OMNOVA Solutions' (OMN) CEO Kevin McMullen on Q2 2014 Results - Earnings Call Transcript

Jun.25.14 | About: OMNOVA Solutions (OMN)

OMNOVA Solutions Inc. (NYSE:OMN)

Q2 2014 Results Earnings Conference Call

June 25, 2014, 11:00 AM ET

Executives

Kevin McMullen - Chairman, President and CEO

Mike Hicks - SVP and CFO

Analysts

David Begleiter - Deutsche Bank AG

Roger Spitz - Bank of America Merrill Lynch

Rosemarie Morbelli - Gabelli & Company

Jeffrey Snell - Jefferies

Bill Hoffmann - RBC Capital Markets

Michael J. Sison - KeyBanc Capital Markets Inc

Operator

Ladies and gentlemen, we'd like to thank you for standing by and welcome to the OMNOVA Solutions Second Quarter 2014 Earnings Discussion. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session with instructions been given at that time. (Operator Instructions)

I would now like to turn the conference over to your host and your facilitator as well as the CEO, Mr. Kevin McMullen. Please go ahead, sir.

Kevin McMullen

Thank you and good morning. Thanks for joining us for our conference call to discuss second quarter 2014 results. Joining me today is Mike Hicks, Senior Vice President and Chief Financial Officer. In addition, I'm pleased to welcome Paul DeSantis, who will officially take over CFO when Mike retires next Tuesday, July 1st.

I'd like to turn the call over to Mike to make comments on forward-looking statements.

Mike Hicks

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 and reconciliation of these non-GAAP measures see our most recent earnings release. Kevin?

Kevin McMullen

Thanks Mike. Overall our second quarter results were below expectations. Despite the overall results, there were several positive developments as we were encouraged to see volume increase in performance chemicals and strong sales of our laminate products and engineered surfaces.

Sales volume improved in specialty coatings for industrial and architectural application as well for oil and gas drilling chemicals and elastomeric modifiers, all of which are higher growth markets for OMNOVA.

However, these positives could not overcome several issues impacting results for the quarter including temporary customer driven delays in shipments, LIFO inventory adjustments and weaker Asian demand.

During the quarter we continued to move ahead on initiatives to broaden our global footprint and respond to the changing needs of our customers and markets. I will expand upon the status of our actions in a few minutes but first I’d like to summarize our consolidated second quarter results as reported in our earnings release.

Second quarter net sales were $266.4 million, down $4.4 million compared to the second quarter of 2013. The year-over-year sales decline was driven primarily by 3.5% in reduced pricing, which was partially offset by 1.6% increase in volumes, plus favorable currency translation effects.

The decline in pricing was a result of the impact of lower raw material cost on index formulas in Performance Materials, as well as competitive pressures in certain markets.

Gross profit in the second quarter of 2014 was $52.6 million, up slightly from the first quarter of 2014, but down from $57.3 million in last year’s second quarter.

Gross profit margins were 19.7% in the 2014 second quarter versus 21.2% in the same period of 2013. Gross profit was negatively impacted by $1.7 million in LIFO inventory adjustments and by approximately $2.5 million due to customer driven shipment delays and higher logistics cost. The delayed shipments have begun to ship in the third quarter.

Overall raw material cost declined $6.5 million when compared to the second quarter of last year. SG&A expense in the 2014 second quarter increased slightly year-over-year to $31.5 million or 11.8% of sales.

Interest expense of $7.7 million, was a $300,000 decline from the second quarter of 2013, due primarily to reduced borrowing spreads as a result of a second quarter 2013 refinancing effort and lower foreign borrowings.

Income tax expense for the second quarter of 2014 was $1.5 million, representing a 28.3% effective income tax rate. This compares to $1.3 million in income tax expense and a 33.3% rate in last year’s second quarter.

The lower effective income tax rate in the second quarter of 2014 was due primarily to higher income in foreign jurisdictions, which have lower tax rates. The company estimates its full-year 2014 effective tax rate will be between 27% and 30%.

Cash tax payments in the U.S. over the next few years are expected to be minimal as the company has approximately $113.6 million of U.S. federal net operating loss carry-forwards and $108.9 million of state and local tax net operating loss carry-forwards with expiration dates between 2022 and 2033.

Net income for the second quarter was $3.4 million, or $0.07 per diluted share compared to net income of $2.9 million, or $0.06 per diluted share, for the second quarter of 2013.

Adjusted income from continuing operations was $4 million, or $0.09 per diluted share, as compared to $7.2 million, or $0.16 per diluted share, in the second quarter of 2013.

Turning now to business segment results beginning first with Engineered Surfaces, second quarter net sales were $63.6 million, a 4.5% decrease with $3 million lower than the second quarter of last year. The decline was driven by lower sales in North American coated fabrics and China driven by 2013 decision to exit from certain lower margin business. However, sales were up from the 2014 first quarter by $9.3 million.

Adjusted segment operating profit for the Engineered Surfaces segment declined to $4.3 million compared to adjusted segment operating profit of $4.7 million for the second quarter of 2013. The profit decline was primarily due to the lower sales although a portion of the LIFO inventory valuation adjustment also impacted results.

Adjusted segment operating profit margin was 6.8% in this year’s second quarter as compared to 7.1% last year. In 2014, the first half adjusted segment operating profit for Engineered Surfaces increased 23% to $8 million versus $6.5 million in the first half of 2013.

Global Coated Fabrics sales were $26 million in the second quarter of 2014, down $4.5 million from last year. Part of the sales decrease was result of a strategic decision in 2013 to exit certain lower margin North America and China business. Year-over-year comparisons related to this decision should improve as the second half of the year progresses.

During the second quarter, sales begin to ramp up from a first quarter win with a new automotive seating customer in China. This adds to a list of platforms and models we now serve with the growing Chinese OEMs. Several of the recent wins are models that are among the highest production volume vehicles in China.

Sales for the Laminates and Performance Films product lines were up $1.5 million during the quarter to $37.6 million. Continued strong sales of our laminates led the increase.

This business continues to win new customers and has a strong backlog of demand for products that go into residential and commercial new construction and refurbishment oriented markets.

Applications for our laminates include kitchen and bath cabinetry, interior window profiles, retail displays, home furnishings and specialty bath surround systems which are the walls that make up the shower stall and bath enclosures.

Turning now to Performance Chemicals, net sales were $202.9 million in the second quarter of 2014, down $1.3 million from the same period last year, but up $31.2 million or 18.2% from the 2014 first quarter.

Year-over-year volumes in this year’s second quarter increased 3.6% or $7.2 million due to continued positive global market growth and OMNOVA market share gains in specialty oil and gas chemicals and specialty coatings for our industrial and architectural applications.

Offsetting the volume increases were lower raw material input cost, which resulted in lower index pricing and competitive pricing pressures in the traditional North American coated paper market.

During the second quarter of 2014 performance chemicals generated $14.8 million in adjusted segment operating profit at a 7.3% margin, compared to $18.8 million and 9.2% for the same period in 2013.

The year-over-year decline was due to a number of factors including customer driven, temporary delays and product shipments particularly in the oil field chemicals, lower pricing in the performance materials product line, higher global logistics expense and an unfavorable LIFO inventory adjustment.

However, adjusted segment operating profit improved $2.1 million as compared to the first quarter of this year.

Sales and performance materials which includes our Paper and Carpet chemicals products were $65.7 million in the second quarter of 2014 compared to $69.6 million in the second quarter of 2013.

While the company is committed to defending share in our traditional paper and residential carpet applications, we also are focusing on growing sales at adjacent applications where technology can deliver greater customer value. These include growing packaging, specialty paper and commercial carpet applications.

Our specialty chemical product line had second quarter sales of $137 million a $2.6 million increase from $134.6 million posted in the same period in 2013. Higher volumes of $6.4 million were partially offset by reduced pricing in certain markets.

As I mentioned earlier volumes were up for our products that go into higher growth applications such as specialty coatings for industrial and architectural applications, oil and gas chemicals, and elastomeric modifiers.

To support our current business and the anticipated growth during the quarter the company opened a Houston, Texas headquarters for our global oil and gas business and added key resources in sales, marketing, and technical roles.

OMNOVA has built a strong reputation in the oil and gas industry for our solutions that go into particularly difficult high pressure, high temperature ocean drilling environments around the world. Our recent technical innovations and new product introductions in fluid loss control implementing (ph) enabling us to broaden our portfolio in reaching to a wider range of applications including land based North America wells.

During the second quarter OMNOVA completed construction of our new polymerization line in Le Havre, France which increases our capacity to produce specialty acrylic rezins for water-borne coatings for our customers around the world.

Customer product qualifications related to this repurpose capability are underway. OMNOVA has also introduced new products under the PLIOTEC brand including an environmentally preferred solution for direct to metal coatings which employs a new OMNOVA proprietary technology that allows the coating to maintain better adhesion in wet or high humidity conditions.

Additional innovations include chemistries that provide excellent fluorescent resistance in pigment and based primers to protect against the formation of powdery deposits and binders used in exterior coatings that eliminates the effect in staining on the building surface.

Production and qualification ramp ups continue under OMNOVA chemical sites around the world while we have recently completed a major investment that will allow us to grow a new and existing markets.

These include a conversion last year of excess North American styrene butadiene capacity to the manufacturing of hollow plastic pigments at our site, Mogadore, Ohio.

The repurposing of additional styrene butadiene capacity also at the Mogadore site to the production of acrylics and other specialty emulsion chemistries. We already completed at the end of the year, the company estimates the actual result of operating savings of $4 million per year beginning in 2015 and provide us with improved capability to serve the specialty gross segments of the North American acrylic markets.

An expansion at our Caojing, China plant, which we competed late last year to add styrene butadiene latex capability to the Asian region. This will provide for local Asian production and OMNOVA products for nonwovens, flooring, construction and other specialty applications.

In summary we at OMNOVA are certainly not satisfied with our results in the second quarter. While we are seeing solid growth in areas such as oil and gas, specialty industrial and architectural coatings and in laminates, we recognized an improvement in other areas of our business have not consistently met expectations.

As a result, we continue to take actions that we believe will have a meaningful positive impact in the future. Those actions include introducing exciting new product innovations that are addressing critical customer needs from insights gained through a more rigorous customer centric sales and marketing process, optimizing our global footprint in building the capabilities that will allow OMNOVA to increase its ability to serve customers with a broader range of products around the world.

The capability and repurposing of capacity investments I talked about earlier are key to our success and we are working hard to move this forward from the construction or ramp up stages to full production.

The actions also include lowering our cost base and making structural changes to position our company for growth. This focus is never ending, and seizing upon the positive trends in markets where we are well-positioned such as oil and gas exploration, automotive and transportation and construction and refurbishment to name a few.

We believe that by leveraging the many positive actions we are taking against the backdrop of improving markets we will move past results of the second quarter and get on with the businesses enhancing the value we bring to our customers and our shareholders.

Before we move on to your questions, I would like to take this opportunity to thank Mike Hicks, for his 36 years of service to the company, and we wish him all the best in his retirement.

And now, Mike and I would be happy to answer your questions. Operator?

Question-and-Answer Session

Operator

(Operator Instructions) Our first question will come from the line of David Begleiter of Deutsche Bank. Please go ahead.

David Begleiter - Deutsche Bank AG

Thank you. Good morning. Kevin, looking to the back half of the year, do you think you can grow EPS in Q3 year-over-year and Q4 year-over-year?

Kevin McMullen

Certainly our focus is to do that. We're not giving guidance as you know. But we are focused on improvement as we move into the second half of the year.

David Begleiter - Deutsche Bank AG

Very good. And that $2.5 million of cost in the quarter, can you break it out – break it out by segment how much was in performance chemicals, how much was in engineered services?

Kevin McMullen

It was all performance chemicals, Dave.

David Begleiter - Deutsche Bank AG

And Kevin just on the continued pricing pressures in SB Latex, any signs of that abating or even reversing going forward?

Kevin McMullen

Certainly one of the things we’re doing is looking at new products that will help reverse that and there is a lot of activity and focus on that. We continue to repurpose capacity in SB Latex to have better utilization in our facility.

Largely the focal area that you’re talking about where the competitive price pressures are occurring is contained in the Paper and Carpet market in North America. So that is where our primary focus is to reverse.

David Begleiter - Deutsche Bank AG

Very good. Thank you very much.

Kevin McMullen

Thanks.

Operator

Our next question will come from the line of Roger Spitz of Merrill Lynch. Please go ahead.

Roger Spitz - Bank of America Merrill Lynch

Thanks very much. Maybe I missed this, but can you just give the -- for performance materials Paper and Carpet chemicals the volumes in Q2, 2014 on a year-over-year basis?

Kevin McMullen

So overall in performance materials volumes were up 2% on a year-over-year basis.

Roger Spitz - Bank of America Merrill Lynch

Okay. And can you give this -- within performance materials, is there any sense of the extent of the margin compression on a year-over-year or other basis, just to ballpark it?

Kevin McMullen

Yeah, it's been a couple of million dollars [across] [ph] all the performance materials business.

Roger Spitz - Bank of America Merrill Lynch

Great. And can you give any updated 2004 CapEx guidance, the Q1 gave the $50 million which would imply $40 million in the second half from $10 million in the first half?

Mike Hicks

As we go forward there is a lot of capital that’s going to go into Mogadore and Akron and the new corporate headquarters that I would looking at the crystal ball now, I would say it would be less than $50 million, somewhere in high $40 million range some that will be based on timing of getting some of that stuff, things like Mogadore and Akron consolidation is supposed to be done by calendar year end.

So again, probably couple of $3 million lower than that Roger than what we had disclosed before.

Roger Spitz - Bank of America Merrill Lynch

Would we push more into the fiscal fourth and the third?

Mike Hicks

Yes.

Roger Spitz - Bank of America Merrill Lynch

Okay. And lastly anything on 2015 CapEx?

Mike Hicks

2000 CapEx we would say, we would go back to the low 30 range, the corporate headquarters will be out of there. I will have the Mogadore, Akron, the French acrylics project, which is already complete and done so it’s a couple of major ones that roll out.

As we go forward we will be looking at the potential to invest more to build out our Caojing, China plant, but that capital decision hasn’t been made yet.

Roger Spitz - Bank of America Merrill Lynch

Thank you very much.

Operator

Our next question will come from the line of Rosemarie Morbelli of Gabelli and Company. Please go ahead.

Rosemarie Morbelli - Gabelli & Company

Thank you. Good morning all. Kevin I was wondering if you could talk about the size of the shortfall versus your own expectation and how much do you think you can cover over the next two quarters?

Kevin McMullen

As we try to highlight in the release in the call here, a big part of the shortfall was this customer driven shipping delays that certainly affected us which we believe the majority of that we will pick up in the upcoming quarter.

So that was a big part of it. There also were some higher cost from a logistic standpoint that we think are temporary and one time. We'll offset that.

And then $1.5 million LIFO adjustment, that all depends on how raw material swing over in the third quarter, but generally that EBITDA over the course of the year, so we would expect that would be something that would, not repeat, but that again that depends on raw material direction in changes over the course of the second half.

Rosemarie Morbelli - Gabelli & Company

Okay. And that customer shipping delay, are you going to recover it all or is there a certain amount of it that will just not happen because now it is tool late?

Kevin McMullen

No, we would expect to recover all of that. It was a situation where the customer could not get, we provide the customer with our products and they bundle other materials that they get from other suppliers and then ship it around the world in these containers and they simply could not get these shipping containers in order to get the shipments packaged up and off.

But we are now shipping that product now even now in a few weeks after the end of our quarter we’re selling to ship product now. So, we believe that will come through, if not all in the third quarter, certainly by year end.

The orders are on the books, the customer is telling us there is still very strong demand, it's just simply a matter of getting shipping containers to ship the product.

Rosemarie Morbelli - Gabelli & Company

Okay. Thanks. And I was wondering, I thought that at the end of the -- during the first quarter conference call, you talked about raw material cost actually being flat to slightly up, and, so can you help me with that lower cost of raw materials, which translate into lower pricing and are you giving up more in price than you got a break on the raw material side since the margins are down, or is there something else going on in that particular area?

Mike Hicks

Yeah Rosemarie, raw materials dropped versus last year and that was primarily driven by lower butadiene costs. So on a year-over-year basis that's through sequentially raw materials were up a little bit in our second quarter versus our first, but not a dramatic move.

When we look at the indexing, the components that are styrene and butadiene has worked as they always have and that pass through continues to have no impact on margin over a 45-day period.

On the third part of the index, which is a fixed amount per pound, that is where we gave up some pricing in the last 12 months in performance materials and the paper and carpet segments, so we are negative because of that part of the component, not raw materials, the raw materials piece is still working as it always has.

Rosemarie Morbelli - Gabelli & Company

And are you seeing a sign of improving demand on the carpet side or is it a question that actually people are deciding that they are not using carpets in their homes and are moving over to woods?

Mike Hicks

Yeah, I think we've just started seeing our corporate customers in the last couple of weeks and I think while it was a tough first part of the year because of weather, everyone in the industry, not in just in carpet but in other industry cited weather related shipment delays and problems, I think they’re encouraged by where demand is and where it will go for the rest of the year.

So I think they believe that we’ll have a reasonable second half of the year from demand and we’ll see growth in the second half of the year.

Rosemarie Morbelli - Gabelli & Company

Okay. So it is not a changing trend, I mean fundamental type of trend?

Kevin McMullen

No, I don't think so, I mean that's an undercurrent, that has been taking place in that flooring industry overall, but I don't think they see a fundamental change in that trend to solid surface from carpet. It continues or it continues to be that, but I think they believe that carpet demand will be positive in the second half of the year and some of the reasons why it wasn't strong in the first half or a big part of the reason why it wasn't strong in the first half was simply the weather.

Rosemarie Morbelli - Gabelli & Company

Okay. Thank you.

Kevin McMullen

Thanks.

Operator

Our next question will come from the line of Jeffrey Snell of Jefferies. Please go ahead.

Jeffrey Snell - Jefferies

Hi, I guess drifting to the EU coatings, are you seeing any uplift, and if so, is it broad based or is it different by regions and they just.

Kevin McMullen

Yeah, I'm sorry, your question was about Europe coatings, is that right?

Jeffrey Snell - Jefferies

Yeah.

Kevin McMullen

Yeah, so, yes we are seeing strength - overall our specialty coatings business was quite strong in the quarter, Europe was strong, after a couple years of difficult period they were starting to see demand strengthening, we're also coming out with a number of new products which is contributing to our stronger demand.

I believe the market was up from what we can tell and I believe we gained share on a growing market based on some of the new products we've introduced.

Jeffrey Snell - Jefferies

Thank you.

Kevin McMullen

Thanks.

Operator

The next question will come from the line of Bill Hoffmann of RBC Capital Markets. Please go ahead.

Bill Hoffmann - RBC Capital Markets

Hi. Thanks. Just a little bit further on the oil and gas canvas, you obviously put a location down at Houston and just want to get some firsthand, as you look forward, what kind of incremental growth you expect to be able to achieve in that segment?

Kevin McMullen

So, we're very excited about our position of oil and gas, we continue to build on it, it continues to be a growth area for us. Overall the market gross is growing somewhere between probably 8% and 10%.

And we believe we’re growing at a faster clip in that based on technology that we have. And one of the very encouraging things is we work with all of the oil and gas service companies that they can use in (indiscernible) world and we continue to work with them on a broader set of areas in their business.

Certainly deep sea offshore drilling is a focus. It continues to be a growth area in the world, all the oil people will tell you that the easy oil compounded are going to deeper parts of the earth to get oil now and that is a sweet spot for us as our products was very well and high temperature, high pressure, applications - continue to broaden few other areas like land based U.S land based opportunity we’re also focusing on.

So, we're excited about the market, we believe there is significant growth for us that heavily continue to invest behind that.

Bill Hoffmann - RBC Capital Markets

And, the land based, some of the tracking fluids, is that where the target is and would it be more oil versus gas or could you help us a little bit with that?

Kevin McMullen

Yeah, so, we have some very, very early products that are going into that space now but it's very early days, so but right now the land based drilling activity is primarily oil, they have focused because of the price of oil versus natural gas, they focus more drilling on oil opportunities, that will swing in time with relative price of oil versus natural gas but right now it's predominantly oil.

And our chemicals move both in oil and gas drilling situations, they’re not, it’s not depended on one versus the other.

Operator

Our next question will come from the line. Did you have another question Mr. Hoffmann?

Bill Hoffmann - RBC Capital Markets

I did, I was just going to, just a question for Mike, from working capital standpoint, obviously have you used a cash in the first part of year and you get a normal release - on a year-over-year basis, what are you expecting from cash or capital needs?

Mike Hicks

I'll go back and talk a little about kind of where we’re at and how we got there. First step at 2013, our cash balance declined by $15 million. So seasonally our first half of the year is always weak as we're building up inventory.

The first half of 2014, as you know that our cash declined by $30 million, that was $50 million swing that was different than say the previous two years. What has been driving that, our couple of major areas, one, a lot of these performance material contract has the prices we negotiated in the last six to 12 months, terms have been extended to those customers to meet competition.

Secondly, we had big inventory build on a year-to-date basis. Some of that relates the fact that we didn't get all the shipments out we wanted in the quarter, but also a theme that you’ll hear everywhere is the global logistic supply chain is very stressed right now and we are holding some key raw materials that higher levels key raw materials, then we would have normally done and it's been a little bit tough sometimes to get things out.

Coming out of this winter, the supply chain and railcars in North America are very weak and some of that is occurring also internationally.

So, we've had that build up, we’ll have some release of that going through the rest of the year and as we go forward, we expect good cash generation from here on now.

Some of the timing around this with, what’s going to happen with the prices of butadiene and styrene makes it real difficult to forecast, but again we traditionally, we do expect to have strong cash flow from the second half of the year.

Bill Hoffmann - RBC Capital Markets

All right. Thank you.

Operator

And the last question in queue at this time comes from the line of Michael Sison of KeyBanc. Please go ahead.

Michael J. Sison - KeyBanc Capital Markets Inc

Hey, good morning guys. Mike its been great working with you over the years.

Mike Hicks

Thanks Mike.

Michael J. Sison - KeyBanc Capital Markets Inc

Kevin, could you give us a feel for, what's the difference between profitability now between Performance Materials and specialties, Performance Materials, is it like even, is it making money and maybe highlight the probability level of specialty chemicals, I would imagine those are running at a higher level than the average right now?

Kevin McMullen

Our Performance Materials business is making money, not as much as we would like it to make but it's making money, especially chemicals, part of our performance chemicals segment, is more profitable now in that is our oil field and specialty coatings business and others.

So overall our special chemicals is more profitable than performance materials, and our focus is to continue to grow our specialty chemicals business and improve the profitability and grow our performance materials business.

Michael J. Sison - KeyBanc Capital Markets Inc

What type of operating rates, are we talking about in Performance Materials at this point? I know you're trying to defend share but is there an opportunity to me to take out from cost given the competitive pressures?

Mike Hicks

In SB Latex as where we would have the lowest capacity utilization and we think we’re in the low 60’s there as well as the North American industry, that's the only place where we, that's a major place where we compete in SB Latex. We’ve added a reactor in China, but most of it is in the U.S.

As we talked about for the last six months or so, we got a major project pick about £80 million of capacity out and that will be a project that will really start to have some spend the rest of the share and that £80 million will be reactors in Mogadore that will be converted from styrene, butadiene latex to acrylic and styrene acrylic applications and then we won’t be making emulsion polymers in Akron anymore.

So, in that shift, again we'll take our capacity utilization at today's run rate at around 70%, which will improve that, but we'll start to generate $4 million to $5 million of operating profit improvement once that project is complete.

I know we’ve got a very busy lives, hot plant with complicated raw materials that takes a long time to get this conversion in but we're on progress to have at year end. So, that's the one thing that we're doing and again we're trying to control what we can control and that'll be a nice opportunity because those acrylic and styrene acrylic products that well be making in Mogadore, will have more capacity than we could have ever made it Akron, it will be a lot of cost position and for our high growth markets like oil field chemicals and coating resins, that's the area that we're going to actually add some more capacity.

So, it should be very positive thing for the company in (indiscernible).

Michael J. Sison - KeyBanc Capital Markets Inc

Right, I understand. Kevin, any thoughts of why competition, there's only really two of you, and one smaller player out there, why are they being so aggressive in paper and carpet, is it an unusual change in the industry dynamic?

Kevin McMullen

I don’t think there is change in industry dynamic, although it does seem irrational from our perspective and there have been times over the last 15 or 20 years when there'll be a period of irrational behavior in the marketplace and then things will return to normalcy.

So, hard to explain, hard to know why, but we’re trying to focus on what we can control, what we can focus on, which is introducing new products that will bring more value to our customers to help offset what seems like an irrational behavior in the marketplace.

Michael J. Sison - KeyBanc Capital Markets Inc

Right. And, I think you mentioned the goal was to grow earnings in the second half of the year. Can you do that, just if you think about it just fundamentally with this competitive pressure or is there enough on what you can do on your own to sort of get there or do you need some little bit of help from the outside to move the needle in the second half?

Kevin McMullen

So, just simple things. We have more shipping days in the second half of the year than the first half. We have momentum in several of our higher growth businesses and markets that we think will continue going forward in our specialty chemicals area.

Our laminates business has strong backlogs going into the third quarter that we feel we can continue the momentum we have there. So there’s a lot of positive things to build on. Some of the innovation work that we're focused on we believe will start to have an impact in our Performance Materials business in the second half of the year.

So, we're not, we believe there's a lot of things that build on, that can help improve kind of where we are here in second quarter as we go through the rest of the year.

Michael J. Sison - KeyBanc Capital Markets Inc

Okay. Great. Thank you.

Kevin McMullen

Thanks Mike.

Operator

And our next question is a follow up from the line of Rosemarie Morbelli of Gabelli & Company. Please go ahead.

Rosemarie Morbelli - Gabelli & Company

Hi, Kevin. I was wondering if you could give us a feel for those businesses that are growing faster than others, is it because of their markets or because of what you're doing. And namely oil and gas, auto, construction coatings, could you give us a feel for the size of those operations?

Mike Hicks

I’ll start on the oil and gas business, to give you a little history was about $28 million in sales in 2010 and prior to 56 last year. We should approach $70 million this year.

The coatings business has been about $90 million for us and that was with a very weak Europe. So that business would be about 60% Europe and again we’re seeing some growth there as just been the pent-up demand, people have not been doing any architectural coatings, architectural painting on various buildings for a number of years. Kevin, do you want to jump on to next one.

Kevin McMullen

Yeah, I think, couple of other ones certainly are, we haven't talked a lot about in this call that are non movements business that's probably $60 million $70 million business for us, elastomeric modifiers business that we did see positive growth from the quarter is kind of in that same range. Our laminates business is a significant piece of our Engineered Surfaces business. In total it's in $70 million to $80 million range.

So, those are all significant businesses where we think we have growth opportunities that in above market range and in markets that we believe are growing as well.

Rosemarie Morbelli - Gabelli & Company

Okay. Thank you. That is very helpful.

Operator

There are no further questions in queue at this time. Please continue Mr. McMullen.

Kevin McMullen

Thank you all for joining us for the call today and operator if you could give everyone the replay instructions and we look forward to talking to you at the end of our third quarter. Have a great day.

Operator

Ladies and gentlemen, there will be a digitized telephone replay that is scheduled for today at 1:00 p.m. Eastern time, until July 16, 2014 at midnight of that day. There's also an audio replay that will be available on the OMNOVA Solutions website at www.omnova.com until noon Eastern on July 16, 2014.

Ladies and gentlemen, that does conclude our conference call for today. I would like to thank you on behalf of Mr. McMullen and the panel for your participation and thank you for using AT&T. Have a wonderful day, you may now disconnect.

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