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Edited Transcript of OMN earnings conference call or presentation 31-Jan-18 4:00pm GMT

Q4 2017 OMNOVA Solutions Inc Earnings Call

FAIRLAWN Feb 1, 2018 (Thomson StreetEvents) -- Edited Transcript of OMNOVA Solutions Inc earnings conference call or presentation Wednesday, January 31, 2018 at 4:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Anne P. Noonan

OMNOVA Solutions Inc. - CEO, President and Director

* Paul F. DeSantis

OMNOVA Solutions Inc. - CFO and SVP

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Conference Call Participants

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* Curtis Alan Siegmeyer

KeyBanc Capital Markets Inc., Research Division - Associate

* David L. Begleiter

Deutsche Bank AG, Research Division - MD and Senior Research Analyst

* Edward James Marshall

Sidoti & Company, LLC - Research Analyst

* Jonathan E. Tanwanteng

CJS Securities, Inc. - MD

* Laurence Alexander

Jefferies LLC, Research Division - VP & Equity Research Analyst

* Rosemarie Jeanne Pitras-Morbelli

G. Research, LLC - Research Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, would like to thank you for standing by, and welcome to the OMNOVA Solutions Fourth Quarter 2017 Earnings Discussion. (Operator Instructions) And as a reminder, today's call is being recorded.

I would now like to turn the conference over to our host and facilitator as well as our CEO, Anne Noonan. Please go ahead, ma'am.

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Anne P. Noonan, OMNOVA Solutions Inc. - CEO, President and Director [2]

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Thank you, Steven. Thank you, and good morning, everyone. It's a great pleasure to speak with you today. In a moment, I will provide an overview of recent operational developments, progress on our strategic priorities and our outlook for the business.

First, I would turn it over to Paul to make comments on forward-looking statements, non-GAAP measures and to summarize our financial performance in the quarter.

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Paul F. DeSantis, OMNOVA Solutions Inc. - CFO and SVP [3]

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Thanks, Anne, 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 website.

Moving on to the results. Here's a quick snapshot of some fourth quarter highlights. We had many moving parts this quarter, with noncash charges that do not impact adjusted EPS and are the result of actions taken to further our specialization, margin and cash generation strategy.

For the quarter, we reported a loss per share of $2.10, primarily due to those noncash charges, which I'll discuss in a moment. On an adjusted basis, our EPS was $0.10 per diluted share compared with $0.14 last year. In the quarter, we recorded a $2.1 million or $0.03 per share bad debt charge related to a customer bankruptcy. This was our first significant bad debt charge in many years. Additionally, as expected, we had an approximately $2 million or $0.03 per share impact from Hurricane Harvey, primarily in terms of higher costs and lower volumes, and $1 million or $0.015 per share cost from the environmental equipment startup delays at our China antioxidant plant.

The noncash charges relate to deferred taxes and goodwill impairments. Primarily, as a result of continued declines in the paper market, the company recorded a noncash charge of about $20 million to write off the goodwill associated with the Performance Materials segment, which includes our paper business. Additionally, the company established a noncash valuation allowance reserve against its U.S. deferred tax assets of $75.7 million. While we're forecasting future taxable income sufficient to utilize these assets, which includes our net operating loss carryforwards, due to the historical restructuring actions and impairment charges, including this quarter's goodwill write-off, the company's cumulative 3-year earnings position is negative.

The rules are complex. The U.S. generally accepted accounting principles required us to record this valuation reserve. For fiscal 2018, we expect our normalized blended book tax rate to drop 5 percentage points from 30% to 25% as a result of the recent U.S. tax legislation. For reference, at 25%, our 2017 adjusted EPS would have been about $0.60 per share versus the $0.56 that we reported. And as I said earlier, we expect to continue to utilize net operating loss carryforwards to offset taxable income. Accordingly, we do not expect to pay any U.S. cash taxes for the next few years. Once we exhaust our NOLs, we expect a cash benefit from the new, lower U.S. income tax rate.

Leverage improved to 3.2x adjusted EBITDA from 3.6x last year, as cash and adjusted earnings both increased. Excluding the effect of the customer bankruptcy, leverage would have been 3.1x adjusted EBITDA. In terms of use of cash, at the beginning of December 2017, we prepaid $40 million of our outstanding Term Loan B principal with cash generated during fiscal 2017.

Thank you, and I will now turn the call back over to Anne.

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Anne P. Noonan, OMNOVA Solutions Inc. - CEO, President and Director [4]

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Thanks, Paul. Good morning, everyone. I'm going to walk through the highlights of our 2017 fourth quarter and our outlook for 2018.

Let me start by making this point. We are confident that our strategy is on the right track to achieve long-term growth and sustained profit and cash generation. We have strengthened the underlying business, and the company is poised for profitable growth. During the fourth quarter, we were pleased to see continued progress against our 4 overarching strategic priorities, which are: specialty growth; expanded margins and increased cash generation in mature businesses; portfolio optimization to accelerate our specialization strategy while also strengthening the portfolio; and finally, progress on our One OMNOVA initiatives designed to make OMNOVA a more agile, efficient and lower cost organization.

Let me go into detail on some key achievements with respect to these priorities. Sales in Specialty Solutions grew almost 10% in the quarter, with volume accounting for about 5% of the increase and price mix for an additional 2%. Foreign exchange accounted for the difference. I am also pleased that for the full year, Specialty Solutions sales grew 9.2%, with volume accounting for 3.5% of the increase on price mix for almost 6%. For the quarter, we had significant growth in targeted key specialty markets and for the laminates and films, oil & gas, coatings and elastomeric modifiers.

The growth in laminates and films was driven by strong demand, with particular strength in kitchen and bath. In spite of Hurricane Harvey, our oil and gas business continued to recover and grow in the fourth quarter. For the full year of 2017, oil and gas performed above our expectations.

As we have said, a key driver of our specialty growth is our new product innovation. We continue to see improvements in both the vitality of our business and in the profitability of the new product portfolio. Our 2017 full-year vitality index reached 24.4% compared to 21.1% for fiscal 2016. Additionally, margins from new products were up 200 basis points from last year during the fourth quarter and are accretive to specialty segment margins overall.

During the quarter, we introduced [PLIOTEC 117], a waterborne intumescent coatings product. The introduction is part of our ongoing specialty coatings innovation initiative designed to offer superior waterborne coating solutions to our customers to meet more stringent regulatory standards across the globe.

We also saw continued strength in other new products introduced earlier in the year, including a next-generation woven binder for diapers, [Nova Jet] specialty latex for inkjet paper and our hydrophobic polymer for interior and exterior sealants. We remain confident that the innovation pipeline is well positioned and that revised processes are in place to fuel our growth, both in Specialty Solutions and selectively in Performance Materials. Although we did not see overall profit growth in Performance Materials during the fourth quarter, the segment did demonstrate volume growth for the quarter, excluding paper coatings and effects of the sale of China coated fabrics business, which was completed earlier in the year.

Sales to the carpet market were especially strong, reflecting the success of a new product we launched at the end of last year. This best-in-class product makes our carpet customers' manufacturing processes more productive and reaffirms our commitment to the carpet market. This type of selective new product innovation for Performance Materials is consistent with our goal to expand margins and improve cash generation in this segment.

Despite some underlying volume growth, the continued decline of paper coatings along with the issues mentioned earlier, Hurricane Harvey, the China antioxidant environmental equipment startup delay and the customer bad debt, all negatively impacted the profitability of Performance Materials in the fourth quarter. That being said, we continue to be focused on improving margins and cash generation in this segment through selective innovation, cost controls and portfolio management.

From a portfolio optimization perspective, we are pleased to announce a new strategic alliance in our oil and gas business. At the end of October 2017, we entered into a licensing agreement to market and sell proprietary technologies from a leading oilfield, technology and services company. The products represent significant value-added solutions to our growing oil and gas portfolio focused on increasing the efficiency and overall production capability of hydraulic fracturing operations. This alliance strengthens our position in North America and the stimulation market overall.

Our One OMNOVA functional excellence initiative is reducing complexity and providing a more agile and flexible organization. One OMNOVA initiatives during 2017 began realizing $3 million of annualized savings during the second half. We continue to evaluate and act on initiatives to reduce overall fixed costs while improving efficiency and agility.

For OMNOVA, 2017 marks the third year in a row we have successfully delivered progress in key financial metrics with improved adjusted earnings, increased cash and reduced leverage. Specialty growth continued with the segment now accounting for more than 80% of segment profitability during the fourth quarter of 2017.

In terms of outlook for fiscal 2018, we are expecting our fourth year in a row of adjusted EPS growth. That growth will primarily come from our specialty businesses supported by continued new product development success and a robust pipeline of commercial opportunities. As we have discussed in recent years, the rise of electronic media has led to a long-term structural decline of the paper coatings business. A consequence of this decline is that pricing for a portion of our historical paper coatings business has declined to unattractive commodity-like levels. As our specialization strategy continues to gain momentum, with improved earnings and volumes, we will no longer serve this portion of the paper coating market. However, in alignment with our specialization strategy, we will continue to supply and support higher value and specialty grades of paper coatings.

While the 2018 impact on paper coating sales dollars appears large at approximately $50 million to $60 million, after cost controls, we anticipate a reduction in profitability related to paper of only $3 million to $4 million below 2017 level. We expect this decline to be offset by growth in Specialty Solutions and other lines of business in Performance Materials.

To be clear, despite this impact from paper, as I said, we are guiding 2018 adjusted EPS for the entire company to be above 2017 levels. By year-end 2018 and going forward, we anticipate the profit contribution from paper coatings will be less than 10% of total segment profitability compared to more than 50% a few years ago, as we continue to aggressively pursue our specialization strategy.

It is too early to tell what, if any, impact this could have on our manufacturing footprint as we transition through this change. With this in mind, we would like to reiterate that our Performance Materials segment remains a critical component of our long-term strategy, and we remain committed to supporting our Performance Materials customers to drive profitable growth in their business, as demonstrated by our new product, carpet and specialty paper products.

In summary, we see 2018 as an acceleration toward the new OMNOVA that I've been talking about since I became CEO last year, a company with a true Specialty Solutions portfolio. We remain committed to consistently drive increased shareholder value through our specialization strategy and increased cash and earnings in our Performance Materials segment, underpinned by an agile, flexible and cost-effective foundation to support our 2 business segments. We expect the changes we have made and continue to make, the strong innovation and sales pipelines we have developed, operational excellence initiatives, and most importantly the top quality team we have assembled to continue to drive profitable growth. Thank you.

Paul and I are available to answer any questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question will come from the line of Edward Marshall, Sidoti & Company.

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Edward James Marshall, Sidoti & Company, LLC - Research Analyst [2]

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So I wanted to talk about the, I guess, the paper coating market discussion that you just brought up. The $50 million to $60 million reduction in sales -- the profitability, were they adjusted already in -- was the price lower already started in Q4 of fiscal '17? Is that reflected in the operating performance of that business?

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Anne P. Noonan, OMNOVA Solutions Inc. - CEO, President and Director [3]

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I normally we don't talk about individual segments. But in this case, I'm going to make an exception. Paper has been down for us -- the overall year is down in volume by 20%. In the fourth quarter, it was actually down by 27%. So it's been declining faster than originally anticipated when we looked at the paper market. So there's been slumps of mills that have come out, and that's been reflected in our fourth quarter numbers.

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Edward James Marshall, Sidoti & Company, LLC - Research Analyst [4]

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And then when I look at the Performance Materials business in general, the customer bankruptcy discussion, the hurricane environment -- startup cost. I'm assuming that's not excluded in the pro forma results. It doesn't look like it was. When you exclude those numbers, that comes out to about double-digit operating profit for the business. I'm just trying to kind of get a sense as to what we should probably expect as we move into fiscal '18 for that particular business.

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Paul F. DeSantis, OMNOVA Solutions Inc. - CFO and SVP [5]

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Yes, so Ed, I'll take a stab at that. So we're not going to give guidance on -- for specific margins for both those businesses. I will point out that the hurricane effect was split between both segments. So both segments had the impact of the hurricane effect in them. And so with our expectation next year of the decline from paper -- that part of the paper business for $50 million to $60 million, obviously that will all be in that segment, which was -- that will have a disproportionate impact on margin, given the profitability of that. I don't know if that helps answer your question or not.

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Edward James Marshall, Sidoti & Company, LLC - Research Analyst [6]

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Sort of. We can follow up again. When I speak to that margin compression for specialty in the particular quarter versus both the prior 2 quarters and the full year, can you kind of comment on what maybe happened in specialty? You mentioned the hurricane impact in the quarter as well. But maybe can you elaborate further on the compression there?

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Paul F. DeSantis, OMNOVA Solutions Inc. - CFO and SVP [7]

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Yes. So -- I mean, if you look at the margin versus the prior quarters, there was a mix effect that had part of that impact and what was happening. So our oil and gas business, there was a bit of an impact in the fourth quarter that tends to have higher margins. And so there was -- that was a bit of a driver. And then of course, there was part of the impact on cost from the hurricane side also hit that segment as well.

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Edward James Marshall, Sidoti & Company, LLC - Research Analyst [8]

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Got it. And since I've given you guys a hard time, I'll point out the $40 million in debt reduction. I'm curious -- first, congratulations on reducing the debt balance. But secondly, I'm curious, as we look kind of forward throughout fiscal '18, do you anticipate additional debt reduction as we move forward?

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Anne P. Noonan, OMNOVA Solutions Inc. - CEO, President and Director [9]

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As we go through from a cash perspective, obviously, our first investment always goes back into the business. And then anything beyond that we would look to delever as cash is available, absent any acquisition opportunities that we might have.

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Operator [10]

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Our next question will come from the line of David Begleiter of Deutsche Bank.

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David L. Begleiter, Deutsche Bank AG, Research Division - MD and Senior Research Analyst [11]

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I may add a very strong year and finish for Specialty Solutions. The 5% volume growth and 3.5% growth for full year, are those metrics sustainable in 2018? Would you expect maybe a little bit higher than 3.5%? Any thoughts on that would be helpful.

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Anne P. Noonan, OMNOVA Solutions Inc. - CEO, President and Director [12]

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Well, one of the things that I said pretty consistently, David, is that while I'd like to tell you every single segment we have is operating consistently at growth rates, in reality, we're still a little choppy. We're not declaring victory on specialty growth. And that was evident even in 2017. In the second quarter, we grew by 6% in specialty. Third quarter, it was like 3%. And fourth quarter now it's 5%. Our goal is to consistently get that growth. And we are encouraged by the fact that we're getting some traction. So we expect that to be a contributor to our year-over-year adjusted EPS growth, no doubt. And we said we want to grow at greater than our underlying market growth rates.

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David L. Begleiter, Deutsche Bank AG, Research Division - MD and Senior Research Analyst [13]

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Fair enough. And just price versus [raws], where do you stand in that dynamic for both the Specialty businesses as well as the Performance businesses?

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Anne P. Noonan, OMNOVA Solutions Inc. - CEO, President and Director [14]

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Well, when you look at -- I think the best example, to answer that, is what happened in 2017. So if you recall, we had pretty significant spikes at the front end, particularly with butadiene at the front end of the year in Q1. And then Q2, we said, look, we'll try and recover that. And that 80% of our business was indexed. And in fact, by Q3, we had recovered all of the price overgrowth in our Performance Materials business. And in our specialties, we caught up as well. As we said, we always lagged a little bit, because we got to get our customers to get there and help them to pass the price through. But we have successfully shown, and Q3 was an example of it, that we can cover our price overgrowth. And the team remains very focused on value pricing as a key initiative from our commercial excellence.

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David L. Begleiter, Deutsche Bank AG, Research Division - MD and Senior Research Analyst [15]

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Very good. And lastly, the paper coatings exit, you mentioned no -- uncertain about the impact on your manufacturing footprint. When will you make a decision on that footprint? And are there opportunities to repurpose that capacity for other uses or other end markets?

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Anne P. Noonan, OMNOVA Solutions Inc. - CEO, President and Director [16]

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Yes, we do not have a definitive date set to look at that right now. We have a number of things that we're looking at from the point of view of volume. Obviously, that footprint serves our corporate market. And we had very significant increases in our corporate in the fourth quarter from that new product. We're getting a lot of traction in the market. We're very committed to our overall SB latex that goes into our oil and gas, our nonwovens businesses, our paper businesses. So we're looking at everything and trying to decide as we optimize the footprint. I've always said, we will continue to look at optimizing that footprint. It's early days at this point in time. I'd like to give you a definitive date, but we're just not that far ahead in our planning.

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Operator [17]

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We have a question from the line of Rosemarie Morbelli of Gabelli & Company.

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Rosemarie Jeanne Pitras-Morbelli, G. Research, LLC - Research Analyst [18]

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Following up on specialties and the choppiness of the volume growth. Was there anything specific in this fourth quarter? In other words, the timing of one large order or the timing of new products being ordered that will not appear in the next -- systematically in the next few quarters?

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Anne P. Noonan, OMNOVA Solutions Inc. - CEO, President and Director [19]

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Not really, no, because when I think about where the growth was, it was in our laminates and films, which we've had -- as the year has gone on through 2017, we've had continued strong demand, particularly in our kitchen and bath and our RV segments. And we haven't seen that as more of a trend. If we look at oil and gas, it continues to recover. As we've said, it's not doing that big spike in recovery. We're seeing the gradual recovery we saw, and we continue to see that in Q1. There were no other big impacts from our other specialty businesses on the chemical side. So I don't think -- Rosemarie, I don't really think anything that there's a onetime there in specialty growth.

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Rosemarie Jeanne Pitras-Morbelli, G. Research, LLC - Research Analyst [20]

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So then there is no real reason why we shouldn't see that 5% volume growth going forward, is there?

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Anne P. Noonan, OMNOVA Solutions Inc. - CEO, President and Director [21]

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Well, we would like to tell you we could do that consistently every quarter. That's what I'm definitely challenging the team to do. But we are not there yet because we still tend to have segments that are good one quarter and not as strong the other, and that's what we're trying to overcome for all the initiatives we've put in place and the capabilities we've built.

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Rosemarie Jeanne Pitras-Morbelli, G. Research, LLC - Research Analyst [22]

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And going back to raw material versus pricing, what are your expectations for raw material inflation in 2018? And can you get the price necessary to offset it and improve margin?

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Anne P. Noonan, OMNOVA Solutions Inc. - CEO, President and Director [23]

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Well, what we're seeing right now, as I talk to our procurement team, is that butadiene, there's some revision of spot pricing in Northeast Asia that has attracted some imports. But the U.S. BD has a surplus. We believe that BD price will recover slowly and gradually. But there's also the increase in crackers in the U.S. So barring any shutdowns or abnormal onetime events, we think that it will be a gradual increase in BD. Styrene is higher in all regions. The market spot price has been very variable. We have our contracts in place. But even beyond that, our index pricing at the 80% of our butadiene already indexed gives us a natural hedge on that. And we have demonstrated that the team is able to do value pricing to cover any inflation we get on the specialty side, albeit with a little bit of a lag at times.

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Rosemarie Jeanne Pitras-Morbelli, G. Research, LLC - Research Analyst [24]

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Okay. And then lastly, if I may, can you give us an update on the antioxidant plant in terms of the delayed startup? When do you see it coming on stream and when will it contribute?

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Anne P. Noonan, OMNOVA Solutions Inc. - CEO, President and Director [25]

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It is back on stream. It's not at full operational level yet but getting very close. We're serving all our existing customers. There's no problem there. We're looking to continue to optimize for capacity in that area so that we can get more out of that plant. We've been sold out pretty much the whole year, Rosemarie, so.

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Operator [26]

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Our next question will come from the line of Laurence Alexander of Jefferies.

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Laurence Alexander, Jefferies LLC, Research Division - VP & Equity Research Analyst [27]

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So if we think about our EBIT bridge for 2018, 2019, should we just think of it as mid-single EBIT growth for the underlying base business? The headwind from the paper business in 2018, but again in 2018, again, looking for mid-single-digit EBIT growth. Is that -- does that seem fair?

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Paul F. DeSantis, OMNOVA Solutions Inc. - CFO and SVP [28]

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Mid-single-digit EBIT growth, so our goal on the specialty business is to drive that at our GDP plus kind of rates, right? So if we can drive that specialty business at those rates, that should give us -- depending on what you assume for those based on market, that should give us some number. I hate to speculate too much on what that growth rate should be. But if we're growing that, obviously we're working on margin because we know we need to get our margins up to 15% on a combined basis for both segments out over the next few years. So we do expect to have some margin improvement. We need to deliver that consistently. On the Performance Materials side, we've seen -- we'll see that impact on the top line. We've been fighting the paper declines for the last few years. So we'll have one more of that. We try to quantify that at the $50 million to $60 million impact. But the other lines of business there, we certainly expect to drive those to increase margin and their overall contribution to the business. So I don't want to give more specific guidance than that on the EBIT outline. But if you combine all that, maybe that helps.

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Laurence Alexander, Jefferies LLC, Research Division - VP & Equity Research Analyst [29]

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That does help. And then if we just take where currencies currently are, what can we assume for FX headwinds or FX tailwinds in 2018?

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Paul F. DeSantis, OMNOVA Solutions Inc. - CFO and SVP [30]

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Yes. So if currencies stay where they are right now, there's probably going to be a slight tailwind by the time we get to the bottom line. So primarily from the euro if the euro continues to stay strong, so we do a good chunk of business in Europe. Now a good chunk of that business is dollar-denominated. And so we're not going to get the full, like, complete impact that you would expect. But there could be some modest tailwinds if the currency continues like it is.

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Operator [31]

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Our next question will come from the line of Jon Tanwanteng of CJS Securities.

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Jonathan E. Tanwanteng, CJS Securities, Inc. - MD [32]

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Can you provide a little bit more color on the customer that went bankrupt, what was the annualized revenue profit, what segment was it in? Was there something that was expected at all?

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Anne P. Noonan, OMNOVA Solutions Inc. - CEO, President and Director [33]

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We don't like to talk specific customer information. It was -- the customer was challenged. It wasn't expected. We had been managing it as close as we could, but the customer did go into bankruptcy. And it was a mill that never really had any history of this. This is an unusual event for us, but it was a onetime impact for us in Q4.

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Laurence Alexander, Jefferies LLC, Research Division - VP & Equity Research Analyst [34]

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And the ongoing impact from the loss of a customer?

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Anne P. Noonan, OMNOVA Solutions Inc. - CEO, President and Director [35]

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We're doing quite well in the segment that customer was in. I think it's okay to say it was in the carpet segment. And we've grown through our new product. So in the fourth quarter alone, our carpet volume increased 54% year-over-year. So we're pretty confident that volume has been shifted around. And if you look at carpet overall, Jon, residential is flat to down, but commercial is also growing in carpet tiles. So -- and on top of that we have our specialty film segment to LVT flooring. So that overall segment, we're pretty strong and committed to as we move forward.

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Jonathan E. Tanwanteng, CJS Securities, Inc. - MD [36]

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Okay, that's helpful. And just to clarify, you're forecasting $50 million to $60 million in revenue declines from the paper coating business in 2018 versus 2017?

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Paul F. DeSantis, OMNOVA Solutions Inc. - CFO and SVP [37]

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That is correct.

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Jonathan E. Tanwanteng, CJS Securities, Inc. - MD [38]

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Okay. And you see growth in consolidated results revenue and earnings despite that?

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Paul F. DeSantis, OMNOVA Solutions Inc. - CFO and SVP [39]

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We see growth on EPS -- on adjusted EPS.

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Jonathan E. Tanwanteng, CJS Securities, Inc. - MD [40]

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Got you. Okay. And is that inclusive of the new tax rate that's going forward. I mean, if you back that out, do you still see growth in EPS?

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Paul F. DeSantis, OMNOVA Solutions Inc. - CFO and SVP [41]

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Yes.

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Jonathan E. Tanwanteng, CJS Securities, Inc. - MD [42]

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Okay, perfect. And then last question. Any -- l don't know if someone asked this already. But any lingering or ongoing impacts from Harvey and maybe the import pricing logistic situation in the area and delays in your antioxidant plant?

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Anne P. Noonan, OMNOVA Solutions Inc. - CEO, President and Director [43]

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On the Harvey vector, our team did a great job managing through it. Obviously, we had an impact as we had called out in Q3. We're largely over all that. I think everyone's challenged in the industry on logistics right now, but nothing that's going to be a major negative impact moving forward or a headwind. And as I said just recently on antioxidants, we're back up and running, serving all of our customers. The next step is kind of to get more volume out of that plant, because we have been sold out all year. It's a pretty good brand that we sell into antioxidant, so.

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Operator [44]

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We have a question from the line of Curt Siegmeyer of KeyBanc Capital Markets.

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Curtis Alan Siegmeyer, KeyBanc Capital Markets Inc., Research Division - Associate [45]

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Most of mine have been asked, but just following up on the specialty growth that you expect in fiscal '18. You guys talked about getting to a company-wide long-term margin target of 15%. So just kind of related to that, are there any sort of key metrics you guys can share with us or benchmarks for fiscal '18 on the specialty side that, as you move throughout the year, we can kind of look towards sort of as a way to benchmark progress in that business?

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Anne P. Noonan, OMNOVA Solutions Inc. - CEO, President and Director [46]

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Well, there's a couple of things that we look at. We look at our specialty growth, and we really look at the underlying segments. We do a lot of work on market segmentation because not everything is created equally, which is why it's hard for me to give a blended percent overall on specialty growth. But we look at volume. We don't look at revenue generally because it can move up and down so much with raw materials; it can give you a false sense of security. So we're very strict internally about looking at volume. The other thing that we look at as a key indicator of our growth are 2 things. One is our innovation pipeline. So we started reporting in all of our earnings calls our vitality index, and just as importantly, the profitability of those new products that are hitting the market right now. Because clearly, as we grow and we want to get to that 15%, the front of the funnel needs to be richer than what we have today. And in this quarter alone, we had 24% vitality, and we increased profitability on the new products by 200 basis points, which was accretive to our specialty segment. So that's all moving. We think that is very positive indicators that we're moving in the right direction. The other thing we look at internally is our commercial pipeline and how robust that is and how quickly we're executing against commercial opportunities. And they're the 2 things that we talk about. But really the innovation pipeline is a key metric for you to continue to follow in deciding how we get that specialty growth.

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Curtis Alan Siegmeyer, KeyBanc Capital Markets Inc., Research Division - Associate [47]

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Great. And then just a follow-up on the China environmental focus. Kind of looking past the startup delays you guys had specifically, and maybe looking bigger picture, we've had obviously a good amount of companies kind of view that as a positive depending on where you're sitting. So just kind of curious what OMNOVA's view is bigger picture over the next 12 months or so in terms of how that could impact potential competitors and just the landscape in general in China for you guys.

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Anne P. Noonan, OMNOVA Solutions Inc. - CEO, President and Director [48]

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Well, there are a couple of things when we look at China. Obviously, our antioxidant business has been strong there, and we'll get past these operational challenges that we had in 2017. From an overall regulatory perspective, while it's uncertain, uncertainty can bring challenges and opportunities. One of the opportunities for us is all of our water-based coatings products that China has basically dictated that we will get our resolvent-based coatings. Now how quickly that happens over time, we don't know. But we absolutely have a very strong performing portfolio from the new products we delivered out last year to the marketplace. So we see that as a positive. On the more negative side from China is more the inconsistency on regulation, on challenging, and that's what this antioxidants was. We saw it as a positive move to bring down air emissions. But the reality was we were not given enough time to get capital in the ground to be able to meet the deadline, and that's why we had to shut down. So it can cause some temporary issues. The other thing about China is the overall general trend to move towards getting away from the focus on quantity and more quality. We believe that fits with our specialty nature of our business because there's more opportunity than there has been in the past for Specialty Chemicals.

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Operator [49]

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Our next question is a follow-up from the line of Rosemarie Morbelli of Gabelli & Company.

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Rosemarie Jeanne Pitras-Morbelli, G. Research, LLC - Research Analyst [50]

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Could you give us a better feel as to what the remaining paper coating business is going to be? What type of product lines or applications or both of the above and the profitability of that remaining business?

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Anne P. Noonan, OMNOVA Solutions Inc. - CEO, President and Director [51]

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I'll tell you that the business primarily that we have left is in labels, packaging, all types of packaging, food packaging, thermal and barrier layers, inkjet that we talked about a new product that we brought out. They are just a few examples of what we're about. And then packaging has been a pretty significant area that we've been looking at and developing new products for. So we sell some in there today, and we have an innovation pipeline that we're also moving into that segment. Profitability is better than the traditional paper and Performance Materials. What I will say is not -- there is my product line -- it's not our highest segment, like in oil and gas type business, but it's definitely not the lowest segment that you see in our Performance Materials.

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Operator [52]

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There are no further questions in queue at this time.

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Anne P. Noonan, OMNOVA Solutions Inc. - CEO, President and Director [53]

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Okay. Thank you for your questions. I would like to leave you with the following summary thoughts.

Our strategy continues to gain momentum. We ended the year with good solid growth and specialty volume and profitability, driven by our commercial excellence initiatives and the strength of our innovation pipeline. Cash generation and adjusted profit growth resulted in net leverage decreasing to 3.2x adjusted EBITDA. And our 2018 guidance calls for our fourth year in a row of continued adjusted EPS growth and continued execution of our specialization strategy.

Thank you for taking the time to participate in our fourth quarter earnings call. We look forward to speaking with you next quarter to review continued progress against our strategic objectives and driving the business to a premier global specialty solutions company.

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Operator [54]

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Ladies and gentlemen, it does conclude our conference call for the day. We'd like to thank you for your participation in today's 2017 earnings discussion, and thank you for using our service. Have a wonderful day. You may now disconnect.