OMNOVA Solutions' (OMN) CEO Kevin McMullen on Q4 2015 Results - Earnings Call Transcript

| About: OMNOVA Solutions (OMN)

Start Time: 11:00

End Time: 11:51

OMNOVA Solutions Inc. (NYSE:OMN)

Q4 2015 Earnings Conference Call

January 19, 2016, 11:00 AM ET

Executives

Kevin M. McMullen - Chairman, CEO and President

Paul DeSantis - SVP and CFO

Analysts

David Begleiter - Deutsche Bank

Roger Spitz - Bank of America Merrill Lynch

Rosemarie Morbelli - Gabelli & Company

Michael Sison - KeyBanc Capital Markets

William Hoffmann - RBC Capital Markets

Daniel Rizzo - Jefferies & Company

Tom Spiro - Spiro Capital

Operator

Ladies and gentlemen, good morning and thank you for standing by, and welcome to OMNOVA Solutions Fourth Quarter 2015 Earnings Discussion. At this time, all lines are in a listen-only mode. Later, there will be an opportunity for your questions and instructions will be given at that time. [Operator Instructions]. As a reminder, today's conference is being recorded.

I would now like to turn the conference over to the CEO, Mr. Kevin McMullen. Please go ahead.

Kevin M. McMullen

Thank you, Tom, and good morning, everyone. 2015 was a year of significant change in OMNOVA, as we have lead initiatives that started late 2014 and announced additional actions this past summer, all focused on transforming our company to improve our financial performance and position OMNOVA for sustainable long-term profitable growth. These broad based actions in virtually every corner of our company are beginning to contribute to our improved results as well as our enhanced outlook.

In the fourth quarter that ended in November, adjusted earnings per diluted share grew to $0.13, up 30% from the 2014 fourth quarter. Margin expansion and better product mix drove the profit growth. This more than offset the headwinds from challenging conditions in the paper and oil and gas markets. In addition, our cost reduction actions announced in 2015 began to have a positive effect and the impact will accelerate through 2017.

I’m excited to update you on the progress we are making through all of these actions to reach our long-term strategic objectives, but first I’d like to turn the call over to our Chief Financial Officer, Paul DeSantis for comments regarding forward-looking statements, as well as a review of what drove key results in our fourth quarter. Paul?

Paul DeSantis

Thanks, Kevin, and good morning, everyone. 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 and investor presentations published periodically on the company's Web site.

For the fourth quarter of 2015, we achieved adjusted EPS of $0.13 per share, up 30% from last year's comparable number of $0.10 per diluted share. Performance Chemicals’ adjusted operating profit reached 14.2 million or 10.1% of sales. Engineered Surfaces’ earned 6 million or 10.2% of sales. Overall, adjusted segment operating profit increased $3 million or 17% over the fourth quarter of last year to 20.2 million.

The drivers of the increase were higher margins on product sold, favorable mix, growth in key specialty lines such as laminates for store fixtures, specialty chemicals that go into construction materials and specialty coatings as well as cost reductions. Partially offsetting these benefits were market-related volume declines primarily from paper and oil and gas as well as continued weakness in the euro.

For Performance Chemicals, this was the fifth quarter in a row of increasing margins improving to 10.1% of sales on an adjusted basis and the third quarter in a row of increased adjustment segment operating profit, up 3.6 million year-over-year.

Paper volume continues to reflect the weak market. Our business was also affected by the closure of a customer’s mill at the end of 2014 and increased finished paper imports primarily from Europe. Despite the volume declines, contribution to profitability from paper was up year-over-year both in the quarter and for the full year as cost reductions and margin enhancement initiatives have begun to take hold. In fact, the contribution to profitability for the Performance Materials product line remains positive and has increased year-over-year for both the quarter and the full year.

During the quarter, we reported $28.6 million of impairment and restructuring charges and for the full year, we reported 44.6 million, of which 2 million and 14 million, respectively, are cash. Of the 28.6 million impairment and restructuring charge recorded in the fourth quarter, 18.3 million is related to our Indian rubber manufacturing operation, which we have decided to sell. The Indian manufacturing plant and product lines were part of our acquisition of the ELIOKEM global specialty polymers business a few years ago.

Products that the plant makes such as bailed rubber are not strategic to OMNOVA and have few synergies with the rest of our product portfolio. The sale will allow us to put greater focus on growing our specialty businesses and improving margins in our traditional core businesses. The impact on profitability during 2016 of selling the business is expected to be minimal.

I do want to emphasize that the Indian market remains highly important to us and OMNOVA will maintain our sales office in Mumbai to manage the continued growth of our specialty polymers in the Indian market through imports from other OMNOVA facilities in Asia, Europe and North America.

2015 was an extraordinary year of restructuring and repositioning the business. We’ve taken the restructuring actions primarily to accelerate growth in our specialty business and to improve the profitability in our Performance Materials businesses. The net result of these and other actions is that we expect adjusted segment operating profit to approach the mid-teens over the next few years primarily through cost reductions and margin improvements in the short run, while our newly focused specialty organization begins to deliver meaningful and sustained growth in our higher margin specialty markets.

As a result, we expect to have a more diversified company not reliant on any one market, growing and generating cash with specialty margins. Net leverage was 3.95 times adjusted EBITDA at year end. Cash flow generation during the year was favorable as cash from operations grew to $43.7 million from $15 million in 2014. Net debt remained about flat at approximately 312 million.

During the year, we spent approximately 14 million cash on restructuring, 5 million on the small acquisition and 18.6 million on share buybacks. Had we retained that cash, leverage would have been approximately 3.5 times adjusted EBITDA. We expect to continue to generate cash in 2016. From a turnaround perspective, we accomplished the significant amount over the entire year.

In terms of successes, we delivered a 29% increase in adjusted EPS for the full fiscal year with profit growth in both of our segments driven by margin expansion and mix, which was more than enough to offset the headwinds from challenged markets. Our Performance Materials business contributed more to profitability in both the fourth quarter and for the full year in spite of the volume declines.

Profitability in our Engineered Surfaces segment grew 20% again this year making this the fourth consecutive year of significant adjusted segment operating profit growth in that segment. The contribution to profitability from our specialty businesses, excluding oil and gas, grew dramatically in both the quarter and for the full year. Additionally, our cost reductions have already begun to contribute to increased profitability. We expect to save upwards of 14 million to 17 million by 2017.

Our team is now fully in place and focused on driving profitable growth through more effective marketing, selling and new product development activities. We saw growth over the year in key specialty lines and we generated almost 44 million of cash from operations.

Thank you. And with that, I’ll turn the call back over to Kevin.

Kevin M. McMullen

Thanks, Paul. I’d like to begin by reminding you about OMNOVA’s four strategic priorities. First is to accelerate growth in our specialty businesses such as chemicals for nonwovens, specialty coatings, elastomeric modifiers and construction materials as well as laminates. Second is to expand margins and generate cash in our mature Performance Materials product lines such as North American paper and carpet. Third, to drive improved return on investment and fourth is to deploy a balanced capital allocation policy. Taken in total, all of our actions are positively affecting these priorities.

Here are a few of our actions and accomplishments in 2015. We put in place new processes to drive commercial and innovation excellence that tightens our business strategies and more closely matches our technology programs with our customers’ needs. Concurrently and very importantly, we strengthened our commercial and technical teams with seasoned high performers in new roles as well as industry experts from outside the company. In a few minutes, I’ll discuss a few of new products and business wins that are resulting from our more disciplined approach to innovation and the closer ties between sales, marketing, technology and our customers.

We are realigning our North American manufacturing footprint to more competitively serve our chemical markets. This action was announced in June of 2015 and built upon other capacity and capability improvements made in 2013 and 2014. This comprehensive realignment includes two plant closures that will increase capacity utilization and improve service to our customers. As part of the footprint realignment, we are transferring production of carpet and paper latex to our most modern and cost effective North American latex production site in Green Bay, Wisconsin, and we are repurposing assets and other plants to drive growth of specialty chemicals. Our footprint work is expected to be largely completed by the middle of this year.

In addition to manufacturing resources, we have refocused the efforts of people across the business and directed key investments to support our specialty growth objective. At the same time, we are reducing our operational and administrative costs. For example, as Paul mentioned, we announced a major restructuring of SG&A last summer. These actions are key to building a stronger OMNOVA that is better positioned for improved long-term profitability and sustained profitable growth.

Most of these recent actions have been focused on our Performance Chemicals segment and are similar to what we have done in Engineered Surfaces to put it on the path of significantly improved performance. As Paul mentioned, Engineered Surfaces has had four consecutive years of increased profitability following the actions we took there, and we have every reason to believe this trend will continue. It is clear that our efforts in Performance Chemicals are beginning to gain traction and we expect improvement to accelerate.

I spoke earlier about the critical importance of innovation to our company. We like to say we provide the science and better brands referring to the fact that countless top brand named products people use everyday perform the way they do in large part because of OMNOVA’s functional chemistries in surfaces. We are a small part of the finished products costs but have a big impact on its performance. We also take pride in our worldwide technical service capabilities and our willingness and ability to customize to meet the needs of our customers. These characteristics help differentiate OMNOVA from our competitors.

We are big enough to have the tools and technology to develop innovative solutions for our customers but small enough to be agile and flexible to work with them to customize our products to their exact needs. The commitment to science and service has been strengthened by our commercial and innovation process improvements, a new organizational design under new leadership and a better understanding of how our technologies can be leveraged for greater impact. With these changes, our efforts are now more focused on new products that drive significant value for our customers and for OMNOVA.

There are many examples of how innovation is making a difference in our company and for our customers. I would like to tell you about three of them; first, in nonwovens. Our specialty nonwovens business in Performance Chemicals made a critical turning point in 2015. We have long had success in disposable hygiene products such as diapers where our latex binders offer superior fluid management. More recently, we have built upon this unique expertise to open a new large market segment for OMNOVA in surface treatment in addition to our traditional binder products.

In 2015, we introduced SoftWick finishing treatment, a unique polymer system that provides softness and wicking properties for improved fluid management. SoftWick offers the potential to design advanced less bulking nonwoven products that’s reducing cost for our customers and increasing comfort for their end users. We are now beginning to apply this and other breakthrough technologies to other key disposable and durable nonwovens market segments such as building materials, filtration, automotive interior and under-hood car and truck applications, disposable wipes and medical requirements.

Another example of where our innovation efforts are making major inroads is in our laminates business where we are building upon the success in retail store fixture applications to provide surfacing solutions for the large and growing markets in restaurant chains. Our new fabrication design service model enables us to work with our customers to value engineer tables and accent and architectural services that provide natural looking solutions not achievable with alternative materials.

This valuable service unmatched by any of our competitors is combined with our technically and esthetically superior surf(x) 3 dimensional laminates to provide value through a long-lasting, durability, planability and an attractive appearance. Customer fabrication costs can be reduced by up to 30% with lifecycle maintenance cost savings of up to 50% versus high pressure laminates which have been the industry standard. Better appearance, more durable, lower costs, we offer a strong value proposition to the market and are being rewarded with more opportunities every day.

I want to emphasize the global impact of our innovation efforts and this brings me to my third example. Even though the China market has slowed a bit in recent months, overall, it continues to be one of the fastest growing economies in the world. OMNOVA is well positioned in China and in Asia with five Performance Chemicals and Engineered Surfaces plants serving China and the Asia-Pacific region. This improves product development capabilities and technical service adapted to the Asian market.

Our innovation is making a difference for automakers in China. In fact, we have now won business with 12 Asian automotive manufacturers to supply fabrics for seating and other interior components such as door and instrument panels for 21 distinct models. As comparison, in 2014, we were serving two OEMs. Likewise, our Performance Chemicals segment is introducing innovative new products to the Asian market from our newest plant in Caojing, China near Shanghai.

2015 was spent completing qualifications and ramping up regional production for applications such as nonwovens, specialty coatings and construction materials. Outstanding capabilities in Caojing are a result of a targeted capital investment to grow our specialty chemical business in Asia. We will continue to update you in future quarters of our key growth actions and accomplishments as we execute our value creating strategy.

In closing, I would like to reemphasize the positive momentum we’ve created in the fourth quarter of 2015 and over the full year of 2015 in spite of challenging market conditions. As we continue to see improvements through our strategic growth initiatives, action plans and cost reductions, the company expects to deliver another year of significant growth in adjusted diluted earnings per share in 2016.

Paul and I would now be happy to take any of your questions. I’ll turn the call over to Tom.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions]. Our first question today comes from the line of David Begleiter with Deutsche Bank. Please go ahead.

David Begleiter

Thank you. Good morning.

Kevin M. McMullen

Good morning.

David Begleiter

Kevin, can you discuss for 2016 Performance Chemicals the operating profit outlook both from a dollar perspective as well as a margin perspective?

Kevin M. McMullen

Yes, so we expect the continued significant margin growth as we’ve seen through the end of 2015. Obviously, our cost actions are taking hold and we are working on pricing actions as well to expand margins going forward. So we expect accelerated growth in operating profit performance in chemicals in '16 versus 2015.

David Begleiter

Thank you. Just on, maybe on SB latex, Kevin, can you talk about current trends as volumes as well as pricing? And what were volume – paper volumes down both in Q4 and year-over-year? Thank you.

Kevin M. McMullen

Yes, so paper volumes overall were down – we think the market was down somewhere in that 10% to 15% level. That was a combination of – the drivers were a combination of lower demand and also there was an increase in imports in the latter part of the year coming in from Asia and to a lesser extent from Europe. So, our volumes were about the same, a little bit more than that because of a plant closure that occurred for a customer that we were serving earlier in the year, but absent that they were kind of on trend with what the market was doing.

David Begleiter

And just SB latex volume trends today, pricing trends going forward?

Kevin M. McMullen

Yes, so from a volume standpoint, we would expect that paper would be – overall all segments of paper would be down probably in the 3% to 5% for 2016 and carpet would be flat to modestly up in 2016 looking forward. From a utilization standpoint as a result of the actions we’ve announced on plant capacity utilization, we would expect that to be above 90% for OMNOVA going forward as we close out the two plants that I mentioned and repurpose assets. From a pricing standpoint, we have – I won’t go into detail there. We are negotiating pricing in the paper and carpet market as we speak and we are certainly intending on achieving price increases to move our business to a more sustainable margin standpoint going forward that those sustainable margins will come from pricing actions as well as the cost actions that I’ve talked about.

David Begleiter

Thank you very much.

Kevin M. McMullen

Thanks, Dave.

Operator

Our next question today comes from the line of Roger Spitz with Bank of America. Please go ahead.

Roger Spitz

Thanks. Good morning.

Kevin M. McMullen

Good morning.

Roger Spitz

What do you peg the North American industry SB latex operating rate overall to be currently?

Kevin M. McMullen

Yes, so our rates following this plant closure that we’ve announced and we’ve done here in early 2016 we think will be at 90%. Our view of the market overall, we’ve read the announcements of our competitors shutting capacity and so we think overall the market is probably 85% to 90% utilization following those capacity shutdowns.

Roger Spitz

Great. And Verso is – you’re probably more aware than we is looking to potentially sell, maybe they closed some additional mills. I wonder how you think that might impact you as well as may be give an update on how much receivables you have currently with Verso should there be a potential restructuring?

Kevin M. McMullen

Yes, so we are well qualified in the Verso mills and typically if there would be a sale of a mill, the best operating assets in the industry have a tendency to continue to operate even through a sale. And so given that we’re qualified in serving those mills, I think we’re well positioned if a sale were to occur. In terms of our business relationship with Verso, our focus is to be a great supplier to them and service them but also to manage our exposure to them. And what I would just say is we’re comfortable with our exposure that we have at Verso. Verso has challenges for sure but their underlying business, they’re generating a great deal of EBITDA and so certainly one of the challenges is the leverage that they have but they are generating strong positive EBITDA in the underlying business, which we think longer term bodes well for that business absent the near-term challenges that they have.

Roger Spitz

Okay. The other is in Performance Chemicals in the press release, you implied margin expansion as raw materials fell faster than price if I read that correctly. With butadiene prices now flattening out, do you expect that margins going forward at least on a year-over-year comp basis will be harder to comp or maybe the margin growth as you saw becomes flat margins or maybe margin compression going forward?

Paul DeSantis

Yes, so Roger this is Paul. So our expectation for the first few quarters for sure that the comp comparison to last year, butadiene will still be well down. Our margin enhancements – so we do expect margins to continue to improve all next year and that improvement is going to be a mix of multiple items. So, part of it will be the impact from raw materials. A big piece of it will be cost reduction initiatives. So we’re expecting the bulk of our cost reduction initiative to hit during fiscal 2016, so we’re very focused on that. We also expect mix to have a big and favorable impact on margins for us. So if you look at what happened to us in the quarter, we had favorable volume growth at a number of key specialty line items and where we saw the lack of volume growth was primarily in more the Performance Materials business, which tend to have lower margins. So, I think we have those three effects that are going to help drive margin improvement throughout the year.

Roger Spitz

Perfect. And last one from me on the bonds, would you look to repurchase more bonds and how do you plan to address the current bonds?

Paul DeSantis

Yes, so that’s a great question. We’re watching the markets very closely to make sure that we’re in an appropriate position and able to move if and when a window opens for an opportunity for us as we look at our capital structure. We’ve paid down 50 million last year, 50 million again this year, so we’re taking the overall growth debt down in the business as we generate cash and are using that cash for that. So, right now the markets aren’t overly cooperative for debt issuers like us. And so we’re watching those markets. We don’t expect them to be this way indefinitely.

Roger Spitz

Thank you very much.

Operator

Our next question today comes from the line of Rosemarie Morbelli with Gabelli & Company. Please go ahead.

Rosemarie Morbelli

Thank you and good morning, everyone.

Kevin M. McMullen

Good morning.

Rosemarie Morbelli

I was wondering if I could follow up on the price increases situation. You are negotiating with paper and carpet customers but the market is down for both of those categories. How confident are you that those price increases are going to go through and why will they?

Kevin M. McMullen

So that is not the only area that we are focused on price increases but we’ve had lots of discussions with our customers. We talked about building a sustainable business model that allows us to reinvest to support their needs, to have the products that they need when they need it, to provide innovation. And so as part of that we are taking a very, very aggressive approach to our cost to reduce our cost to help improve margins and at the same time, we need to get pricing actions up to have more sustainable margins to have a more sustainable business. And so we are very focused on that and we are working through that with our customers and are confident that we will get pricing as we come through this. And our team is very aligned on driving to achieve those.

Rosemarie Morbelli

And if you cannot achieve them, Kevin, are you willing to eliminate additional capacity and focus on even a smaller range of product lines that will be real specialties?

Kevin M. McMullen

Yes, so we will – as a company, we are very focused in our chemicals business on getting margins to acceptable levels. And so we will take all actions we need to, to achieve that. We believe that we’re a very important and valuable supplier to those industries. We’ve continually brought innovation to those industries over the years. We’ve been a reliable supplier over the years and we believe going forward we will continue to do that. But we certainly need to earn acceptable returns in order to do that.

Rosemarie Morbelli

Sure. And could you share with us the size of your paper, carpet and oil and gas businesses? And I am assuming that all three of them are part of the Performance Materials, but I could be wrong.

Kevin M. McMullen

So paper and carpet are part of Performance Materials, oil and gas is not. It’s a separate product line altogether.

Rosemarie Morbelli

And what is their respective sizes on an annualized basis?

Paul DeSantis

Yes, so Rosemarie if we look at oil and gas, it’s around 10% of our sales if you look at our sales for the Performance Chemicals business somewhere in that range. If we go to paper and carpet, it’s in the 20% of the entire company range. I’m trying to get the exact numbers out here. So if I look at the fourth quarter, sales for paper were approximately in the 25% range or so for the whole company. And then your third question, I’m sorry I missed it, the third component?

Rosemarie Morbelli

Well, it was paper, then carpet and then oil and gas.

Paul DeSantis

Yes, then oil and gas as I said was 10.

Rosemarie Morbelli

So oil and gas is 10, paper is 20% and carpet or was it paper and carpet that were 20%?

Paul DeSantis

I’m sorry. Let me just make sure I have the right numbers for you. Yes, so 20% for paper of the Performance Chemicals business and carpet was – let’s see – carpet was about 8% of the Performance Chemicals business in terms of sales in the fourth quarter.

Rosemarie Morbelli

Okay. If I may ask a couple of more questions, you are now focusing on the innovation and could you share the R&D spending currently and what you think you need to get it up to in order to really accomplish your goal?

Paul DeSantis

So Rosemarie I’ll take the first pass. We’re going to publish the K shortly and I think you’ll see when we publish the K that R&D spending is about $8 million in total for us as a company.

Rosemarie Morbelli

And then are you targeting, I don’t know, a 20% growth in order to get the new product lines that you think you need in order to grow and have higher margins?

Kevin M. McMullen

We are very focused on growth in our specialty product lines. As we grow our specialty product lines, our mix improves. They are higher margin businesses and we think that we have a very strong value proposition in those markets today that will allow us to grow faster. We also think with an improved innovation process that will help accelerate growth and bring more value to those markets. But frankly in addition to all that, we also think that a more effective selling process in addition to innovation where we are getting more effective at focusing on key accounts and having more focused key account strategies and being more effective in articulating very strong value propositions. This is why they should be doing more business with us and will allow us to grow as well. So it’s not one thing, it’s not just innovation, it’s a combination of stronger innovation plus stronger selling and marketing capabilities overall.

Rosemarie Morbelli

Great. And then lastly on the leverage, are you comfortable? I mean what is rather a comfortable level in this environment, your currency at 3.9 times, Paul said 3.5 if we make some adjustments. Where do you think you should be?

Kevin M. McMullen

Yes, I’ll take the first crack [ph] and then let Paul add. But I think we are comfortable with where we are. We will continue to generate cash we think and accelerate our cash generation over the course of 2016 and beyond and we will reduce our leverage going forward. We’ve said before over the long term having a goal of around 2 times but balancing that with the opportunities for the right strategic acquisitions and bolt-on acquisitions. And so that’s generally our trend and what we are pointing towards and I think we’ll make good progress. We have a lot of work not only on growing our earnings but also on growth and on improving our working capital efficiency that’s going on across the company. And I think we will become more effective at that and as a result of that generate more cash going forward.

Rosemarie Morbelli

Thank you very much.

Kevin M. McMullen

Thank you.

Operator

And next we’ll go to the line of Mike Sison with KeyBanc. Please go ahead.

Michael Sison

Hi. Good morning, guys.

Kevin M. McMullen

Good morning, Mike.

Michael Sison

For 2016, I think you had talked about cost savings of 7 million to 9 million that hits this year. Is that still the same number?

Paul DeSantis

Yes, so we think we had around 3 million of the 14 to 17 hit in fiscal '15. We’d expect then the bulk of it to hit in fiscal '16 and then a few million more in fiscal '17 as we round out the savings benefit.

Michael Sison

So it’s a little bit higher than you previously thought.

Paul DeSantis

It’s in the 14 to 17 range, it’s still there. We’re targeting additional initiatives where we think they make sense and so we want to – we’ll be happy to over-deliver on that number.

Michael Sison

Okay. Then aside the cost savings in '16, how much do you think volume growth in total will contribute to earnings growth this year?

Paul DeSantis

The biggest contributor is going to be the cost reduction as we talked about. We then expect mix to be the next biggest contributor. So we saw good growth last year in nonwovens, we saw good growth in coatings, we saw good growth in a few of the specialty lines in laminates – North American laminates in particular had very good growth. We expect that that growth is going to continue and so we expect that right on the heels of cost reduction, we expect to see the benefit of that growth in terms of increased mix and profitability from that mix.

Michael Sison

How much did mix contribute in '15 and will it be bigger in '16?

Paul DeSantis

Yes, so we didn’t discuss how much mix contributed. It was a big contributor. It wasn’t the only contributor to the profitability. I would expect that it will be a bigger contributor in fiscal '16.

Michael Sison

Okay. And then foreign currency, will it be a negative in '16 to any noteworthy degree?

Paul DeSantis

Yes, it will depend. The euro alone cost us around $400,000 in the quarter and cost us more than $2 million on a full year basis on the operating profit line. So obviously we’re very sensitive to the euro and we’re watching that very closely. So depending on what happens with the euro, that will have another impact. The euro was basically our average in the fourth quarter in 2014 was roughly $1.28 that dropped to $1.11, so a pretty big impact from the euro. Right now the euro is trading I think a little bit lower, so we’re keeping an eye on that.

Michael Sison

Okay. And then Kevin maybe in total, I think you commented that the goal is to have operating margins in the mid-teens at some point. And I don’t know if you have a timeframe there, but maybe generally speaking, what else needs to happen for you to get there?

Kevin M. McMullen

Well, clearly putting a floor under our Performance Materials business, the paper and carpet business, here in North America is step one. That has been the biggest contributor to our erosion over the last couple of years. And so putting a floor on that and growing profits from that floor and growing cash flow from that spot is critical in our Performance Materials business and we are making progress and doing that. Secondly is to accelerate the growth in our specialty businesses, specialty coatings, nonwovens, elastomeric modifiers, construction materials, our laminates business. We’ve seen growth in all those businesses. We believe there’s opportunities for us to accelerate growth. We believe there’s more market opportunities for us out there that we’ve realized and so that will be a big part of it. And then a huge part of this is following through on the cost actions that we have talked about overall that we think we are on point forward and on track to realize those. And so I think all of those things in combination is what allows us to drive profitability to the next level of performance. For the last couple of years we talked about reaching double digit operating profit across the board. We are approaching that now as you saw in our fourth quarter, so clearly our next focus is to get to mid-teens profitability and we feel like we have a clear path, not without challenges but a clear path in order to get there.

Michael Sison

Okay. And finally when you think about '16 in total, you sort of suggested substantial or strong – I forgot what the wording is – EPS growth next year. Could you help us gauge what – maybe to some degree what that means? Consensus is 50% above where you’re at now. And then in the first quarter, clearly a tough quarter as I recall. Is it typically going to be a quarter that’s going to be tough again?

Kevin M. McMullen

Yes, so let’s talk about this last part of that first. The first quarter is seasonally always our weakest. It starts in December, which we all know it’s just a weak business month overall and the first quarter with cold weather and much of the areas and whatnot, a lot of construction and building is going on which were influenced by that. So the coating season really winds down and there’s not much going on there in the first quarter. So first quarter is always seasonally our weakest. We would expect that to continue going forward but feel – obviously we don’t give specific guidance. We believe there will be significant improvement overall and I guess I would just leave it at that. We’re confident in our plan, we’re confident in the actions we’re taking. There are global economic headwinds out there that are challenges for everybody in our business, in our segments, but we are confident in the actions we’re taking, we’ll be able to overcome those and we will see significant improvement on a year-over-year basis, off of what was a 2015 that had considerable improvement as well.

Michael Sison

Great. Thank you.

Kevin M. McMullen

Thanks, Mike.

Operator

And we’ll go to Bill Hoffmann with RBC Capital Markets. Please go ahead, sir.

William Hoffmann

Thanks and good morning. Kevin, I wonder if you could just talk a little bit about – obviously, this is a tougher time of year but what your general views are on the volume trends in specialty – I’m not talking paper or carpet chemicals, but on the specialty side in Europe and also what you’re seeing in Asia?

Kevin M. McMullen

Yes, so I think Europe will see market – and I’ll talk about market and then I’ll talk about – so I think Europe will see modest growth in 2016 in areas like coatings and other specialty businesses. But I think Asia is slowing but we’ll still see significant growth in 2016 in a lot of these specialty markets. North America is I think pretty solid from a market standpoint in these specialty markets. I think we have the ability to outperform the markets. We generally have – we play in niche areas. We have other opportunities to go penetrate. We’re not a huge player overall, so we don’t have a lot of headroom in terms of – it’s not like we’re limited from us growing in the market and we have a lot of new opportunities. A great example of that is in our laminates business. It’s a several-billion-dollar market in North America alone. We have a small fraction of the market. We believe we have a better mousetrap with high pressure laminate, which is the dominant player in the market and so there is a lot of room for us to grow without needing a lot of market growth to help us do that. So from that standpoint, we’re very encouraged. There’s a whole new market in North America that’s just now opening up, it’s growing very rapidly, it’s called luxury vinyl tile. We are an active participant in that both through print layer as well as wear layer supplied to the luxury vinyl tile producers. That market has been in the North America, it’s now being on-shored by the luxury vinyl tile producers who are setting up manufacturing facilities here in North America and we are intimately involved with them and supply them key components that go into the finished product. So all of those areas; in our coatings business, in our chemical space, we have new direct-to-metal products that has just recently entered the market last year and we see ramp-up opportunities there. We have new masonry-coated products. We have a very strong line of [indiscernible] coating products to protect steel in the event of fire. We have new wood treatment products for decking and other areas. So, we have a lot of new things that are in the market that we believe will allow us to grow higher than market rates in all these specialty categories that we play in.

William Hoffmann

Great. Thank you. That’s very helpful. And just a quick question. In 2015, you showed quite a bit of improvement on working capital. I mean obviously a lot of that was raw material cost reductions. Any thoughts for '16 working capital? Do you think it generates some additional cash this year or you go back to sort of a more neutral year?

Paul DeSantis

We think our working capital levels have room for improvement. We actually have formed a taskforce here internally in the company and we are mapping out a strategy to get working capital down. We want to bring working capital down pretty significantly from our point of view. We want to take a number of days out of working capital. And so we have very targeted initiatives going on across each element of working capital right now that we want to focus on. Additionally, we’re looking at our incentive plans and modifying incentive plans to target working capital in a much more specific way. So, net-net we’re pushing working capital discipline through the organization, a new level of discipline through the organization and our intention and expectation is that we use that to continue to drive improvement in working capital.

William Hoffmann

Great. Thank you. And then capital spend expect to still be in the 25 to 30 range this year?

Paul DeSantis

Yes, we’re somewhere in that range. That’s correct.

William Hoffmann

Okay. And then just cash restructuring costs, thoughts for you.

Paul DeSantis

Yes, so cash restructuring costs, we’re through the bulk of the cash restructuring costs. We spent about $14 million in fiscal '15. I would expect that if we think forward, there may be [indiscernible] with finishing off all the programs that we started this year.

William Hoffmann

Great. Thank you and good luck.

Operator

And next we’ll go to the line of Laurence Alexander representing Jefferies. Please go ahead.

Daniel Rizzo

Good morning. This is Dan Rizzo on for Laurence. How are you guys doing?

Kevin M. McMullen

Good morning, Dan.

Daniel Rizzo

Last quarter, you indicated I think there was a hiccup in Chinese automotive end market. Has that continued? I’ve heard from other companies that things have kind of rebounded in that particular end market. I was wondering what you guys are seeing?

Kevin M. McMullen

Yes, so I think we’ve seen a mild pickup there. We’re going through some shifting in terms of the customer base we’re serving. I mentioned in the comments that we’ve picked up a lot of OEMs and a lot of new business that’s being offset for some decline we have in our particular customer that we have anticipated. So I think overall we think the market has improved a little bit from its dip. But longer term, we only talk about a little bit longer term. Longer term, we’ve done a pretty extensive analysis on penetration of automobile ownership in China versus other developing countries and where we are. And if you look at China today, it’s still very low penetration rates. You got a growing middle class. And so the expectations for China longer term from an automobile build are pretty strong, over 5% per year growth off a very high basis, the largest automobile market in the world. And so we’re pretty bullish on longer term that there will be growth in China. Yes, there will be pickups from time to time and you’ll see softness from time to time. But I think over the long term, it’s pretty compelling that there will be significant growth there and we’re well positioned.

Daniel Rizzo

Okay. And then one other question. Your carpet is supposed to be I think you said up mid-single digits or volume wise in 2016. Did I hear that correctly?

Kevin M. McMullen

No, I think our view is it will be up modestly in 2016 for probably low-single digits I would guess the market overall for carpet.

Daniel Rizzo

But it did fall in the fourth quarter. That was a bit of a surprise, wasn’t it?

Kevin M. McMullen

Yes, I think there was clearly inventory correction going on by the manufacturers of carpet in the fourth quarter and they were taking extensive downtime to right-size their inventories. And so I think the fourth quarter is indicative of what the market was doing overall in 2015. So, I think the market in 2015 for carpet was probably flattish overall for the year, fourth quarter certainly weaker.

Daniel Rizzo

All right. Thank you very much.

Operator

[Operator Instructions]. We’ll go to the line of Tom Spiro with Spiro Capital. Please go ahead.

Tom Spiro

Tom Spiro, Spiro Capital. Good morning.

Kevin M. McMullen

Good morning, Tom.

Tom Spiro

Paul, just a couple of cash questions. Of the 45 million or so on the balance sheet, how much is in the U.S.?

Paul DeSantis

Very little in the U.S. Most of it is outside the U.S.

Tom Spiro

Are we comfortable in maintaining that modest U.S. cash position?

Paul DeSantis

We are. We have a revolving line of credit that’s asset backed we have not drawn on and rarely drawn. So the cost of that is fractional compared to the cost of our long-term debt. And so when we looked at our cash and deployment of cash, we thought we’d get better return paying off those seven and seven-eight notes.

Tom Spiro

Thanks. And what is our cash pension fund funding obligation for '16?

Paul DeSantis

I think it’s about $5 million to $6 million.

Tom Spiro

5 million to 6 million, thank you. And lastly, Kevin, our expansion of the Caojing plant in China, I guess the expansion now is done. What’s our utilization rate over there now with the newly expanded facility?

Kevin M. McMullen

Yes, I think our utilization rate is down in the 75% to 80% level as we mentioned in the call. A lot of 2015 was spent qualifying new customers and ramping up production, so I think we’re in good shape as we enter 2016 there to continue to grow that business. It will focus on specialty areas; nonwoven, specialty coatings, tape and construction material products. And we continue to think that there is opportunities for us to grow there. We’re a pretty small player locally in China markets, so we think the growth that we’re looking at we’ll certainly be able to achieve.

Tom Spiro

Well, thanks so much and good luck.

Kevin M. McMullen

Thanks, Tom.

Operator

Gentlemen, there are no other questions queued up at this time.

Kevin M. McMullen

Okay. Tom, why don’t we turn it back to you and maybe you can give the replay instructions. Thank you all for joining us for our fourth quarter release. We look forward to talking to you at the end of the first quarter.

Operator

Ladies and gentlemen, this conference will be available for replay after 1 p.m. this afternoon and running through February 9th at midnight. You may access the AT&T executive playback service at any time by dialing 800-475-6701 entering the access code of 382049. International participants may dial 320-365-3844. Those numbers again are 800-475-6701. International participants dial 320-365-3844 and the access code is 382049.

Also, an audio replay will be available on the OMNOVA Solutions Web site at www.omnova.com until noon Eastern Time on February 9, 2016. That does conclude our conference for today. We thank you for your participation and using the AT&T executive teleconference. You may now disconnect.

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