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A. Schulman (NASDAQ:SHLM)

F2Q 2014 Results Earnings Conference Call

April 8, 2014, 10:00 a.m. ET

Executives

Jennifer Beeman - Director of Corporate Communications & Investor Relations

Joseph Gingo - Chairman, President, and Chief Executive Officer,

Joseph Levanduski - Chief Financial Officer

Bernard Rzepka - Chief Operating Officer

Analysts

Kevin Hocevar - Northcoast Research

Rosemarie Morbelli – Gabelli & Company

Dmitry Silversteyn - Longbow Research

Matthew Dodson - JWest

Christopher Butler - Sidoti & Company

Operator

Good day, ladies and gentlemen, and welcome to the A. Schulman fiscal 2014 second quarter conference call. [Operator instructions.] I would now like to turn the conference over to your host for today, Ms. Jennifer Beeman. Please proceed.

Jennifer Beeman

Thank you, operator. Good morning, and welcome to A. Schulman's second 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 release 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.

As many of you know, we are hosting an investor day on Thursday, April 10 in New York. During this half-day session, we will present our long term goals and you’ll have an opportunity to hear from Joe Gingo, Joe Levanduski, Bernard Rzepka, as well as from Patty Mishic regarding our marketing initiatives and Jim Irwin on our M&A strategy. We encourage you to join us for this informative day. We’ve sent registration information out, but if you need additional details, please contact me directly.

Now, I’d actually like to turn the call over to Joe Gingo, who will then go through our prepared remarks, and then we’ll open up the call for your questions. Thank you.

Joseph Gingo

Thank you, Jennifer, and thank you all for joining us this morning. Now let’s turn to our strong fiscal 2014 second quarter. I’m very pleased to report that we’ve continued our positive growth trend into the second quarter. These results were largely driven by the dedicated work of our European associates related to operational efficiencies and restructuring initiatives.

Now that we have experienced modest volume improvements over the past two quarters in Europe, we can see stronger pull through to our bottom line from these efforts. On a consolidated basis, we delivered a 14% increase in net sales and an 18% increase in gross profit over the prior year quarter. In Europe, we successfully capitalized on operational efficiencies and increased gross profit, excluding certain items, by 18%, with a 9% increase in pounds sold.

We also benefited from previous restructuring efforts in Latin America during the quarter. Additionally, we experienced solid contributions from our recent acquisitions globally, which accounted for 9% of our top line growth.

Now, I’d like to turn the call over to Joe Levanduski for more detail on our second quarter results. Joe?

Joe Levanduski

Thanks, and good morning everyone. I’ll begin with a discussion of our second quarter results on a consolidated basis. For the quarter, net sales increased $73.1 million or 14.2% to $588.5 million. Incremental net sales from acquisitions contributed $52.4 million during the quarter. Volume increased 8.8%.

Excluding the impact of acquisitions, net sales were positively impacted by a 3.1% increase in price per pound and a 0.8% increase in organic volume. Foreign currency translation favorably impacted sales by $3.6 million.

Gross profit, excluding certain items, for the company was $75.3 million for the quarter, up from $63.6 million for the second quarter of fiscal 2013. Excluding the foreign currency impact, gross profit increased by $11.2 million compared with a year ago, which reflects incremental contributions from recent acquisitions, improved mix, and savings from prior restructuring initiatives.

SG&A expenses, excluding certain items, were $56 million, which represents 9.5% of net sales, compared to $51.3 million or 10% of net sales in the same period last year. The increase was primarily due to incremental SG&A expense from recent acquisitions, along with higher incentive compensation expenses compared with the fiscal 2013 second quarter.

Operating income, excluding certain items, was $19.3 million, an increase of $7 million or roughly 57% from the prior year period. The increase was primarily due to improved gross profit across all segments, partially offset by the increased SG&A expense.

Recent acquisitions contributed $2.3 million of operating income before certain items. Net income on a GAAP basis attributable to the company’s shareholders was $6.9 million for the second quarter, compared with $11.8 million for the prior year period. As you’ll recall, the strength of last year’s results was favorably impacted by certain tax benefits.

Foreign currency transactional losses were $1.5 million for the quarter, primarily related to the company’s consolidated venture in Argentina. The Argentine peso depreciated 22% in the month of January, leading to the majority of this FX loss. The impact of this loss on net income attributable to the company is reduced in proportion to the 49% equity held by noncontrolling interest in the venture, and the impact to A. Schulman shareholders was less than $0.02 per diluted share.

Foreign currency translation had a positive impact of $100,000 on net income for the current year quarter. On a non-GAAP basis, net income from continuing operations was $11.3 million or $0.39 per diluted share compared with $8.2 million or $0.28 per diluted share for the prior year period.

Now let’s turn to our business segments. In EMEA, net sales were $383 million for the quarter, an increase of $40.8 million or 11.9% compared with the prior year quarter. Of that increase, $21.4 million was due to the Perrite acquisition.

Organic volume increased in all product families. Sales and volume benefited from greater demand in the automotive and electronics and electrical markets. EMEA gross profit increased $7.6 million to $47.5 million, mainly due to the incremental contribution of the Perrite acquisition, improved product mix, benefits of prior restructuring initiatives, as well as higher volume in all product families. Foreign currency translation positively impacted EMEA’s gross profit by $900,000.

In the Americas, net sales for the second quarter increased $12.9 million or 8.9% to $157.1 million. The Network Polymers and Prime Colorants acquisition increased sales by a total of $17.3 million, while foreign currency translation negatively impacted sales by $4.4 million.

As we continue to execute our strategy to increase specialty product sales and reduce less profitable commodity sales, we saw an increase in selling price per pound, which I am pleased to say more than offset the decline in organic volume.

Gross profit for the Americas was $21.2 million for the quarter, an increase of $2.5 million from the prior year. The benefits of recent acquisitions, improved mix, and prior restructuring initiatives were partially offset by lower volumes and a $500,000 negative impact of foreign currency translation.

Net sales in APAC were $48.4 million for the quarter, an increase of $19.3 million or approximately 67% from the prior year quarter. The incremental contribution from the Perrite acquisition accounted for $13.7 million of that increase.

Excluding the Perrite acquisition, organic volume increased by 26% in APAC. That increase was partially offset by the decreased price per pound, driven by competitive pricing pressures, primarily in Masterbatch solutions.

Gross profit for APAC was $6.5 million for the quarter, an increase of 32.2% from a year ago, primarily due to the positive contribution from Perrite, as well as the increase in organic volume. As expected, the gross profit percentage declined as a result of the competitive pricing pressures and our expanded product mix in the region.

Looking now at our balance sheet, we continue to operate from a strong financial position to support our strategy of organic growth and bolt-on acquisitions. At the end of the second quarter, the company was in a net debt position of $233.5 million, compared with $81.8 million on August 31, 2013. We increased leverage to fund recent acquisitions, capital expenditures, dividend payments, and seasonal working capital needs.

Working capital, excluding cash, was $316.4 million as of February 28, 2014, an increase of $74.8 million from the fiscal 2013 year-end. $30.1 million and $7.9 million of the increase was driven by our fiscal 2014 acquisitions and foreign currency translation, respectively, while the balance was related to seasonal requirements.

Our working capital of 66 days as of February 28, 2014 represented a decrease of 2 days from February 28, 2013. The net availability under our credit lines, which includes our recently expanded credit facility, was $309.4 million at the end of the fiscal 2014 second quarter, compared with $198.3 million at the end of fiscal 2013.

With that, I’ll conclude my prepared remarks and turn the call over to Bernard.

Bernard Rzepka

Thank you very much, Joe. Good morning. As Joe mentioned, we are pleased with the continued recovery in Europe. During the quarter, we saw particular strength in the European automotive and electronics and electrical markets. After six years of declines, Europe is expected to see an approximately 3% rise in new car sales in 2014 to about 14 million vehicles. Keep in mind, this is still well below the 18 million units sold in 2007.

Since the global trend will continue for lightweight vehicles to promote fuel economy, our family of automotive related [unintelligible] plastic products will continue to match OEM requirements for lightweighting and fuel efficiency.

In the Americas, we are transforming our business further for higher value and I’m encouraged that organic net sales in the region remain consistent with prior year, despite an 8.2% drop in organic volume, as we continue to move away from commodity products. And of course, severe winter weather in the United States did not help us to realize our potential.

In our APAC segment, the addition of Perrite Group’s Malaysian subsidiary has led to significant growth and provides us with another solid engineered plastics operation in Asia. Overall, the Perrite [unintelligible] is performing well, and the integration is on track.

On a growth market basis, I believe that we have seen stabilization on a sequential basis. Additionally, we are seeing organic growth across all product families in the APAC region. Thus, we just approved our fourth manufacturing line for China.

While we are pleased with our progress in the region, we are always seeking opportunity to expand wisely in this fastest-growing area of the world. Last quarter, I updated you on a few new products, but today I wanted to elaborate more about our innovation centers and how they are creating a steady stream of value-added products that win in the marketplace.

If you are able to attend the investor day later this week, you will hear about a few more products in more detail. Since we aim to be a global leader in innovation, we are creating dedicated facilities which enable greater collaboration of our technical team and bring our product to market faster than ever before.

In Akron, Ohio, our innovation and collaboration center is dedicated to developing solutions that address the growing demand for high-performance plastics compounds and [unintelligible] in the Americas. We have integrated the product development of our recent network acquisition into this facility to fully leverage our multiple technologies and [unintelligible] at one site.

This center enhances collaboration among our engineered plastics, Masterbatch, and especially in [powder] business units to development innovative solutions for customers. Our customers can then leverage the full scope of our technology capabilities to meet their specific needs.

The innovation and collaboration center is located near our Akron manufacturing plants and is equipped with [unintelligible] converting equipment for multiarea cuts, [unintelligible], and injection molding. The center has the capability to support multiple development efforts across a wide range of target markets, products, and manufacturing processes.

Similar to our other innovation centers, the Akron center also works in cooperation with universities and industrial partners to develop state-of-the-art technology to support new product development [unintelligible]. One example is funding of a university fellowship to conduct research on the migratory impact of additives. With four innovation centers around the world, we are in an excellent position to serve and develop with local customers as well as support development with our key customers globally.

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

Joseph Gingo

Thanks, Bernard. And before we take your questions, I wanted to update you on raw materials, since we spoke last quarter. If you recall, we tempered our optimism at the end of the first quarter because we were unsure if a steady uptick in demand would enable suppliers to push through substantial price increases.

While modest increases in demand have occurred, our major raw material pricing has remained relatively flat. We did not experience notable price escalations during the second quarter. While we still keep a close eye on the pricing environment, we do not see our raws negatively impacting us during the second half of this fiscal year.

Therefore, driven by the trend of our positive European results, the continuation of relatively stable raw material pricing, and modest economic growth globally, we raised our expectations for 2014 adjusted net income guidance to a revised range of $2.23 to $2.28 per diluted share. This would represent an approximately 25% increase over the prior year results, using the high end of this range.

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

Question-and-Answer Session

Operator

[Operator instructions.]

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

Kevin Hocevar - Northcoast Research

I was wondering if you could update us on the impact you think that weather had during the quarter, both in the Americas and in Europe. Because my understanding is Europe was the exact opposite of here in the U.S. Just wondering if there’s any way you could quantify the impact that those had during the quarter.

Joseph Levanduski

It’s really not something that we were able to quantify with any degree of accuracy, but obviously when we saw the volume change in the Americas, we obviously have correlated that to the harsh winter that we experienced in the Americas. I think the European weather was somewhat mild. I don’t think it had very much influence on the financial results.

Joseph Gingo

The other thing that we’ve noted is, since March, there’s been a pickup in our order book, particularly in the United States. The rest of the world is staying pretty consistent. With that pickup, we think we’re trying to draw the conclusion that there was some weather impact to us.

Kevin Hocevar - Northcoast Research

And then just wondering, as Europe has shown now two consecutive quarters of positive organic volume growth, how should we think of incremental margins in that region, given all the restructuring and cost take out you’ve done over the past several years? How should we think of those incremental margins in that region going forward?

Joseph Levanduski

I think as we’ve been saying all along, the efforts of the European team over the course of the last several years, this is not just a second quarter impact, but over the course of the last several years, have really over the course of the last year or two, have been really to fill in the hole that the volume decline had presented to us, meaning it was really kind of offsetting the volume decline.

As we have gone into this year, as you’ve seen, volume has increased, which is the first time in quite some time that we’ve been able to report that. And as a result, I think a benefit that we’ve been achieving through our restructuring initiatives, efficiencies on the shop floor, and SG&A control are starting to show up more significantly.

Our assumption at this point in terms of the second half is that volume will continue to be modestly improved, and therefore we don’t have any anticipation that the picture will change dramatically from what we’ve seen in the first half.

Kevin Hocevar - Northcoast Research

And it’s really helpful that you now provide a breakout of revenue and pounds sold by the product line in each of the regions, and I noted that specialty powders, revenue per pound seemed to increase substantially. Volumes were only up 2%, revenue was up 15%. So I was wondering if you could describe, is there anything you’re doing in particular specialty powders that pricing actions or mix improvements, or what’s happening in that segment to really drive that. And are you seeing similar results on the bottom line in that segment as well?

Bernard Rzepka

We have focused really on specialty powder, and we have developed new products in the market. And here in the Americas, we have been particularly successful with the volume [unintelligible], where we have specified some solutions for some of these players here that I think everybody knows on the call. This is an industry which is growing and developing nicely here in the States. So that’s certainly one thing, and the other is we restructured, I believe now two years ago, our Italian plant in specialty powder, and we put it into our plant and focused on specific products like [unintelligible].

Operator

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

Rosemarie Morbelli - Gabelli & Company

Could you give us a better feel on what is behind the price pressure in Asia Pacific?

Joseph Gingo

Yes, we are a very big player in the BOPP film industry. What has occurred is, our customers have put in a significant amount of capacity. And with the downturn in the economies in Western Europe and the United States, a lot of that was exported.

And as growth in the region itself has slowed, although it’s still in that 5% to 7% range, what’s happened is the supply that is available from our competitors and ourself, we really are getting a lot of pressure from the customers on pricing. So that has depressed our pricing on BOPP additives and lights and that’s one of our key markets. And that’s primarily the reason.

Now, I think with time, as the demand grows into this supply, that will alleviate. So I don’t think it’s a long term problem, but definitely I think it’s a short term problem, not only for what we’ve seen so far, but through the remainder of this year.

Rosemarie Morbelli - Gabelli & Company

So you are seeing pressure from customers? What about competitors?

Joseph Gingo

Well, because competitors are dropping their price to fill the less demand, more people are trying to sell into this industry, which now has less demand than it had in the past.

Rosemarie Morbelli - Gabelli & Company

So it is more of a competitive pressure from all the suppliers than it is customers. Customers are just playing the game.

Joseph Gingo

Yeah, but as a result of excess capacity in our customer ranks.

Rosemarie Morbelli - Gabelli & Company

And then the volume, in the Americas, was down 8.2%. Can you estimate how much you voluntarily eliminated in terms of your project to have fewer commodity product lines?

Joseph Gingo

It’s very difficult to do and get an exact feel of that and anything that was weather related. So I really am not in a position to give you a really good number there.

Rosemarie Morbelli - Gabelli & Company

Okay, so if you just look at the game plan and where you stand, is there more commodity elimination coming down the road? Or are you just about where you would like to be in terms of your mix?

Joseph Gingo

This answer only applies to the United States. There is more commodity opportunity for elimination in the USA. I feel in the rest of the world, we are in very good shape. We have the right balance, not only in Masterbatch, but in EP, specialty product, our entire product line. But we still have room for improvement in the United States, and Bernard has several programs underway just to do that.

Rosemarie Morbelli - Gabelli & Company

And then lastly, if I may, what kind of products are going to the oil industry in terms of your specialty powders? What are they used for? Is that [big bites] or is it something else?

Bernard Rzepka

It’s specific products that we have developed already some while ago, and there’s now a trend more to green products when they drill, so it’s PLA. Something when you drill a hole with, and you put this product into it, it will dissolve with time, and it has no ecological impact. And that’s what we have developed with our partners now, and that’s what we focus on.

Rosemarie Morbelli - Gabelli & Company

Oh, so it is not a compound that is being used for making equipment? It’s like a [mud] more or less?

Bernard Rzepka

It was [unintelligible], one reason why we are doing so well in the specialty powders area and business. It’s a technology that we have developed with our customer. So it’s a powder that is going down for drilling oil and gas.

Operator

Your next question comes from the line of [Samit Rashan] from KeyBanc.

[Samit Rashan] - KeyBanc

As I think about the competitive environment in Europe and over the past couple of years you’ve pointed out just a little bit more pressure there in terms of pricing. Now that you’re seeing organic growth pick back up and demand start to pick back up, can you comment on maybe what you’re seeing from your competitors and how that environment’s changed? And also, kind of segue that into how you think of the industry in terms of where we stand in terms of capacity.

Bernard Rzepka

What you have seen over the last year, I was able to dig some data out in the last week, that some sources say, in the last five or six years, Europe lost about 10% of its plastic market. So the environment is still very, very competitive, in which we operate, but in the meantime, what we did was describe already that we adjusted our footprint and our costs.

And what we didn’t discuss in detail, but I think you saw it in a lot of our announcements, we really strengthened our new product engine, our [unintelligible] with our customers, our development of new products. So we are positive that we will move ahead and we will not only benefit from a volume increase now, but as well from we will increase and improve our profitability step by step.

However, in some areas, [unintelligible] is not the best solution, for instance. Whites and certain additives have big competition in Europe, and we don’t expect that this will change.

[Samit Rashan] - KeyBanc

And then I saw the announcement this morning around the share repurchase authorization. Just kind of curious around the timing there, whether that’s going to be a little bit more opportunistic, or you think that’s something that you can ramp up fairly quickly. And then as I think about the timing in terms of the implications around what that might mean, around what you’re seeing in the M&A environment, both in terms of the plastics roll up, but also in the search for a transformative second life to the Schulman story.

Joseph Levanduski

The new program that we announced today, a $50 million three-year program, replaces the existing program that expired at the end of March, which was roughly about the same size, about $55.5 million. So really it’s a continuation of that same program. We’ve been opportunistic in the past, we’ll continue to be opportunistic in the future.

I think the program has served us well. The main focus is on M&A and organic growth. So we can use this share repurchase program as another vehicle, along with our strong dividend program, to return cash to our shareholders, but at the same time, have the investment and the financial strength to support our organic growth initiatives and our M&A activity.

Operator

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

Dmitry Silversteyn - Longbow Research

In the electronic and electrical market that you cited as a source of growth in Europe, where do you participate in that market? Is that in the insulation and connector and wire and cable market? Or do you have some other areas where you supply materials, either colors or engineering materials?

Bernard Rzepka

We are very strong in one area, already I mentioned it, in connectors. But generally, what we’d say is really in the flame retardant products and the highly specified flame retardant product. And it’s mainly in the injection molding. However, we try step by step as well to expand this business into a [unintelligible]. So that’s the area we play in.

Dmitry Silversteyn - Longbow Research

So it’s mainly Masterbatch and engineering materials and connectors?

Bernard Rzepka

Yes, that’s correct. It’s a lot of, you know, electrical panels, switches, as well when you look into automotive electronics, [unintelligible], do you put it in mobility, or do you put it in [unintelligible].

Dmitry Silversteyn - Longbow Research

I’m going to ask a question probably for the third or fourth time on this call, but I’m going to ask it a little differently. In the 8% decline in volumes in America, rather than trying to split it into weather related or intentional walking away from business, can you just talk about the areas, perhaps, of the end market or markets or product lines where that weakness came from?

Bernard Rzepka

Yes, you’ll probably remember that the U.S. was very strong in polypropylene compounds, and when Joe came, he eliminated a couple of plants here, and then we started really to move the business into more the added value, into the [unintelligible] flame retardant products, and as well into the automotive areas here, like the BMWs [unintelligible], which we’ve [unintelligible] because we have obviously the European specifications.

But still, we have too much polypropylene compound. And we just needed it to have the business going, but we added step by step [unintelligible] product. So what we are doing now is since we are very successful with the specialties here is we are looking at the polypropylene compounds, and that’s the area we really talk about, and where we can play, and where we can really have the competitive edge, because there are some flame retardant polypropylene compounds too. Whether we see that we cannot be competitive, or the market is getting more and more competitive, and we really cannot add any value to it, we step out.

Dmitry Silversteyn - Longbow Research

My question was more on this particular quarter, and the 8% volume decline that you saw year over year. Again, without trying to separate out into weather or business attrition, was it all in engineered materials related to polypropylene? Were there other areas of weakness that are end market specific, whether construction or automotive or general industrial, or packaging?

Bernard Rzepka

It was mainly what we saw is that in construction we cannot really put it down in numbers. In my view, the majority was weather related, and we see already now that in March pipeline, all the order books are full now. And if we had any shift away from our business it was really related to polypropylene compounds.

Joseph Gingo

I think to add to that, it was a softness in all markets. That’s why I think we think it’s weather related, because with the exception of the specialty powders and drilling, which makes a lot of sense, because of what’s happening. So it was a general softness, and I think that’s why Bernard and I both feel that it’s more weather related than walking away.

Typically, what we are walking away from is almost all automotive. It’s almost all mobility. So we are intentionally walking away from polypropylenes and automotive, and then we saw a general softness, we saw it in packaging, we saw it in mobility, we saw it in construction, and even in agriculture, because people delayed planting. So I’d say it was general, with the exception of automotive in polypropylene.

Dmitry Silversteyn - Longbow Research

And then just to follow up on the Asian volume growth, it obviously excludes the roto molding business in terms of year over year volume improvement there. But it was very strong. So can you talk about sort of what the drivers of that are, and how sustainable that is for the balance of the year? I imagine it has something to do with your initiative to move into bigger markets and that perhaps is an impact on price mix as well that’s associated with it. But can you give us a little bit more color on sort of the Asian business and the 20% growth that you’ve been getting there?

Bernard Rzepka

Yes, we have been very successful in engineered plastics. We’ve positioned ourselves, we are here in the U.S. getting into more [unintelligible] in Europe as well. [unintelligible], we are really in the Asia Pacific, in the [unintelligible] of the [unintelligible]. Because this is a very competitive play there too, so we positioned the business a couple of years ago there already very well.

Additionally, the Perrite acquisition gave really a lot more momentum, a lot more than we thought. It’s really moving nicely. And at the same time, what we are doing too is that we’re expanding our color business. You probably remember, about two years ago, we split off color from our Masterbatch division and we started to focus more and more in Europe on it and started to do the same in America. And that’s moving nicely ahead.

And we are doing the same now with, it’s still a very small business, in Asia Pacific. And that’s very successful too. And between the color business and engineered plastics business and the Masterbatch business, there is a lot of synergy. We do a lot of cross-selling. This is something which we promised we will be doing, and that’s what is really happening. And our customers like it.

Joseph Levanduski

And just to add to Bernard’s comments, we’ve discussed in the past that we had earmarked a significant amount of our current year capex into the Asia Pacific region in various engineered plastics and color production capabilities to continue to take advantage of the demand scenario that we’re seeing there. So we anticipate that that capacity is getting filled up.

Dmitry Silversteyn - Longbow Research

And then one final question, if I may. Your pricing was down a little bit in the Asia Pacific and EMEA regions, but it was up very strongly in the Americas, 8%. Was that sort of an offset to the deflating Argentinean peso? What was behind this very strong pricing result that you delivered in the quarter in the Americas?

Joseph Levanduski

It really didn’t have much to do with the Argentinean peso. That was all down below the operating income line. That was dealing with some intercompany transactions between our Argentina venture and some of the sister companies that we have in Brazil and Mexico that were in U.S. dollar transactions. So it was more of a transactional impact item. It really didn’t have anything to do on the top line.

So the top line strength coming out of the Americas really kind of driven by just the nature of the business that we’re seeing, continued focus on the niche and trying to stay up there while we’re moving away from some of the commodity stuff as well.

Joseph Gingo

And the realignment that we did in Latin America, which included Mexico and Brazil, which we did in the fourth quarter of our fiscal fourth quarter, which started to bear fruit in the first quarter, continued that trend. And I think a lot of that increase in profit came out of our Latin American division, particularly our Mexican operation.

Dmitry Silversteyn - Longbow Research

So the 8% improvement in price mix, was that just mostly mix rather than pricing going up in any particular area?

Joseph Gingo

Absolutely. And reduced cost.

Operator

Your next question comes from the line of Matthew Dodson from JWest.

Matthew Dodson - JWest

Can you talk just a little bit about, you’ve alluded to it a couple of times, and I don’t know if you want to speak to it, but is there any way that you can give us any insight to kind of the bookings strength that you saw in March in the U.S.? You’ve kind of alluded that it’s very strong.

Joseph Levanduski

I don’t know if I used the word “very strong.” What I said is it’s recovering. And right now our order book’s global, not just in the U.S. What I would say, this last quarter, our order books were strong everywhere but the U.S. And what I’m seeing in March is our order books are strong across the board. And we’re getting more confidence in our customers. Customers are ordering out farther, they’re less tepid. I can recall times two years ago where they would give you two weeks’ notice on an order. We’re back to the one to two months. So I think there’s just a recovery in demand. As I said, we have to speculate on it. We believe a lot of that is just weather-related, and recovery in demand that’s taking place in the U.S.

Matthew Dodson - JWest

And then can you talk a little bit about, you have a lot of exposure to the high end German auto industry. We’ve seen reports that Audi, Mercedes, BMW, they’ve all added shifts, etc. because sales have been so strong worldwide. So can you talk a little bit about that? Did you see that in the quarter that you just reported, or are you starting to see that additional shift happening now, or that additional demand happening now?

Bernard Rzepka

Actually, [unintelligible] in automotive has been, for a long time, a target for Schulman with the specialty compounds. But it’s not only the Germans. We are very successful through the [unintelligible], which as you know is [unintelligible]. And they’re developed with Jaguar and Rover applications, so through these acquisitions, we’ve got an entry door into this luxury segment too, which is actually doing very well.

So yes, the only answer I can give you, they’re very, very successful, they are doing very, very good, and we are very happy to co-develop and co-innovate with these people globally now, our solutions, because as you know, they’re not only manufactured in Europe. They go out and manufacture in places globally, and that’s basically the business model which we are following as a global compounder. Locally, we have the specifications, we work, we innovate, and help them innovate the product.

I was talking about the lightweight products, which is a big trend too, which we see for a couple of years, and we are [competent]. And we pick up the specifications working with them on the development two to three years before they really come into full production. And now we can see not only globally but as well in Europe, for the past couple of months, the automotive sales are starting to pick up. So I think this is a big success story for this industry and for us.

Matthew Dodson - JWest

And the last question I have for you, and maybe you want to talk about this more at your analyst day, can you give us any kind of aspirational goals of where you think you can drive op margins in Europe over the cycle as it improves? Can you get it into the high single-digits? Or do you want to speak to that on Thursday?

Joseph Gingo

You’ve answered your own question. Yeah, we will be speaking to that on Thursday.

Operator

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

Christopher Butler - Sidoti & Company

Circling back to the Americas, if we’re looking at this segment sequentially, you had increased prices per pound, yet you had a fairly dramatic dropoff on the operating income per pound. Is this just the acquisition? How much of this are costs, because this is really the first quarter of these deals that will eventually go away?

Joseph Levanduski

I think there is some purchase price accounting embedded within the numbers. Obviously Network was beginning of the second quarter, Prime was at the end of December. So two out of three months were reported. But I think some of the continued fixes in Brazil and Latin America, as we came off of the fix that we did in the third quarter, are in there, and I think overall, just the improvement that we’re seeing is really starting to drive and offset the volume. So it’s really kind of volume driven

Joseph Gingo

We didn’t mention it specifically, but obviously we had not seen a lot in terms of Brazil recovery. What we’re seeing in terms of Brazil is our cost reduction program, consolidated of our plan. But if you’ve noted, even over the past last weekend, they cut the outlook for Brazil on growth from like 2.4 to 1.4. So Brazil is still not giving us any kind of robust recovery. Everything we’re gaining is actually through our cost reduction programs.

Christopher Butler - Sidoti & Company

And as we look at Asia, you indicated that this is going to continue to be an issue on the price competition, but could you give us a sense of how much you think we have to go? It seems as if sequentially we’re still sliding a bit on the operating income per pound. Is this something that continues through the rest of the fiscal 2014 for you?

Joseph Gingo

Well, there’s two things that are driving this. Number one is obviously we have made a decision, remember as Bernard said, we’re in the niche of the niches. And we can’t grow with that approach, and our customers expect us to participate more in not the commodity, but the midmarket products. So we’re going to have to extend our line as we grow our capacity in Asia.

So I think that’s a long trend. And I was actually pleased that we didn’t go down farther than we did with that strategy, plus the fact that in one particular market that I mentioned, Masterbatch, because of its predominance of BOPP, we were seeing pricing pressure. So I think that pricing pressure and Masterbatch will continue through the rest of this year, and the long term gradual trend down in margin is likely down to more of the levels that we’re experiencing in Europe and the USA over time.

Operator

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

Kevin Hocevar - Northcoast Research

I just had a quick follow up question. I wondered, on the increased guidance that you gave for the year, it seemed like the increase was $0.10 on a $0.06 beat for the quarter, so it seems like there’s an expectation for a stronger back half maybe than previously. I was wondering if any of this is FX related, because I think before you were using a low 130s euro in those targets. It’s been at the high 130s for a while now. So I was wondering if any of it is FX related, or is it all what you’ve already mentioned on the call, organic, Europe improving, raws relatively flat, that type of stuff.

Joseph Gingo

First of all, no, it was not based on FX at all. And as I mentioned in my closing remarks, [unintelligible] there was potential raw increasing, and therefore we were a little conservative as we looked over the last three quarters of our fiscal year. We have not seen that happen. So we were a little more bullish on what’s going to happen, and we really don’t see it happening over our fiscal year, the remaining half of our fiscal year. So it was much more driven by stability in raw material pricing than anything to do with FX.

Operator

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

Rosemarie Morbelli - Gabelli & Company

Just quickly, Joe, when you look at the order level in the U.S., customer orders are larger, they have longer lead ways, do you have a feel, or what is your confidence rather, that this is not a temporary inventory buildup and then growth is going to resume at a substantially lower rate, or is it real orders, because of [unintelligible] demand in the market, not inventory buildup?

Joseph Gingo

I think you asked that question very well, Rosemarie. I really mean that. I think it is not an inventory buildup. I think it’s a buildup. But then you said to me, what’s my confidence level of that. It’s a little over 50%. It’s not like 80% or 90%. I believe personally it’s a recovery in the economy, not just purely an inventory buildup. But, Rosemarie, I think it’s been so shaky in all the economic environments around the world, that you get a little gun-shy in being too optimistic. But I’ll tell you, I’m modestly optimistic that we’re seeing a return to the recovery that we saw through the last half of last year.

Operator

There are no further questions at this time.

Jennifer Beeman

Okay, thank you for joining us. That concludes our call today, and we hope to see many of you on Thursday. Thanks.

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