Q3 2019 Earnings Call
Ladies and gentlemen, today's conference.
Again shortly please continue to standby. Thank you for your patience.
Shannon and I'll be operator for today.
At this time, all participants are in listen only mode.
Have a question answer session at the end there's a conference.
As a reminder, discovered this me recorded replay purposes.
At this time of like to turn the call over to Joe to follow Vice President Treasurer and Investor Relations. Please proceed.
Thank you Shannon good morning, welcome everyone joining us on the call today.
Before beginning we'd like to remind you that statements made during the conference calls maybe considered forward looking statements within the many of the private Securities Litigation Reform Act of 1995.
Forward looking statements with your current expectations are forecast what future events are not guarantees of future performance based on management's expectation and involve a number systems restaurant uncertainties any of which could cause actual results could differ materially from those expressed and implied by the forward looking statements. Some of these risks and uncertainties can be found in the company's filings with the secured.
He said exchange Commission as well in today's press release.
During the discussion today the company, we use both GAAP and non-GAAP financial measures.
Please refer to the earnings release potion to play one website, where the company describes and I guess financial measures and provides a reconciliation for the most comparable GAAP financial measures.
Otherwise stated.
Operating results reference during today's call will be comparing the third quarter of 2019 to third quarter of 2018 on a continuing operations basis, which excludes the PPS business, that's presented as a discontinued operation.
Also note that included an attachment <unk> today's release issued today is updated summary of the prior period earnings per share showing the impact of the discontinued operations.
Joining me today I'm, Nicole is our chairman President and Chief Executive Officer, Bob Patterson, and Executive Vice President Chief Financial Officer, Brad Richardson.
Now I will turn the call wondered about.
Thanks, Joe and good morning, everyone I'm pleased to report the for the third quarter, we delivered adjusted EPS of 44 cents, that's a 7% increase over prior year.
Our investments and recent acquisitions and sustainable solutions combined with our cost reduction initiatives continue to offset the weak demand environment.
Specialty engineered materials led the way this quarter growing operating income 7%.
Highlighted by our recent acquisition fiber line and new business gains in our composites portfolio.
In fact organic sales of composite technologies grew 8% in the quarter and operating income more than doubled for the prior year.
Composites along performance additives are two of our high growth technology platforms and the difference. These technologies are making is reflected in our now less cyclical more specialty portfolio.
Well, the announced agreement to divest or performance products and solutions segment.
I have taken yet another significant step further establish us as a specialty company.
Following the sale, 80% of polling ones EBITDA will be generated from specialty formulations and that's up from 7% from when we began our specialty journey.
This latest portfolio enhancement reduces our exposure to cyclical end markets, while at the same time strengthens our balance sheet.
Proceeds from the sale will provide us increased financial flexibility to accelerate growth by acquiring additional specialty technologies and investing in innovation focused on sustainable solutions.
More on this strategic approach is captured in our just released sustainability report.
It's our first ever at Polyone, and I'm going to spend some more time on that this topic in my closing remarks.
To our customers colleagues and friends in the P. BNS business. We're excited about your future with SK capital. We are grateful for your partnership innovation and the success, we have had together.
Since 2006, we have invested and grown this business and it is played an important role in our transformation.
As we look back on this time that growth has come from organic initiatives such as investing in commercial resources, achieving a high level of operational excellence and of course training and innovation.
But as we look to the future the business needs an owner like SK, then we'll look to add on acquisitions and incremental investment to help the portfolio achieved even higher level performance.
That's king has big plans for the business and customers should know they're in good hands.
And we count ourselves among them as PPS will continue to be a supplier to polyone and an important partner for our distribution business.
Our distribution segment is having a record year from an operating income standpoint, and it continues to be a cash flow generating machine. Despite challenges in certain end markets our distribution benefits from a high degree of health care customers as well this engineered resins.
Although sales are down margins have improved and better mix pricing and controlling costs.
You know the reality is overall macro conditions haven't changed much since the beginning of the year.
Which is why I'm, particularly proud of how we differentiate our performance in the quarter and demonstrated our ability to grow the bottom line in this environment.
To be clear some of this is from crude and self help actions. We took earlier this year.
We have reduced cost control discretionary spending and increased our commercial focus on pricing and new business keys to improve mix.
And this is what a specialty company does our most recent performance demonstrates the growing strength of our portfolio in our investments and other strategic decisions are paying off in these uncertain times.
On this in a moment, but next Brad will provide a segment review and go a little deeper on our performance for the third quarter ran well. Thank you very much Bob and good morning.
Now let me first start with our GAAP results, we reported GAAP earnings per share from continuing operations 30 cents.
Special items in the quarter resulted in a net after tax charge of $10.5 million compared to a half a million in the prior year.
The increase in special items is primarily related to the earn out adjustment associated with the fiber line acquisition.
The business is performance has been exceptional exceeding our original expectation.
To reinforce Joe's earlier comments our results are presented on a continuing operation basis, which excludes the P. PNM segment, which has presented as a discontinued operation.
Adjusted EPS for the quarter was 44 cents, 7% higher than the prior year third quarter.
This increase includes the headwind from a higher effective tax rate.
At a constant tax rate as would've been up 10%.
Driving the growth in adjusted as.
With a 5% improvement in operating income.
Contributions from our fiber line acquisition are growing composite portfolio and barrier additives continue to perform and differentiate us.
And what can only be characterized as a challenging economic environment.
And as Bob said, we are benefiting from our earlier efforts to reduce cost and improve pricing and mix.
From a regional perspective organic sales in Europe were down 11%, primarily due to weak demand in automotive applications and unfavorable foreign currencies.
Foreign currency negatively impacted the regions overall sales by 5%.
Asia sales were down 7% as growth in the packaging end market from our bear additive technology was more than offset by weakness in the automotive and electronics end markets.
Weaker foreign currencies impacted overall sales in the region by 2%.
Still despite the topline weakness in Asia operating income grew 11% for the quarter due to improved mix from our wins and higher margin specialty applications.
As you know the early days of our transformation are more known for mix improvement that drove margin expansion.
But clearly it's still a focus of ours as exemplified by the Asia results this quarter and we'll continue to be.
In reviewing our segments SCM expanded revenue and operating income, 10% and 7% respectively.
Strong performance from composites, and North America wire and cable along with mix improvements, we're able to offset unfavorable FX and weakness in Europe and Asia.
Driving the mix improvement for SCM or wins in health care applications.
Sales into this end market improved 19% in the third quarter and that followed a 25% growth in the second quarter. This year.
Examples of wins in applications that are driving the steady growth include.
Hey sensor delivery design device for a continuous glucose monitor.
The applicator inserts, a small sensor just beneath that skin, which continuously measures glucose level and since the data wireless slate smartphone.
The customer chose Polyone because of our material science expertise and medical grade solutions and sophisticated formulations of F.D.A. compliant medical grade polymers.
Polyone fraud value to the OEM and its manufacturing network through both design and processing support to create consistency and accelerated product development.
Another contributor to our recent SCM health care growth is the expansion of our any you platform, which supplied formulations for catheter extrusion.
These include specialty radio pay and pre colored material as well as molded components used in intravenous and minimally invasive therapies.
These are just a few examples of how we continue to innovate for our customers and improve our portfolio of specialty offering and less cyclical end markets.
Looking at our color segment revenue and operating income were down six and 7% respectively.
Weaker foreign currencies impacted both sales and operating income by 2%.
From an end market perspective.
Growth in packaging and health care with more than offset by weakness and transportation applications and more recently in North American consumer applications.
The packaging end market continues to be a growth story within color as we've mentioned sales were up over 3% for the segment in the quarter.
Driven by continued market demand for our barrier additives.
Asia led the way in this end market with 8% growth this quarter.
And that center stage was once again, our lacter FX additive serving the expanding drinkable yogurt market.
Similar to FCM healthcare sales were also up in color growing 7% into third quarter.
Recent wins included new application for a melatonin related product, where we were able to provide a solution that not only met the desired aesthetic intent of product design, but also provided the required UBI protection for the pharma contents.
Melatonin is UBI sensitive and easily degraded.
Our solution met the technical requirements, so well that our call aren't was included in the patent filed by the OEM for this application.
Another example, including winning a personal care product application for an existing customer who with launching a private label branded product for one of its customers a prominent global retailer.
Because of our longstanding expertise in this market and ability to provide consistent solutions used in this particular medical class one application we earn the business.
And yet. Another example includes a great collaboration effort between our color and distribution teams.
Our distribution team received the lead and we ultimately won the business over the competitor for a health care housing application.
We were selected by this customer based on their speed to market requirements for a custom color design and the Oems desire for a single point of contact.
Our supplier relationships and distribution enabled us to obtain the resin quickly to then expedite the color design and sample to the customer.
With an on target sample the application was approved and immediately followed by commercial orders.
Fast response, and an accurate design enable the win for Polyone.
It's also a great example of this strategic fit of our distribution business and how we can leverage the customer and supplier relationships to grow all of our businesses.
And speaking of distribution it had yet another quarter of operating income growth.
Segment grew operating income 7%.
On operating margin expansion from improved mix and pricing.
The mix improvement was primarily related to gain an outdoor high performance.
Now makes up approximately 8% Cody segment revenues.
The third quarter volume was up.
18% in this growing end market through a combination of new wins and expanding with existing large customers, particularly in the recreation and eightv applications.
I'd also like to add to what Bob said about PEO. These presence in healthcare.
In 2013 about 20% of segment revenues were health care.
Today, it's nearly 30%.
Health care as a growing point of differentiation for our distribution business.
And it's contributing to our company ongoing movement towards higher margin less cyclical end markets, regardless of the segment.
Before I turn the call back over to Bob I wanted to highlight the recent 4% increase in our dividend, marking the ninth consecutive year of increases.
Latest increase reflects our track record of growing earnings over the long term and are confident to continue doing so in the future.
This.
Cash and the same ways that we have in the past to benefit all of our many stakeholders that is investing in innovation and acquiring specialty companies to deliver differentiated performance.
And rewarding our shareholders through earnings growth.
Our quarterly dividend and opportunistic share repurchases.
With that I'll turn the call back over to Bob.
Thanks, Brad our prepared remarks today are big.
I think vehicle I don't hear anything you hear anything for my call.
Good luck.
Yes.
Somebody.
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I will continue.
Related to our sustainability report is certainly a does cover a number of things such as environmental social and governance activities as we go to market, but it goes well beyond that it demonstrates how we are adding value to all of our stakeholders and positively impacting the planet and our communities.
It also provides an inspiring look forward at what's to come.
For those of you have read our two previous annual reports you know we approach sustainability from the standpoint of for cornerstones people product planet and performance.
The for PS are inextricably linked to an honor and other and our recently issued a report provides a tremendous amount of insight into the progress we have made in each area.
For example, we share our environmental performance metrics and renewable energy outlook.
Products stewardship and supplier expectations are also discussed.
We review some of the many leadership development technical training and other educational offerings, which work in concert to help us attract retain and promote tomorrow's leaders today.
We also address our Polyones formulations in particular will play an important part in improving sustainability in nearly every industry.
In the report we showcase how our performance additives for packaging help reduce material usage energy requirements, and ultimately spoilage, while increasing protection for food and beverage content.
Many of our additives also improved recyclability of packaging, thus promoting a more circular economy.
While other additives offer we offer rely upon renewable energy applications.
Our eco conscious formulations like Nymex utilize reclaim nylon and our formulations and growing interest among brand owners.
And at the core of any polymer solution is the opportunity for Lightweighting.
When used as a substitute material for metal Glasser would.
Our composite solutions take material replacement in reinforcement to a new level.
They open endless opportunities for lightweighting, improving strength and resistance and into transportation industry. This all translates to reduced carbon emissions through better fuel efficiency.
These are just a few of the many product innovation examples we highlight in our report again I urge you to read the report.
You will gain a deeper understanding of the growing need for our sustainability based materials science in turn our stakeholders will see the clear alignment with our investment in each of the for peace.
We'll see the many reasons why polyone is in an excellent position that contributing grow as customers adjust in real time to the changing landscape and regulations of plastics globally.
It's inspiring and I think you'll understand why despite all the macro noise, we feel better about our future than we ever had before.
Our specialty transformation, which began in 2006 continues within enhanced portfolio of technologies with operational and commercial excellence to serve customers everywhere around the world.
And with a unique ability now to help enable the sustainability challenges of today and tomorrow.
Our near term focus is on finishing 2019 as strong as possible and with momentum.
It's certainly been a choppy year in many grew our regardless, but we have grown the bottom line.
And we reiterate our positive outlook for EPS growth this year and expect fourth quarter EPS to be about 10% higher than the prior year.
As I said on our last call we are managing for today, while leading for tomorrow.
That concludes our prepared comments for today's call. We welcome any questions that you may have.
The car lines are now open I know you need to press star one to ask the question. Please limit your questions to one question and one follow up question.
Your first question comes from Mike Harrison with Seaport Global Your line is open.
Hi, good morning, Miami Okay.
Yeah Miami area.
Thanks.
Appreciate the chance to ask some questions here wanted to ask about the composites business.
You referenced the growth rate I believe 8% is what youre seeing there.
Do you feel like the.
With that business has slowed or decelerated at all with some of the macro uncertainty.
And can you maybe comment on the pipeline of new applications that you're seeing within that composites business.
It's actually been the opposite we haven't seen as slow and in fact, I think it's been picking up as demand for those applications.
Seems to be moving in a different direction than some of the other macro polls.
That may be because we are heavily aligned now with fiber line and the.
On a fiber optic infrastructure build out of which will end does include Fiveg, but also I think theres just a lot of demand for composites for reinforcement materials that.
A number of industries are looking at so we've seen growth from fiber line. This year, but we've also seen growth from our legacy composites business, Mike really.
All around the world.
Alright, and then also wanted to ask your question about year sustainability efforts you just went into some level of detail there and I look forward to looking through that report.
But I know one of the issuance, but working on and you mentioned Recyclability can you talk a little bit about kind of what ordinating, where in the process of making plastics more recyclable and whether you see that being driven more by regulations or is that more of an economic.
Decision on the part of your customers, where the cost of recycled resin might be lower than Virgin resin.
Well I think we're in the early innings and I really do believe that's being driven by.
First consumer preference and then second a brand over a brand owner desire to serve that preference. So I think there's a lot of customer pull for sustainability initiatives.
And what I love about our portfolio as that is really going to enable that as you know, we're not a base resin manufacturer, but rather a formulator and many of our formulations are aimed at doing just that fits to help use less plastic in some cases or.
I think what you'll see in the future is just a higher use of recycled content and I think has been a big area of focus for brand owners, many of whom as you know our stating some some public goals about where they want to be in five or 10 years from now and I think thats a good thing for our portfolio.
Alright last quarter I have is maybe a one more for Brad just wanted to get some guidance on the corporate segment.
Wondering if that 18 million dollar number for Q3 does that reflect a full quarter of stranded costs from the Pts business or maybe how should we think about that 18 million dollar number.
As we look into Q4 in 2020.
The answer is yes, so all the periods have been adjusted for the retain cost. So those will be part of our continuing operations I think the 18 with maybe a little on the lowest side I would say, it's going to be more like 19 to 20 on an ongoing basis, but as you know our plans.
Our.
Between now and the end of 2020 would be to take about $12 million out of our retain cost.
And that's our plan for 2020.
All right thanks very much.
Thank you. Your next question comes from Mike Sison with Wells Fargo. Your line is open.
Hey, guys.
Yeah, nice quarter, there given the difficult environment.
Hello.
Yes, we could area yeah. So.
Yeah, I might've missed this I apologize that.
But in terms of your guidance for 2019 I think.
Guy said fourth quarter will be up 10% year over year, I think I missed a full year, but could you give us a basis for the fourth quarter is that based on that 25 cents pro forma.
X PPS and then let the basis for 18.
Right. It's based on if you look at the attachment eight in the release that has a split of.
Continuing ops in disco ops, so the 10% increases using last year's fourth quarter from continuing ops, which was 24 cents right. If you look at attachment eight we fine tune.
The numbers here trying to and so 24 would be our fourth quarter 2018.
Got it Okay, and then Bob you're getting a lot of cash here soon with in the fourth quarter can you maybe walk us through what what what's sort of the plans are there there is.
Yes, I think Theres press, saying Clarion businesses after sales that something of interest to you and and how fast you hope to deploy some of that cash back into into either acquisitions or debt paydown et cetera.
Right. So I mean, we will immediately put.
Cash proceeds to work and paying down the revolver balance.
There will be some remaining cash that sits on the balance sheet at least for the time being with the expectation that we can put that to use again to support our growth initiatives going forward I can't comment on the Clarion speculation.
Okay, and then last one on on 2020 can you maybe frame up how earnings growth looks next year in and in a difficult environment, just maybe walk through some of things you can control where you see some growth.
And what type of earnings growth.
Polyone can provide given your much leaner and and and generate a lot of cost savings this year.
Well I think we're going to defer our comments broadly on 2020 until we get to the end of this year and.
We don't release our numbers in January .
What I can say is that I believe there is still going to be strong poll for composites and sustainable solutions I think those things will continue to see a positive trajectory in the way that we have seen them play out this year.
I think when we get to the end of the year, hopefully, we get a little bit more clarity on some of the bigger industries and macro dynamics primarily around.
Auto in Asia, and Europe , if I look back on this year.
Those have been the two areas of.
Most significant demand decline that we've experienced so I don't really want to prognosticate on those two at this point, but hopefully we're in a better spot to do so in January .
Got it thank you.
Your next question comes from calendars with Oppenheimer. Your line is open.
Thanks, So much guys could you talk a little bit about input costs and what your opportunity is there to reduce costs over the next period of time, but then also talk a little bit about option integrates murdo will input materials.
End up with a bit better.
Full cycle lights with some of these products.
Yes, I mean, the first thing I'd say is that we have there have been a little bit of deflation in a couple of.
Again, the base resin inputs that we have.
I'd say that is helping a little bit in the current farid, but not as significant amount.
But then of course there also are.
Some ongoing I'd say inflation in areas like nylon and now maybe that's just hang over from prior year costs, but we're still seeing that up some so if I looked at a whole basket kolon, maybe it's all down 1% for something it's pretty close to zero.
Your next question I believe relates to what opportunities we may have.
Now for a greater degree of recycled content and I think theres, a tremendous amount of opportunity, but that has to be done in concert with what our customers want right. So our customers need to specify.
I think material content that works for them I think we're going to see a lot more pull for recycled content and we hope to support that.
Okay.
Thats a follow us on I'll take offline and then in the specialty materials business.
The operating margins are holding kind of flat even as you grow what sort of opportunities are you seeing to increase or expand operating margins as you continue to grow that business.
I mean, the first thing I'd say is that bringing fiber line and that was at a little bit lower operating margin than where we were from a legacy perspective on am.
That's pretty consistent with acquisitions, we've made over the last four or five years as you know in the intent is to expand that over time, So I view that actually is.
As a good thing so we're in good stead, there put it is influencing the year over year.
Comparisons your second question on that was what with respect to margins.
Just the opportunity to expand operating margins on a percentage Oh, yes, that's right. So I mean, obviously you fiber line and where we are with respect to composites presents a good opportunity is you know I mean the legacy.
Composites business inside of Polyone.
To date still has a relatively low return on sales because of the significant amount investment investment we've made and so as that grows I think that we'll have the greatest impact on margin improvement.
Alright, thanks, so much dress.
Sure. Thanks.
Your next question comes on the line has been Keller with Baird. Your line is open.
Hey, Thanks for taking my questions.
I guess forbid ready to go back to Mike's question.
How do we think about your debt capacity, if you want to Bacon acquisitions out there what you feel comfortable with.
Following.
The sale of Vpns and that number two disco forward ought to the.
The margin question.
Could you just talked through the Q over Q acquired it.
And I think you so thats really it's a composite growth, but just maybe a more detailed there. Thanks.
Yes.
I'd say first of all with respect to leverage our.
View on that is is conservative we have said that for the right.
Acquisition, we can certainly take leverage.
I have three.
Three times, obviously with the sale of PPS and cash on the balance sheet will be sitting around too so that's pretty.
On a low from where we've been historically.
You know to the extent that we're going above that obviously, we've got to have line of sight to getting back down.
Below that number again in the event that we do an acquisition. So I'd say our view on that is still pretty conservative Ben.
With respect to engineered materials again, I think the biggest thing that's kind of influencing things is the.
As the addition of fiber line, but I would also point out that.
The European auto decline in demand has sort of disproportionately impacted our EPM business in that region and that's another reason why the margins are down this year versus last year and those are the two biggest reasons for that.
Thank you.
Yeah.
Comes from Jim Sheehan with Suntrust. Your line is open.
Thank you good morning.
Okay.
Yes, how would you characterize your interest in expanding your existing Masterbatches business is the broader masterbatches business attractive or are you really just focused on niche specialty areas of that market.
I mean, I think the broader masterbatch business is very attractive and continues to be its.
I think going to be an important enabler for a sustainable solutions going forward I mean for example.
Just the use of higher degree of recycled content for beverage packaging for example is going to require.
I think additional color in order to facilitate that.
Certainly additives will enable it as well.
But I feel very good about the overall color portfolio, we have a tendency to point out I guess, probably in the last two or three quarters.
Some of the additives and specifically sustainable solutions, because they've been growing this year, but.
Thats not to detract at all from the balance in the Masterbatch portfolio.
Good and you sound pretty bullish on barrier technologies and sustainability overall I'm just wondering.
Our customers deciding what materials to use or they sticking with PT or are they switch anymore to aluminum containers and how are you trying to balance that.
Well I think.
I think you are seeing some.
Experimentation, if you will with doing some things a little different out there from a consumer perspective.
But broadly speaking I believe consumers are still.
Using the materials that they have historically for food and beverage containment bolt, where they're looking to make changes to try to increase the degree of recycled content.
Certainly there is a focus on using less overall, if they can as well and that can be center gauge material and or an absence of material. So.
I'd say the biggest push on material substitution is probably around using a higher degree of recycled content versus an outright switch to something different.
Great and can you comment on where you see your customer inventories and when would you start to expect some restocking next year.
Again, I'm going to defer probably comments on 20 Twond until we get into January and see if we've got some better clarity on that.
Hopefully, we do as I pointed out earlier, maybe to Mike's earlier question was.
We've seen pretty significant pullback in auto and Europe , and Asia and Im not really.
I don't really have a clear vision on one that actually starts to improve so hopefully we see something between now and when we report back in January .
Thank you.
Your next question comes from Dimitri Silverstein.
Tim Research open.
Good morning. Thank you for taking my question guys Oh, sorry.
Just want to understand sort of an I.E. some of the economically challenged regions like Europe and Asia Pacific.
What were the trends like during the quarter in other words, where they sort of getting weaker as the quarter progress. There was there some level of stabilization.
Mmm.
Kind of how do you look up within that context.
On the fourth quarter kind of going beyond the earnings guidance that you provided if we think about.
I'm sort of above the EBIT line items, where do you see kind of growth.
In most regions, so going into second lien in the fourth quarter.
I'm not sure that I would say there was.
You know any noticeable difference between let's say July in.
The other months of Q3, I will say that isn't general observation about the two regions and specifically auto.
They were down more than a third quarter than they were in a first and second quarter.
That may just coincide with the time of year I'm not sure.
But with respect to our estimated 10% increase in EPS in Q4 that takes that all in the consideration.
Okay, and then your outlook on raw materials, you mentioned that in a quarter there were in aggregate down to about 1%, so almost flat year over year.
Would you expect that to get better in the fourth quarter.
For your Pops or are we sort of what the Duffy.
The modest deflation cycle that we had in raw materials over the last year have.
I mean again I think it's it's really difficult asset answer for for the portfolio in its entirety, but im expecting to see probably something that looks a lot like what we had in.
Third quarter with respect to year over year changes.
Maybe the stores to get a little bit better, but I really that remains to be seen as the quarter plays out at this point in time not seen much different.
Gotcha and then final question you mentioned in the press release them in your prepared remarks seeing some.
Cracks and domestic consumer market demand, where you were referring to any particular segments of your business our segments of the economy, where those consumers in the U.S. are slowing.
I think more so than anything else is probably some we have called it consumer but it may be right on the edge of saying consumer electronics.
As you know, sometimes it's no it's not a perfect signed somewhere things go into from an end market standpoint.
But I'd said point, though that out as one area that seems to be.
A little bit weaker this year than it was last year.
I don't know whether or not that's a tariff thing or trade thing I don't really know I mean, our customers say that to us sometimes but it's really hard to determine if that's the case.
For us we focus on our new business gains and taking care of the customer and from that standpoint, I think things are going well as they could be.
Okay. Thanks Bye.
Your next question comes from Bob chord with Goldman Sachs. Your line is open.
Okay.
Bob Corker. Your line is open please check your mute.
Good morning, This is Don Campbell on for Bob.
Reduction idle.
Color business thing on first half for the year.
It seems like Theres pretty decent margin declines on a year over year basis.
Actually improved.
This quarter, whereas relatively flat.
In terms of margins year over year.
Kind of breakdown I think volumes stower relatively pressure this quarter on a year on year over year basis. So you can give me a little bit break down somewhat improved this quarter to make that.
Differential between if you're in last year's margins and led a bit smoother.
Yes, I mean look I think it's a combination of.
The number of a set of actions that weve certain small self help here over the course of this year there have been some.
Cost reductions, we've also worked on pricing and probably benefiting a little bit here from.
Mix in the third quarter, notably around additives in a sustainable solutions on mentioned.
Carry a little bit better margins than some of our other products and I think thats really what is lending to it. So I think what you're seeing in the third quarter is really just.
Sort of search cycling pass, where we were last year and finally seeing some some benefit from those actions.
Okay. That's helpful and then for the barrier additive technology I think you guys said it grew 3% this quarter, how does that compare against our last handful of cars and just trying to get a sense of whether that's decelerating or.
Accelerating in terms of trial.
Yes, I mean look we did see some stronger sales in that market in the first quarter, but I'd also say there is some.
Seasonality effect to that in a lot of that of course is outside the U.S. So.
I'm not sure I would conclude that while it is a little bit slower growth in Q3 from where it was in Q1.
Not putting that in the alarming category I think we'll see more as we get into fourth quarter, but.
Certainly customers in every industry or thinking about how much inventory they have and why and.
Always concerned just in general about what's going on the macro economy.
Got it thank you.
Certainly.
Your next question comes from Laurence Alexander with Jefferies. Your line is open.
Good morning, how much was FX has an impact on profits for Q3 in Howard and your thoughts for Q4.
And then on Q4 Q4 outlook are you factoring in any significant year end de stocking or shutdowns by your customers.
So FX I think it was about a $1.5 million bad guy for the quarter a lot of that shows up in color.
Some in engineered materials as you know.
And I think we're going to continue to see a little bit of a headwind in that respect.
It's been interesting over the last few quarters the.
The dollar just doesnt seem to me I assume the dollar doing well a euro hasn't been pulling back up where we hope that it might.
With respect to stock and I think our customers.
Basically are very cautious about.
The year and how the next year starts and so.
I think theyve been kind of on high alert here for a period of time, so im not sure if you're going to see something unusual in the fourth quarter typically you do see.
Much lower levels of inventory at the end of the year and I really don't know if that's going to be different this year than what we've experienced last year.
And with respect to the sustainability push that you were emphasizing this morning, how much of this.
Is going to lead to a change and skill sets or hiring patterns and how much of it is just disclosing and re framing initiatives that you already had already well underway.
Well one of things I'm really.
Proud of what we have done is you know.
Lawrence you better lots of commercial resources over the last four years.
Oftentimes people here commercial and they think sales, but for us that really has been sales marketing and technology and in fact a technology.
Increases really been on par with sales. So it's almost on a one for one as we've added a salesperson we've added somebody in technology, and I think thats aligned with.
Having a greater degree of engineered complexity in the portfolio, but a lot more focus on the sustainable solutions and that is inside the business units as well as what we sponsor at corporate from research and development standpoint.
And then lastly are there any end markets have longer selling cycles that we should see.
Shift as a group factoring your growth algorithm and say three to five years.
Well look with respect to sustainability.
Particularly for food and beverage packaging that has historically been on long sales cycle.
Just because of FDN related.
Regulatory requirements.
What I do think you'll see is construe as his brand owners pushing for that to happen faster. So as they look to use more recycled content for streamline our products there will be pushing that faster. If they can I think it will still be a relatively longer sales cycle.
I do think Thats, one that could actually.
Get a little bit faster outside of that I wouldn't say there is any changes to how and viewing sales cycles today versus a year or two ago with healthcare being the longest.
You know in some of the other I'd say, maybe standard packaging materials being shorter.
Thank you.
Driven.
Your next question comes from Kevin.
With Northcoast research your line is open.
Hey, good morning, everybody.
So in.
Just curious in this you guys referenced earlier the dollar 51 in EPS from continuing operations that you highlight.
At the end of this press release in the.
The when you divest not the Divesture of Vpns. It we did you had $1.54 in there. So wondering what the Delta is that the recent delta is there more stranded costs maybe than you initially thought or why the slight difference in those numbers.
No Kevin really what.
As you can appreciate when we had to split the PNNT out there with a lot of work that we've done since that announcement on our.
Overall effective tax rate for PPS as well as from continuing operation. So that change really was associated with the tax rate.
Okay got you make that tenants.
Brad the cash generation. This year has been done really good.
And working capital in particular looks like its youve managed that quite well so.
I'm wondering what you attribute that to and does anything reverse out perhaps in the fourth quarter.
What is your outlook here for free cash generation and do you see there are other more opportunities to drive working capital even lower.
Well I think it will I mean, we have the normal seasonality in the fourth quarter. Typically there is further release of our working capital as you know this has continued to be a strong focus of the corporation. It has been for long time on appreciate your comments on that.
The free cash flow this year from continuing operations.
It is about 135 million and that fund $60 million of our capital investment, which is really large chunk of that.
So shape with supporting the overall growth.
So thats kind of what we're thinking in terms of the overall cash generation for the year.
Okay, perfect and last one for me is.
The vpns divestiture outside of the stranded costs are there any.
Topline synergies that you might lose from between.
You know things that might be sold through the distribution business or.
Or in any procurement synergies anything like that outside of the stranded costs that might go away when you lose that business.
I think Kevin first of all we have.
And it supply agreement that will be an ongoing part of how we work with between distribution and PPS it'll be one of the larger suppliers that we actually represent in our line card and I think a very important relationship for us. So I think the GM brand views that has a very good enough.
Active way to go to market.
Obviously as a supplier that we represent we need to work hard to make sure that they feel that way a year and two and three years from now so that we continue to have them as a supplier. So I don't see that changing I think we have a very good relationship and we'll continue that way.
I don't know Theres really an impact year on the that supply chain with respect to purchasing primarily because you know the underlying base resin going in the P. BNS.
Current run PVC for example is not something we used in our other businesses. So there may be some small things here and there, but nothing really to.
Point not as significant.
Okay perfect. Thank you very much.
Sure thing.
Your next question comes from Rosemarie Morbelli with GE Research Your line is open.
Thank you I apologize if it has been asked but I would somehow subcontract the call. It so I missed some of the common.
D. Do you think Bob that there is enough recycled material currently to supply customers should they move very quickly towards increasing got particular level.
Okay.
I don't I think Thats one of the challenge is that the world is facing right. Now is that brand owners are making some pretty big statements about where they want to be in five or 10 years with respect to.
The use of recycled content and present only presently we don't have enough supply to meet those needs. So.
Fortunately I think we have organization like the alliance Dan plastic waste, that's very much focused on improving the amount and degree to which we can.
Harvest recycled content, but right now that's a huge challenge.
So all in this in mind.
No we hear from a lot of slots beverage companies that they are planning switching from plastic bottles single served to aluminum cans and some of them have already announced that they are going to add capacity.
So if this is actually the case how much of a have an impact is going to have an your various technologies I am assuming that a lot of that is going into those plastic bottles cats or maybe I'm wrong.
It looks a lot of the barrier technology is going into food and beverage AAV patients and PT for.
Beverages for examples are really really good place for that works. So look to the extent to somebody switched out of a PT like 20 ounce bottle and went to an aluminum can yes that would impact us.
We are really seen that and very small areas. The ones you probably read about.
I'd say, we're getting way more pull from customers, though to actually help them continue to use the d., but to do so with greater degree of recycled content. So what I'm hearing from customers really as more of the latter than an outright switch out of muttered.
Ill content.
Okay, Thanks, and I have two quick questions.
Your EPS growth of 10% in the first quota does that include additional share buyback or is it just pure operations improvement.
That's just operational improvement.
Okay, and then could you remind me of the size of variables going to pay down.
Yes Rosemarie.
If you look at our Q, which will be filed here momentarily is about $194 million on the ABL right now that will be paid down.
Okay. So that they feel like credit be deaf cash and tend to stay with you. Thank you thats where it.
How about here yeah, all right. Thanks, Rosemarie, we appreciate your question and all the others that we got today.
We apologize for what seem to be a little bit of technical difficulties on the call. We didn't hear everyone. Okay, but we know that there were some people who were balanced and fell off so we're available to answer questions and take those over the course in the next day or two as you have them, but for now we just say I. Thank you for joining us.
On the call today, we look forward to updating you on our progress that are nice regularly scheduled call in January take care.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.