surprised that with the trimming of lower profit sales, that we didn't see a little bit more improvement in the first quarter.

Joseph J. Levanduski

Yes. I think once the Latin America headwinds clear out, I think you'll see that benefit showing up in the operating profit per pound.

Christopher W. Butler - Sidoti & Company, LLC

And just shifting gears, how much leverage are you comfortable with? What would you be able to push things to, assuming that you would then start to pay it down again?

Joseph M. Gingo

Well, I'll tell you what, Chris, we're going to let Joe answer that because I would go with a higher number. I know it. We'll go with the official.

Joseph J. Levanduski

This is the more conservative Joe speaking. I think, obviously, where our net leverage is today, which is just above 1x, is very conservative. I think we have demonstrated through our acquisitions and our recent closing of 3 deals in the last 4 months that we're willing to increase our net leverage position. And with Jim coming onboard and an active pipeline, we're hoping to continue that trend. I think the comfort zone for me is probably in the 2.5x net leverage basis. But obviously, it all depends -- everything is dependent on the nature of the business that we're looking at, the target and what we need to invest in. And we're going to make the smart decisions as we make investments of our balance sheet and continue to keep our balance sheet strong.

Joseph M. Gingo

And as Joe has said in his previous answer to a question, look, up to now, our -- all of our acquisitions have been acquisitive for us. So as long as that continues to occur, and we are confident that they would be, and now that Joe has been able to achieve a much stronger credit facility for us, obviously, we're going to continue to look. And I think our hiring of a dedicated resource indicates that this remains a serious area for us. And we anticipate, as Joe and I would tell you, that our leverage is going to go up.

Christopher W. Butler - Sidoti & Company, LLC

And just finally, it seems as if you're anticipating raw material costs to rise. I would assume that your customers are as well. Could you speak to the impact that, that would have on demand for the quarter? Did you see a pull forward at all, do you think?

Joseph M. Gingo

No. I'll tell you what, and I hope -- I'm glad you asked the question because maybe I can expand upon the raw materials statement. Raw materials did not really rise significantly for us, but what we've seen is a pent-up -- a feeling by our suppliers, because it's been a long time since the -- it's been over a year since suppliers have been able to get raw material price increases. So they are really looking forward to it. Now if demand stays in the 1% to 2% in the big markets of the world, I don't think raw material prices are going to go up anymore than slightly. What I was trying to convey is if we see a return to strong demand, above 2% to 3%, there is a potential then that we finally get the supply-demand equation in a different ratio than it is now. At the current time, demand does not exceed supply. If we see some robust growth, that possibility will change, Chris. And at that point in time, if you are a raw material supplier, you're going to take advantage of it, to try to get back some of the margins that you lost. So I hope that explains the question. But we didn't see much pull forward. We don't think that was it because we're not seeing, other than what I mentioned, slight increases in polypropylene globally and polyethylene slight increases in Europe, we're not seeing a huge push on raw materials at this point. But if demand comes back very strong, all of our suppliers will attempt to take advantage of it.

Operator

We have a follow-up question from the line of Rosemarie Morbelli, Gabelli & Company.

Rosemarie J. Morbelli - G. Research, Inc.

I was wondering if you could give us a little more details on the competitive environment in APAC, which you made a point of pointing out.

Bernard Rzepka

Yes. It's Bernard speaking. It's very competitive. It's a bit more competitive than what you see in Europe. As Joe mentioned, I think we mentioned a couple of times now that the demand has slowed in this region too, to significant lower levels, and they are still the same players. And I'm sure you follow China, how they try to consolidate the entire industry. So there's a tremendous pressure and competitiveness in these markets. So that's why we are well advised to stay in added-value products. We pick products which go into the broad markets, basically by using our global leverage. There's a lot of producers, as you know, from the continent where we have approvals, and that is the business, which we further develop; and plus service and service levels are rising in that region and speed requirements. And that's why we are very, very keen as well to grow our color business, which is specifically targeted to these markets. So it's very tough out there, and you have to pick your place where you play.

Rosemarie J. Morbelli - G. Research, Inc.

So it sounds as though, on the margin side, you are getting a double whammy. First, you are commoditizing, to a certain degree, your offerings and then you have additional competition on top of that. So would -- if this continues, wouldn't that get you to focus on maybe lower top line growth but higher margin and focusing on niches again?

Joseph M. Gingo

Well, I think one thing we have to clarify, we're not moving into commodity. We're not doing what the U.S.A. used to be for A. Schulman. We're looking at more what I'd classify, Rosemarie, as broad market. And in the -- if you recall, I've used a pyramid, I know, with you; at that top, the niche. Well, really and truthfully, when we look at all of our other regions, except for APAC, we were in the niche and we were in broad market. But in Asia, we were 100% in the niche. So what we're attempting to do is move much more like the rest of our regionals to a broad -- some more broad markets. So although we will see a margin deterioration from a pure niche business, it's not going to be driven into the commodity type of environment that I inherited when I came to Schulman in the U.S.A.

Rosemarie J. Morbelli - G. Research, Inc.

Okay. That is helpful. And I also was wondering if you could expand a little bit on your new products.

Bernard Rzepka

On the new products, you've seen what we are talking about. One is targeting more the medical device markets, and for some time we said this is a very attractive segment. So we are improving our product going to the segment here with our POLYnnova activity in Mexico, which is linked to Europe and what we do in Asia too, because we have global teams working on it. So we found a solution here in Mexico. We are testing it out in the markets, and we see it's getting successful. We were rolling it out worldwide. And the flame-retardant business I was talking about here in the U.S. in engineered plastics, this is a cooperation with our European colleagues, where for almost a decade, we have targeted in Europe electronics and flame-retardant markets, because the legislation is very, very tough on these products. And we are testing now this product here for the U.S., Americas market. And actually, we use the same technology in our -- in Asia. So we develop specific solutions in the region here, and then we multiply them in the other.

Joseph M. Gingo

And I think, Rosemarie, to add on that, and Bernard mentioned it in his comments, is let's take a look at Network. Prior to us acquiring Network, we had no styrenics in the United States, although we have them significantly in Europe. So we're taking -- and Network had some unique products as well. So we're taking those products in Network that we got through the acquisition, moving them into Europe and Asia, as well as taking products we developed into Europe in styrenics and move them into Network. So although they're not new products, they're new products in different regions of our world.

Rosemarie J. Morbelli - G. Research, Inc.

Okay, that is helpful. Lastly, could you give us a feel for the size of your business going to medical applications and the one to flame retardant? Or do you not -- I mean, I know you have flame retardant before, and is it that it used to be bromine-based and it is now something else?

Bernard Rzepka

Oh yes, we are moving away from these products definitely. So as I said, environmentally friendly products, halogen-free products, that's what we are moving to. Yes, but we would not quote now any size of this.

Joseph M. Gingo

No. But in general, what I can say to you, obviously, we have been a big player in the flame-retardant business in Europe, and we've even done that as we moved into Nylon into the U.S.A. and into Asia. Medical, we're really just starting. I mean, some of -- and that's been a goal for us, and Bernard has mentioned one of our new entries. But if I would compare the size of the markets, they're not -- for us, they're not comparable at this point, Rosemarie. Flame retardant is a very big market for me. Medical is an emerging market.

Operator

We have a question from the line of Saul Ludwig, Saul Ludwig Consulting.

Saul Ludwig

I was really glad to hear the talk about moving out of some lower-margin businesses and a more emphasis on the specialties, and that clearly showed in your product per pound. In thinking about the moving out of low-profit products, how much -- what's sort of the magnitude of this as we go forward? Is this something that we're going to hear about impacting volume for several quarters into the future? Or does the sale of the Bellevue facility pretty much cleaned out that commentary?

Joseph J. Levanduski

Yes. I think the sale of the Bellevue facility really kinds of clears that out, and that was towards the tail end of calendar '12. So it will kind of wash its way out of the comparatives pretty soon.

Operator

[Operator Instructions]

Jennifer K. Beeman

Any further questions, Cecilia?

Operator

There are no further questions at this time.

Jennifer K. Beeman

Okay. Thank you all for joining us today, and that concludes our call.

Operator

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

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