Q4 2019 Earnings Call
Ladies and gentlemen, today's conference is scheduled to begin shortly please continue to standby. Thank you for your patience.
[laughter] good morning, ladies gentlemen, and welcome to the Polyone Corporation fourth quarter 2019 conference call.
Shannon and all the operator for today.
This time, all participants are in listen only mode.
The question answer session at the end of the conference as a reminder, just comes just being recorded for replay purposes.
This time I like to turn the call over to show the Sallow, President Treasurer and Investor Relations.
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Thank you Shannon good morning, and welcome everyone joining us on the call today.
Before beginning I like to remind you that statements made during this conference call maybe considered forward looking statements during a meeting.
But securities Litigation Reform Act of 1995.
Looking statements will get current expectations are forecast to future results are not guarantees of future performance.
They are based on management's expectation that involve a number of business risks and uncertainties any aboard you could result, actual results could differ materially from those expressed or implied by the forward looking statements.
Some of these risks and uncertainties can be found in the company's filings with the Securities Exchange Commission as wells in todays press release.
During the discussion today the company use both GAAP and non-GAAP financial measures. Please refer to the earnings release posted on the Polyone website, where the company describes the non-GAAP measures and provides a reconciliation for the most comparable GAAP financial measures.
Unless otherwise stated operating results referenced during today's call will be comparing the fourth quarter of 2018 to the fourth quarter of 2018 or the full fiscal year 2019 to full fiscal year 22.
Joining me today on the call is our chairman President and Chief Executive Officer, Bob Patterson, and Executive Vice President and Chief Financial Officer Red Richardson.
Now I will turn the call over and above.
Thanks, Joe and good morning, everyone.
I'm pleased to report the for the fourth quarter, we delivered adjusted EPS was 34 cents.
42% increase over the prior year fourth quarter.
Sure sounds better than we expect there wouldn't be provided our updated outlook into summer.
Much of the upside was driven by our composites platform, However, Europe color and Asia engineered materials also did better than expected.
Our investments in composites and other sustainable solutions have been a highlight for us this year when combined with cost reduction initiatives. We took early on we have been able to offset a weak demand environment and a number of end markets or regions.
Specialty engineered materials finished the year strong growing organic operating income 30% in the fourth quarter.
This was driven by topline expansion from new business gains in composites wire and cable in health care applications.
Backed on a full year basis, our composite technologies grew organic revenue 11%.
As sales and health care and wire and cable applications.
Also grew 14, 16% respectively over this same time.
It's pretty impressive when you consider that SCM Europe's automotive related sales were down 12% for the year.
These same end market dynamics negatively impacted our color segment as sales and operating income from color Europe were down, 7% and 13% respectively for the year.
Despite these results there were some real bright spots in color as demand for sustainable solutions gains momentum.
Our barrier technologies for food and beverage packaging now would preserve content, but they are also improving recyclability.
They reduce material more carbons and energy consumption consumption in the manufacturing process as well.
These positive attributes deliver on our customers sustainability goals.
And in doing so this helps to preserve our planet's natural resources.
It's a win for customers our planet and for Polyone.
And that's why we have been investing in our sustainable solutions portfolio for several years now.
Overall that portfolio grew again this year and in fact over the last three years sales from sustainable solutions has expanded at a compound annual growth rate of 8%.
Lastly, let me highlight our distribution business, which increased operating income to a new record of $75 million for the full year.
Return on invested capital for this segment has over 35%.
The improvement over the prior years really a story of mix and margin improvement.
As health care now makes up about 30% of this segment sales.
And we also benefited from phrase surcharges, which implemented late in 2018.
You know in some respects 2019 was a challenging year as automotive sales in Europe , and Asia were down, 6% and 27% respectively.
Further we believe tariffs and related trade issues between the U.S. in China impacted dine in demand dynamics.
The reality is overall macro conditions haven't changed much since the beginning of 2019, which is why I'm, particularly proud of how we have differentiate our performance and demonstrated our ability to grow in this environment.
Our investment in commercial resources over the last four years has been a difference maker.
And as you know, we have increased sales marketing and technology associates by 31% since 2014.
As a result, we are providing our customers with exemplary service and quality.
Certainly doing so with a better makes a specialty products such as composites.
Overall, we delivered adjusted EPS growth from continuing operations of 12% to $1.69 for the full year.
We benefited from the previously described growth drivers, but also lower interest expense and lower share count.
We're very pleased with this performance, but even more excited about our future.
The second half of this year, we divested our performance products and solutions segment.
And announced the transaction to acquire Clarient Masterbatch business.
In doing so we've taken to truly transformational steps to accelerate specialty growth like never before in our company's history.
Well have more to say about that following brad's additional remarks on a quarter and the year.
Well, thank you Bob and good morning, everyone.
Let me first start with our GAAP results in the fourth quarter, we reported GAAP earnings per share from continuing operations of eight cents.
Special items in the quarter resulted in a net after tax charge of 19.9 million compared to 20.6 million in the prior year.
2019 special items are primarily related to additional provisions for earn out payments associated with the fiber line and plastic comp acquisitions.
As the businesses performance has been exceptional exceeding our original expectations.
As Bob mentioned adjusted EPS for the quarter was 34 cents, 42% higher than the prior year fourth quarter.
This growth in adjusted EPS was driven by 13% improvement in operating income.
Lower interest expense and a lower share count.
Contributions from fiber line are growing composites portfolio and barrier additives continued to perform and differentiate us.
And as Bob said, we're also benefiting from our earlier efforts to reduce cost and improved pricing and mix.
From a regional standpoint organic sales in Europe were down 8%, primarily due to weak demand in automotive applications and unfavorable foreign currencies.
Foreign currency negatively impacted the regions overall sales by 3%.
Asia sales were down 2% with weaker foreign currencies impacted sales by a percent.
Still despite the slight topline decline improved mix from wins and sustainable solutions led to a 30% growth in operating income for the fourth quarter.
And a record operating income for the full year.
In reviewing our segments for the fourth quarter, SCM expanded revenue and operating income, 18% and 60% respectively.
Organically operating income increased 32% on flat sales driven by improved mix from wins in health care applications and composite solutions.
Strong performance from composite and North America wire and cable sales along with mix improvement offset unfavorable FX and demand weakness in Europe and Asia.
And health care mix for SCM improved throughout the year, where end market sales were up 14%.
Examples of wins in applications that are driving this steady growth each quarter included medical devices like next generation glucose monitors.
Formulations for new catheter Extrusions performance to be required for the effective delivery of liquids and component and fields on mass used for continuous positive airway pressure therapy made possible by our versaflex.
Thermoplastic elastomers.
We are being chosen by customers because of our material science expertise in medical grade solutions and FDA compliant polymers.
Our value added services eight our customers in the earliest stages of their product design and testing.
We're more than just a material supplier, we are a collaborative partner and their product development process.
In looking at our color segment revenue and operating income were down, 6% and 9%, 9% respectively for the fourth quarter.
Weaker foreign currencies impacted both sales and operating income by a percent.
From an end market perspective.
Growth in sustainable solutions, such as bear additives was more than offset by weakness in transportation applications.
Sustainable solutions continue to be a growth story, particularly within the color business.
Similar to STM healthcare sales were also up and color growing 6% for the year.
And just like in food and beverage President preservation additives can play a crucial role to enable the desired performance products in this industry.
For example, when certain pharma contents are you be sensitive and Ken degrade it requires packagings with additives that protect the quality and integrity of the precious content inside.
Our added its portfolio offers that and more.
As Bob mentioned, the distribution team delivered a record year operating income growing 6% to 75.4 million.
The segment grew operating income through operating margin expansion from improved mix and pricing.
In addition to healthcare recent mix improvement is attributable to gains in outdoor high performance.
It's now make up 7% of our PEO These segment revenues.
For the full year unit sales were up 14% in this growing end market through a combination of new wins and expanding with existing large customers, particularly in the recreation in off road vehicle applications.
I'd like to also add to what Bob said about these presence in health care.
In 2013 about 20% of the segment revenues were from healthcare.
Today, it's nearly 30%.
Healthcare as a growing point of differentiation for our distribution business and it's contributing to our companys ongoing movement toward higher margin less cyclical end markets, regardless of the segment.
Lastly, I want to comment on our ending balance sheet position.
We finished the year with $864 million of cash which includes the proceeds from the sale of PPS.
There is $855 million tax liability associated with the gain on the sale that will be paid in the second quarter 2020.
We are in a great position to use this liquidity to help fund the clearing transaction, which is expected to close in the middle of 2020.
That concludes our segment and financial review, Bob will now provide some closing comments well. Thanks, Brad I'm certainly proud of our teams accomplishments this year growing adjusted EPS, 12%, what I'm most excited about our portfolio transformation and what lies ahead.
Well, the divestiture or PPS pro forma for the announced Clarient transaction over 85% of our EBITDA will be generated from specialty applications and thats up from just 7%. When we began our specialty transformation journey little over 10 years ago.
The new Polyone portfolio will have significantly reduce exposure to cyclical end markets like North America housing and transportation.
More than half of our sales will now come from packaging consumer and health care.
Geographically, we will be much more global this client expands our geographic presence and higher growth regions, such as India, Southeast Asian, Brazil, as well as in established markets such as Europe .
And the latter should not be overlooked.
Entrepreneurs are often behind breakthroughs in technology, we all know this but established markets and Oems will also be driving forces behind sustainable solution innovation.
Such solutions will of course, we deployed around the world and I believe that this is one of the largest opportunities in front of us.
Our focus on sustainability has never been higher.
If you haven't yet read our sustainability report I encourage you to do so.
They are and we define our four pillars of people products planet and performance.
As comprehensive report not only details how we are investing in each quarter highlights how important culture has been for us and transforming the company.
As many of you know in 2018, we earned our first great place to work certification.
And our recent employee engagement survey results demonstrate further improvement in how our associates feel about working for Polyone.
It's a huge source and pride for us and it is a competitive differentiator.
Our recently announced transaction to acquire Clariant Masterbatches, certainly garner the preponderance of investor attention recently as it should.
Well I'd like to conclude my remarks today by reminding our investors are growing presence in composites.
Five years ago, we began investing in this technology through a series of bolt on acquisitions.
Using our investor grow philosophy, we added much needed commercial resources to help drive growth.
And in 2019, we had our best year ever and the composites platform.
And did you ever think you'd be talking about polyone and fiveg with the recent acquisition of fiber line. We now provide an exciting suite of solutions for the for the fiber optic market.
And market that is expected to grow over 10% annually over the next several years.
With respect to the Clarient transaction, we're conservatively financing it so that we continue to add on to our composites platform with additional bolt ons.
And our goal is at five years from now we will talking about composites is a driving force behind specialty engineered materials, if its not its own segment.
Our near term focus now is on starting 2020 as strong as possible.
As we look back on 2019, it was a choppy year in many regards but we did grow the bottom line by double digits and we expect to do the same and 2020, excluding any impact from the clariant transaction or related financing.
Some of you know that Polyone turns 20 and 20 point.
Internally with our incredible team of associates were using that as a rally cry to serve our customers with excellence to deliver on our sustainability goals and to make this the best year ever.
We have purpose, we have momentum and we are well underway to creating a world class sustainable organization.
Concludes our prepared comments for today's call and we will now open it up for questions.
Ladies and gentlemen, due next question you need to press Star wondering your telephone to withdraw your question press the pound Keith Please standby will accompany joining roster.
Our first question comes from Frank Mitsch with from Research. Your line is open.
Thank you and nice entered the year Bob and.
Happy belated birthday.
Thank you very much.
Got a lot of celebrating to do not just for yourself, but also with with Polyone, Hey, listen you outlined a couple of the areas as to why Youre able to post four cents better.
From your from December 19th guidance and I was curious if you had any thoughts was any or or concerns was anydata pull forward into into 2019 and how is how are you seeing the first quarter start out since it. It appeared that you ended the fourth quarter pretty strong.
Yes.
I don't perceive or believe that any of it was a pull forward is you know.
And our space, sometimes December can be a little bit of a wildcard with respect to customer buying patterns and oftentimes that's directly offset by what takes place in January so.
For us going into December we had a pretty conservative view on how it would play out and Fortunately it came in a little bit better.
But don't believe that we were pulling anything in from customers did any way from January into December .
With respect to how things have started out to the year.
I'd say is probably a pretty.
Decent continuation of what we saw in the fourth quarter. The reality is there isn't a whole lot of macroeconomic.
Tailwind here so as we look at the first quarter, we do see the opportunity to expand.
Yes by double digits, but acknowledged a lot of thats going to come from a price and mix.
And a little bit lower interest expense.
Thank you and.
We're now a bit more than a month after the announcement on Clariant is there any update that you can give us in terms of your discussions with regulatory agencies or there is anything else.
From a change perspective in terms of your outlook on synergies et cetera with this transaction.
Yes, no changes with respect to our outlook on synergies or timing related to the capture all of those synergies.
So our expectation is that.
Regulatory approval will take some where between four and six months. So we expect to close the transaction sometime in the middle of this year.
The filings have all been made with the exception of one which will be done.
Tomorrow.
And as I said before we don't expect any issues with that so no. Other comments really to be made at this time with respect to related financing I think that will be known as we move forward and get closer to deal being done.
Thank you so much.
Yep.
Our next question comes from Mike Sison with Wells Fargo. Your line is open.
Hey, guys congrats on a.
Nice ended the year.
Good morning to make sure I understood learning I, just want to make sure I understood. Your outlook for 2020, I think you said that.
You can do double digit growth on your own meeting without clarion or the financing and if that so can you maybe talk about how that flushes out with the segments into into 2020.
Yes so.
First of all thanks for asking that question, because we wanted to be clear that.
The guidance expectation really is.
Than organic one with respect to what we believe we'll be able to do in 2020.
Of course, we do have.
The intention of raising equity and ultimately issuing debt to accomplish that clarity at transaction and my comments about double digit EPS growth don't contemplate any of those changes. So just look at what we have today and what we see for next year.
We expect to deliver the double digits. So my expectation is is that should play out.
Aspects of probably.
Getting we'll get there in a first quarter with respect to 10 or 11% EPS growth.
I don't really expect Mike much in a way of.
Substantial sales expansion this year I really think it could be somewhere between one and 3% as we still see.
Some downward effects from Europe , and Asia, although they were not as down as much as we thought in the fourth quarter, but are still down.
So large that we're going to get there through a continuation of improved mix and margin improvement so.
Thats kind of how I see things playing out.
For the year as a whole and how we expect to start the first quarter my sense is that.
Again, composites and SCM will had the highest level of growth for the year and in the first quarter I think color will continue to see some challenges coming out of Europe in Q1, which we hope to start to improve in the second quarter.
Right, Okay, Great and then.
Thank you outlined.
They are you still see 85 cents in terms of accretion, including or excluding the step up amortization.
For the Clarion TL can you maybe talk about a little bit what drives that in year. One in terms of how much will come from integration and maybe sales growth if any and how do you think the current business needs to perform to get there.
Yes, so with respect to.
First of all the 85 cents is a pro forma figure as if the acquisition had been done on the first day of a year and.
With all the synergies fully capture our expectation is that of the $60 million of synergies. We've identified that we will achieve a run rate of 20 by the end of first.
Full year of acquisitions, so that means if the deal were to get done in June of this year, we would be there by June of next year.
And that is contributing to.
EPS expansion to the tune probably.
15, 16 sensors so.
We do see incrementally vs expansion from simply the acquisition of Clariant without synergies from that's probably four to eight cents on a per annum basis, Mike If you want to think of it that way.
And again, we haven't given any guidance with respect to how that plays out.
This year, because we just don't all the timing of the deal.
Got it thank you.
Yep.
Thank you. Our next question comes from Mike Harrison with Seaport Global Securities. Your line is open.
Hi, good morning.
Mike Mike.
I'm wondering if you can maybe talk a little bit about the that's the strengths in composites and wire and cable.
Yes.
I think one of the one of the questions I have it.
It's yes.
If that stuff is so strong.
Clearly there are some offsets.
Whats going worse in engineered materials revenue would have thought and then maybe the second piece is specifically on flavor line.
How sustainable Ken that improvement the is the is that fiveg infrastructure build out.
Pretty steady or is it something that's going to have some fits and starts.
Yes, so well first of all we have benefited this year from the acquisition of fiber line.
But we have also grown some of our legacy product lines in the wire and cable space. So both of those are actually doing very well this year.
A lot of that in connection with fiber optic buildout now in our markets like the you us in Europe , where we have the largest presence.
A lot of that Buildout as actually of legacy technology infrastructure, Threeg and Fourg to Fiveg is really just beginning obviously, China is way ahead of anyone else in that regard, but it's really just getting started so when I look at the growth of fiber line in our other wire and cable applications.
In this last year, just a little bit of that's driven by Fiveg. The rest of it by the legacy infrastructure build out. So I do view that is very sustainable and I view that as something that's going to continue to grow over time really over the next decade is this rolls out.
It takes that long for.
The infrastructure to get.
To reach really critical mass now you did ask the second part of that question is will what's not going well and a lot of that has been offset by automotive demand in Europe friends here materials, which is down considerably over the year. So if you'll look at SCM segment results as a whole.
So there's certainly a plus with the out of fiber line organically the growth of.
Composites in wire and cable, partially offset by automotive demand in Europe .
Alright, and then in the color business one.
I think we take a look at the packaging piece within that business.
Has generally been solid or is it more mixed.
Maybe just comment on areas within packaging, where you're seeing some strength in some weakness right now.
Yes, I mean packaging is actually.
It just want to think across the board.
For our major markets I'd say packaging has actually been fairly stable.
We have grown in that end market, primarily as a result of the sustainable solutions, we've introduced primarily in.
Light blocking beverage preservative type additives.
So for us as a whole packaging is up that's a.
A question that is getting asked more and more frequently of course, which is what challenges sustainability present.
People, if they do try to use less plastic and how does that play itself out.
Interestingly, if you look at 2019 rigid plastic consumption is actually up almost 2%.
For the year population growth is maybe up 1.1%. So there is a continued consumption.
Although I think people are doing so in smarter ways and the sustainability trend is here to stay so.
We view it as a is primarily an upside opportunity for us.
All right thanks very much.
Yes.
Our next question comes from Jim Sheehan.
Suntrust Robinson Humphrey your line is open.
Good morning could you talk about interest expense in the fourth quarter was that did come in a little lower than you expected and what should we be thinking about for interest expense in 2020.
Yes, Jim I mean, it came in.
Pretty much in line with what we.
Spec that.
And I would say as you kind of look at the full year.
We had 11.9 million as Bob mentioned, excluding obviously.
The impact of the Clariant the run rate that we were on in the fourth quarter, it's probably a good run rate for the year.
Terrific and.
For for your double digit 2020.
EPS growth outlook.
What should we be using as the adjusted EPS space.
In first quarter 2019.
Okay.
Yes that should be 43 cents.
Okay and.
The operations right correct.
And.
And quickly on your color.
Margins when do you expect to start to see margin expansion year over year.
Yes look.
As I said I think the first quarter is.
Potentially in our challenging quarter for the color segment and so.
I should see improvement starting in the in the second quarter.
Really what we have seen there is just some level of volume decline associated with the really transportation and fiber related demand in Europe and Asia. This year.
Sustainable solutions are still a good guy from a margin standpoint, but that's really what's driven the year over year decline.
Thank you very much.
Our next question comes from College column.
Your line is open.
Thanks, So much has now given the success, you're having with the sustainability solutions can you talk a little bit about your pricing power and how you expect that on a go forward basis.
Yes.
I mean look.
I think that from a margin standpoint. These are some of our best performing offerings.
So I do think that there is really good pricing power with respect.
To those solutions I can't really put it into a relative basis 40 averted visa b.
The other things that we have in the portfolio other than to point to let's say additives for example are always.
A higher margin profile than what we have in some of our traditional or legacy.
Masterbatch offerings again, if I'm, just sort of focusing on the color side, so it could be that its.
Four or 5% higher between the two.
But look I do expect that Theres competition out there for these products as well we're not the only one with this is an initiative everybody has it as a headline.
But we really do think we got a great sweeter products to help our customers.
Okay, Great and then I'm going to combine to that you may not have good answers for about one you just the.
FTC antitrust clearances came through curious about how that may impact.
That came in a little bit faster than expected and accelerate some of the closing activities that you've got.
For the.
All right.
Business acquisition and then also just if you have any early indications on whether they're corona viruses impact the supply chain in Asia you guys at this point.
Yes so.
The last one first if I can.
With respect to the current virus obviously, we.
I'll have.
US that are obviously concerned about the safety and wolper of our associates.
China and around the world.
This point, we're not aware of any of our associates being impacted.
It is Chinese new year, our plants are actually shut down presently.
There is some discussion about potentially or the government potentially extending that shutdown for a longer period of time.
That remains to be seen and how that plays out for us we don't have any facilities and we won directly.
But we do have some associates there. So we've taken measures to restrict travel for all of our associates into and out of.
China and at this point really just waiting to see how things develop over the course of the next couple of couple days and see if theres any other governance mandate. If you will with respect to one plants can be operational.
To the extent that there's an impact from that we'll just have to update our investors. When we know more at this point, we havent assume there is because we're on Chinese new year as we expected so.
I can't I don't have any more to say about that call on the.
I think the first part of your question was about us regulatory approval, which we just got early clearance for that just came out so thats a good sign.
You know, it's one that we did request early termination for we were happy to get that.
Just this morning are last night whenever that got Polish show us right off the prices I think it's a good sign that.
We're going to get regulatory approval and the other 12 locations, where we have filed.
One of the reasons why we've said four to six months really is simply just a matter of.
The time it can take in certain jurisdictions to go through the process. So.
Not expecting any challenges, but do expect that just could take.
More time, so hopefully I'm answering the.
Okay.
That's fine I just wanted to check if theres anything there. Thanks, so much guests.
Our next question comes from Ben Kallo with Baird. Your line is open.
Hey, good morning, guys.
About event.
Hey, so just a low why do should maybe but the other income during the quarter what was that.
So portfolio.
Other income for the quarter I'm sorry good.
The quarter.
Yeah, I should've been closer to about $1 million.
On an adjusted basis.
Which is a combination of.
Pension expenses below the line as well as some.
FX related items.
Yes, yes, there's 10 million.
When we we have a defined benefit plan.
And we mark to market in the fourth quarter of every year and we head of about $10 million Mark to market gain thats really whats in the other income and courts in our adjusted results that we speak to the 34 cents, we pulled that out because that's kind of a one timer.
Yeah got it and that just go the other question the sustainability aspect.
Is there a way for you to to kind of breakout you're.
Revenue or have you thought about for sustainable products or is just a rough estimate because sometimes we get asked by investors focused on that thanks.
Yes.
I'm going to defer that.
Until we've put together next IR deck, we're doing some work on that presently to update the numbers for 2019.
I'd say, a reasonable estimate is probably around $380 million to $400 million in revenue.
But admit to we've got to go back to a look at FTC code and guidelines and do the same thing. So we've done some estimates in the past thats, probably a good place to start with.
Could end up being a little bit higher, but we just would need to work on finalizing those numbers for 19, which will get in our next investor deck.
Sounds good thanks, guys.
Thanks.
Our next question comes from Bob Accord with Goldman Sachs. Your line is open.
Good morning, This is Don Campbell on for Bob.
Question on raw materials polyethylene and polypropylene prices have come in during recent mines and Buffalo down recently I imagine that's getting into a couple of your other raw material basket.
How is the competitive landscape currently and I guess kind of with the likelihood that youre going to be able to preserve.
Margin on lower raw material costs, and I guess, what do you will add in terms of raw material trends and your 2020 guidance.
Yes, so I do think we have seen some benefit from those trends in the second half of 2000.
19, hopefully that continues into the first part of 2020 so.
This point I'd say, we have hung onto some but im sure not all that the competitive dynamic is.
Candidly getting more challenging with respect to demand conditions, particularly in automotive markets like Europe and Asia. So I think when auto starts to pull back that just puts a lot of comprised of competitive pressure.
In engineered materials for things that are let's say nylon base for example, so.
But hopefully in color, we're actually able to preserve that underlying base resins for polypropylene and polyethylene and I think.
We have seen some of that with respect to margins being down in color. There, mostly again thats just volume driven with what comments I made about Europe .
Few moments ago.
Got it that's helpful. And then I guess in in terms of margins again pretty strong margin improvement SCM business.
On a year over year basis, I think if comping against that fourth quarter, 2018, where I'd imagine is fairly low utilization rates.
Yes.
So kind of utilization rates and that business as we head into 2020 earn on or they can I guess kind of what margin improvement could we see in that business I guess in March.
Typically stronger seasonal quarters outside of the fourth quarter.
Right well first of all too.
One of your points acknowledging that the fourth quarter of 2018 was weak is.
It is spot on so clearly that was a very difficult quarter for us one on most challenging we've had in a long time so.
Potentially God's just an easier comp in that regard.
I'm sure that utilization explains some of the margin expansion as a result of.
Of that.
But we're not quoting a capacity pacific capacity or utilization rate.
Certainly there are up but it's not anything we've never really been obsessed about as you know not thinking about volume, but thinking more about.
Sales and value I do expect margins in SCM to improve in 2020.
Which is going to be through a combination of increased sales and composites, but all as well as well as margin expansion.
Partially again, driven by I think a little bit of benefit from lower raw material costs. So.
Probably a more to say about that when we get too.
The first quarter.
Helpful. Thank you.
Thank you. Our next question comes from Laurence Alexander with Jefferies. Your line is open.
Hi, guys if demos on for Laurence how are you.
It added Dan.
Hey, just a quick question, how does client fit into your kind of sustainable solutions portfolio I mean as their work to be done there or do we kind of melding seamlessly I was wondering how you think about that.
Well look I think clarient fits in very well they have a larger presence in.
Packaging than we do but look at us is being look very similar with respect to.
How we view at that end market and how we're both going to participate and the mega trends that drive it so.
I think it's a very good fit culturally.
I'll, just reiterate what I've, probably said in the past.
In the sense that were both HCC responsible care certify would both take great care of our employees.
Customers and the planet as well so.
I think it's going to be a really good fit now because were competitors right. I don't have perfect lies site in visibility into product line profitability or detail.
So more to come on that once they are part of our organization, but certainly believe theyre sustainability portfolio should.
There are on.
And then you mentioned, obviously the weakness the European auto.
I Might've missed you haven't really comes with North American auto is that not as important and what is the doing I guess.
Okay well is.
Didnt impact us as much as Europe and Asia did this year.
For our sales into it it was down a couple of points in 2019 versus 2018.
And it probably just hasn't guard any attention Dan simply because the other two were so much bigger so again someone earlier asked a question about.
Composites are growing so much smaller than Mike Harrison of composites are drawn so much what's going on with the rest of the.
And the and the preponderance of that answer really has been Europe auto. So there is some going on there from a north American auto perspective is down slightly but it just doesn't hit the radar probably for that reason.
Alright, Thank you very much.
Hi, Good then we got time from one more question or in warmer color on the line.
Our last question comes from Rosemarie Morbelli with GE Research your line is.
Thank you good morning, everyone.
Good morning.
If I could follow up on a couple of a of James in terms of China into the core virus go or no virus can you give us the fields for you exposure into that market, whether it is directly or the customers.
Okay waiting in the region.
Well, we do have eight facilities in.
China. So we are located there we have our own employees there.
Nearly a 1000.
So we do have a significant presence in China.
We do not have any facilities located in move on the employees that are there our sales associates.
For the most part and so our exposure is very similar to what you read about anybody else who is in Shanghai Shenzhen Suzhou. All for example are the biggest places where we have operations.
That's really what I could say about our size and scale when we do business in China typically it's for customers who are located there although they may be exporting their products ultimately outside the us.
Can you, let me say revenues.
Generating in the region.
Yes, I mean, China for Polyone legacies about 10% of sales.
Okay, Thanks, and just quickly any expectations of potentially having to divest.
Small pieces of Masterbatches in one region or another lease.
Regarding Cambrian.
No. We don't have any expectations, we there had been some questions about mix and.
The percentage of their sales that are from blacks and whites.
Acknowledged that that's higher than our own.
But I also think historically Clarence done a better job with those product lines and in those end markets that they serve so my starting promises that it's a positive but obviously once the deal is complete we looked at our overall profitability and where we do business things can change.
But I'm not looking at right now as if there is something that needs to be.
Divested.
Okay. Thank you very much.
Okay. Thank you. Thanks again for everybody who is joining us on the call. We look forward to given every at one an update following our first quarter results.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.