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Edited Transcript of OMN earnings conference call or presentation 26-Sep-18 3:00pm GMT

Q3 2018 OMNOVA Solutions Inc Earnings Call

FAIRLAWN Oct 24, 2018 (Thomson StreetEvents) -- Edited Transcript of OMNOVA Solutions Inc earnings conference call or presentation Wednesday, September 26, 2018 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Anne P. Noonan

OMNOVA Solutions Inc. - CEO, President & Director

* Paul F. DeSantis

OMNOVA Solutions Inc. - CFO, SVP & Treasurer

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Conference Call Participants

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* Curtis Alan Siegmeyer

KeyBanc Capital Markets Inc., Research Division - Associate

* Daniel Dalton Rizzo

Jefferies LLC, Research Division - Equity Analyst

* 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

* 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, thank you for standing by. Welcome to the OMNOVA Solutions Third Quarter 2018 Earnings Release Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Anne Noonan. Please go ahead.

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

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Thank you, Greg, and good morning, everyone. It's a pleasure to speak with you this morning. In a moment, I will provide an overview of recent operational developments and progress on our strategic priorities.

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 third quarter and our outlook for the business.

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

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Thanks, Anne. 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 third quarter highlights. The Specialty segment recorded another quarter of volume and adjusted segment operating profit increases, 2% and 4.2%, respectively. Performance Materials delivered adjusted segment operating profit of $2.2 million. This was an improvement from the second quarter of 2018, driven primarily by improved profit contribution from antioxidants and coated fabrics, but as expected, was down from last year's result since last year's third quarter included recovery from raw material cost spikes in the first half of 2017.

Overall, volume will remain down as we continue our strategic exit from the commodity coated paper market.

Regarding butadiene and styrene, the company expects butadiene and styrene costs to remain flat through the fourth quarter. Until costs begin to decrease, we won't see margin recovery from the raw material escalation that occurred earlier this year. For reference, butadiene prices in August were up more than 75% from December of 2017.

This morning, we announced the acquisition of Resiquímica for EUR 28.5 million or approximately 7x EBITDA before cost synergies. We expect the effective EBITDA multiple will be significantly lower as cost synergies are realized. We are currently working through purchase accounting, which will include a step-up in the asset base and result in higher depreciation.

From an adjusted EPS perspective, we expect the acquisition to be accretive in fiscal 2019. Given the uncertainty around the asset step-up, the modest level of short-term debt we're using to finance the transaction and the seasonality of a coatings business, we expect the fourth quarter adjusted EPS impact to be neutral. We'll provide more clarity around our expectations for this bolt-on acquisition during our year-end earnings teleconference call.

Net leverage improved to 3x adjusted EBITDA from 3.3x in last year's third quarter, driven by stronger cash generation. Cash flow from operations was $21.6 million for the quarter and $37.1 million through August compared with $19.9 million and $28.2 million last year, respectively. We continue to monitor the near daily developments in tariffs, particularly with China.

For OMNOVA overall, our exposure to Chinese exports and imports is relatively low. We're keeping a close eye on how these tariffs may affect our customers and will remain agile as this situation continues to develop.

In summary, while we do not expect to recover the shortfall from third quarter expectations during our fourth quarter, we still expect a strong fourth quarter compared to last year and we're reaffirming our full year 2018 outlook of continued growth in adjusted EPS.

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

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

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Thanks, Paul. Good morning, everyone. As always, I'm going to walk through the highlights of our 2018 third quarter in the context of our 4 overarching strategic priorities. Let's start by talking about our highest strategic priority, growing our specialty businesses.

The third quarter was another good quarter for our Specialty Solutions segment, which recorded its seventh consecutive quarter of year-over-year volume growth. Overall, sales in Specialty Solutions were up 6.1%, with volume up 2% and profitability up 4.2%.

This quarter, we saw very good growth in our coatings business as well as in our adhesives and sealants, elastomeric modifiers and films businesses. The growth in coatings was primarily in North America and Europe as the market returned to normal patterns after weather caused a slower start to 2018. Growth in the adhesives and sealants business was largely driven by OMNOVA's proprietary hydrophobic polymer platform, which is contributing to the success of the customers' construction-related product being sold in DIY stores. This win is a great example of the strength of our innovation pipeline and our customer-centric model.

Growth in films continues, primarily from our luxury vinyl tile customers, who buy critical components of the tile from us, including the wear layer and the print layer.

Volume in laminates business was down slightly, though the mix was richer, contributing to better profitability.

The RV market, which has contributed significantly to volume all year, has shown a few signs of moderating growth as customers work through inventory and managed new model changeovers. This remains a good market for the company, and we will continue to grow through innovation and design in new products.

Our innovation pipeline was again accretive to margins. The third quarter vitality index was 22%, very close to our overall target of 25%. Overall margins from new products in our vitality index were 230 basis points higher than last year, led by Specialty Solutions, which improved its margins from new products by 360 basis points.

During the quarter, we introduced several new products, including 2 new oil and gas products that are already showing sales traction. Pexotrol 332 is a synthetic polymer fluid loss additive for oil-based drilling fluids. With its low dose rate, Pexotrol 332 represents an economic alternative to popular hydrocarbon-based products. It complements our portfolio of high-temperature additives by providing similar performance at more conventional temperatures.

Vericem DP536 is a super-plasticizer based on our differentiated chemistry for wellbore cementing. Its main function is to reduce the viscosity of cement slurry, which supports the performance of fluid loss control additive, improving cost efficiency.

Additionally, in August, the laminates business launched our new ECHO product line at the International Woodworking Fair. This Embossed-in-Registered, realistic wood-grade product line targets kitchen and bath, retail and RV markets. The new range unifies a printed wood pattern with matching wood-grade texture, simulating the look and feel of an authentic piece of wood.

And lastly, in our nonwovens business, we unveiled our Tribute Technology Platform. This solution levers OMNOVA's unique ability to combine both resin binding and surface treatment innovations to deliver differentiated softness, thinness, lightness and durability, all while being lint-free. By simplifying the production process and enabling differentiated features, our Tribute Platform helps our customers deliver a cost-effective and environmentally friendly product.

The innovation pipeline continues to be well positioned to fuel our growth. In short, we have another quarter of continued progress in Specialty Solutions as the momentum from our specialization strategy continues.

Next, I want to provide a bit more granularity for Performance Materials and our path to 10% segment operating profit margins. We were pleased to see the expected recovery in profitability from the second quarter low point. We saw volume growth in antioxidants and tire cord versus last year through optimizing customer mix and profitability, with some price improvement in tire cord compared to last quarter as pricing initiatives have begun to take hold.

The closure of our Green Bay, Wisconsin plant is on track, and we expect to start receiving benefits during the second half of 2019. As a reminder, as full realization, we expect $7 million to $8 million of profitability through net cost reductions on an annualized basis.

Earlier this year, we noted that our higher-margin Performance Materials businesses -- reinforcing resins, antioxidants and coated fabrics -- will receive additional focus to help us on our path to 10% operating profit margins. For example, the new leadership team in coated fabrics, through its innovation focus, has developed and successfully gained listings for several innovative new products in the Southeast Asian automotive, North American marine and North American transportation markets.

In antioxidants, we are levering our full return to production capability to continue to drive profitable growth. And in both reinforcing resins and antioxidants, we have strengthened our sales force globally by dedicating specific individuals to support these businesses directly.

The 3 businesses together represents approximately 1/3 of segment sales and are accretive to our 10% operating profit margin target for the overall segment.

While Performance Materials remains challenged as we move OMNOVA to its asset-light footprint, we believe we are on a clear path to 10% operating profit margins. However, it is important to remember that to date, 90% of OMNOVA's profitability and 62% of OMNOVA sales are coming from the specialty segment.

With respect to portfolio optimization, I'm excited to discuss our bolt-on acquisition of Resiquímica, which we announced this morning. Resiquímica produces and sells polymers and resins for coatings and construction applications. These technologies overlap with and expand our current offerings in coatings and construction. The business, which operates from an efficient Portugal-based plant fits well into our existing footprint, expands our reach into Portugal, Spain and North Africa and increases our specialty manufacturing flexibility. With annual revenues of approximately EUR 56 million, or roughly $65 million, this acquisition is expected to be a strong contributor to the specialty segment success. We intend to generate cost synergies as we streamline and standardize this business. And the acquisition is expected to be accretive to earnings and margins in 2019.

In addition to cost synergies, which include levering the new footprint to reduce reliance on outside tooling, there are significant opportunities as we integrate this business and share their expanded product portfolios and customer relationships. This is another important milestone on OMNOVA's path to becoming a premier global specialty solutions company.

Finally, during the last several years, we've demonstrated our ability to sustain favorable cash flows and reduce our debt through our One OMNOVA initiative. This and our continued successful execution against our specialization strategy have led us to take a critical look at our capital allocation, including our targeted net leverage and our deployment of cash. As a result, going forward, we will look to target a new net leverage ratio in the 2.5 to 3x range. This added flexibility in our capital strategy will allow us to target strategic bolt-on activities similar to Resiquímica and to repurchase shares of OMNOVA stock.

In light of this revised capital allocation strategy, our Board of Directors has authorized the company to repurchase up to $20 million of OMNOVA shares. The program, which will support our existing capital deployment strategy and enable us to drive attractive returns over the long term, allows us to repurchase shares from time to time, depending on business and market conditions and other factors like dilution from equity programs.

Our progress towards becoming a premier global specialty solutions company continues, and we are building momentum behind that strategy. This quarter was another important step in that transition, with the seventh consecutive quarter of year-over-year volume growth in Specialty Solutions, increased profitability in Specialty Solutions over last year's strong third quarter, net leverage improving to 3x EBITDA based on the strength of our cash flow; our bolt-on acquisition of Resiquímica, which will further enhance our specialty offering; continued reductions in SG&A as we realize the full $3 million of annualized savings from our One OMNOVA initiative; and our revised capital allocation strategy, including the announcement of a $20 million share repurchase program. We continue to do the hard work necessary to deliver across all elements of our specialization strategy and enhance value for our shareholders.

For our sales, marketing and innovation focus, we are well positioned to fuel our specialty growth. Through portfolio optimization, we are exploring opportunities to inorganically enhance our product offering. Through our One OMNOVA functional excellence model, we continue to drive an agile and cost-effective, asset-light organization. And through disciplined capital management, we continue to generate cash and pay down debt and now when appropriate, return capital to our shareholders.

Thank you. Paul and I are ready to answer any questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of David Begleiter from Deutsche Bank.

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David L. Begleiter, Deutsche Bank AG, Research Division - MD and Senior Research Analyst [2]

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Anne and Paul, can you discuss in Specialty Solutions the sequential EBITDA margin or operating margin decline and what drove that decrease?

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

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Yes. So there was a little bit of mix that we traded away in terms of margin. So oil and gas wasn't as strong in the third quarter as it had been in the prior quarters. And as a result, we saw a little bit of margin decline.

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David L. Begleiter, Deutsche Bank AG, Research Division - MD and Senior Research Analyst [4]

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Very good. And just on Resiquímica, any range for the expected cost synergies and any potential on sale synergies for this business?

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Anne P. Noonan, OMNOVA Solutions Inc. - CEO, President & Director [5]

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Yes. We have -- our cost synergies basically are coming from sourcing, leveraging our SAP and bringing some tooling opportunities in, a little bit with the duplication of personnel. So our ranges will go from 7x pre-cost synergies to about 5x post-cost synergies. And we do believe that with sales opportunities, we'll be able to bring this even further than that.

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Operator [6]

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Your next question comes the line of Edward Marshall from Sidoti & Company. Okay, we'll move on. Your next question comes the line of Jon Tanwanteng with CJS Securities.

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Jonathan E. Tanwanteng, CJS Securities, Inc. - MD [7]

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Did I hear you correctly that you don't expect to recapture margins assuming prices are stable in the next quarter -- or in this quarter? Or are you having issues passing prices through to customers?

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Paul F. DeSantis, OMNOVA Solutions Inc. - CFO, SVP & Treasurer [8]

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No. What happens with our margin is when raw material prices move, we reset our prices based on that. We recapture shortfall in margins as it comes down. So if you look at what happened last year, we had a spike in raw material prices in the -- kind of the second quarter, the early half of the year. Then, those raw material prices came down, and we immediately recaptured that margin. So when our raw material -- when our prices reset, they reset effectively to the average price. We recapture the margin shortfall as those margins come down -- as the raw material prices come down. And so based on the volatility of when those prices move, that's when we get that recapture.

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Jonathan E. Tanwanteng, CJS Securities, Inc. - MD [9]

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Understood. That's very helpful. And then just regarding Resiquímica, I think Anne answered my question on the synergies, but over what time frame do you expect to achieve that by?

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Anne P. Noonan, OMNOVA Solutions Inc. - CEO, President & Director [10]

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Well, we believe the business will be accretive in 2019. We'll achieve most of those synergies over the next couple of years, I would say.

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Jonathan E. Tanwanteng, CJS Securities, Inc. - MD [11]

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Okay, great. And then finally, nice to see the buyback. Just give me a little bit more color on what drove that decision. Is it you having trouble finding more uses for cash such as accretive M&A? Or is it just the lower confidence in this strategy in operations going forward and the visibility you have?

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

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Yes. I think it's the latter, Jon. We're happy with our cash generation today, and we believe it allows us to do some of these bolt-on acquisitions. So we believe we can do the acquisitions plus now return cash to our shareholders. And additionally, we can address some share dilution from equity. And frankly, several of our shareholders have been asking us to do it. So they are kind of the key reasons why we're doing it at this time.

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Jonathan E. Tanwanteng, CJS Securities, Inc. - MD [13]

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Got it. And just one follow-up. Are planning to reduce share count overall?

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Paul F. DeSantis, OMNOVA Solutions Inc. - CFO, SVP & Treasurer [14]

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Yes. Share count, as we buy that $20 million, dilution from equity is nowhere near that high, so there would be some reduction in share count.

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Operator [15]

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Your next question comes from the line of Rosemarie Morbelli from Gabelli & Company.

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Rosemarie Jeanne Pitras-Morbelli, G. Research, LLC - Research Analyst [16]

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So going back to Resiquímica, and I may not have done it correctly, but if you paid 7x and you paid EUR 28.5 million, EBITDA was EUR 4.1 million. And based on Anne's comments recently, maybe if you paid only 5x, then we go up to EUR 5.7 million. This is really a substantially lower EBITDA margin than your Specialty business. And therefore, I am just wondering why are you expecting them to contribute to margin expansion? It looks to me as though it will lower the margin.

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Anne P. Noonan, OMNOVA Solutions Inc. - CEO, President & Director [17]

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Yes. Great question, Rosemarie. Basically, first of all, we got a very value-accretive price on this. And when you look at the margins, we believe with the cost synergies in place, we'll move the margin points by about 400 basis points. And then, we do believe that we have not put in any of the captured sales upside here. And so with other opportunities that we haven't even identified yet around the footprint, so as we said, we're bringing some tools -- some things we're tooling today back in. But additionally, we make products today in the U.S. that will now be able to be made in that facility, which we're transferring over all the time. So those costs are not built in to the comments I said. So over time, we expect that we'll get over that 15% operating profit margin.

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

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Okay. That is helpful. And then you talked about seasonality. What is Resiquímica's seasonality?

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

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Seasonality is typical coatings, Rosemarie. It's usually pretty low in coatings in the fourth quarter. Second and third quarter tend to be more of our coatings season.

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

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Okay. So similar to yours?

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

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Yes. Yes, very similar.

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

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And looking at Performance Materials, in your comments, you mentioned that about 1/3 of those particular product lines are the most affected segment. What kind of a margin do they have compared to the 3% overall for the quarter and your target of 10% over the [long term]?

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

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We didn't disclose individual product line margins, but what I will say is they're accretive to the 10% operating profit margin overall.

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

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Okay. All right. And then lastly, if I may. Regarding new products, if you look at your current pipeline, what kind of potential revenues can you generate over the next 3 to 5 years from those existing potential, not new ones?

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

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Well, we calculate it every 5 years. It's basically what new products, basically that are commercialized in the next 5 years. So we are consistently saying we would like that to be 25% of our revenue each year.

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Operator [26]

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Your next question comes line of Laurence Alexander from Jefferies.

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Daniel Dalton Rizzo, Jefferies LLC, Research Division - Equity Analyst [27]

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It's Dan Rizzo on for Laurence. You mentioned about optimization, and I know you're talking about M&A. But I was wondering if there are product lines that still exist or like orphan product lines or noncore stuff that you are thinking about deemphasizing or selling. I mean, is that part of the mix as well?

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Anne P. Noonan, OMNOVA Solutions Inc. - CEO, President & Director [28]

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Yes. As we've always said, Dan, we will continue to optimize the portfolio and at the right time. There's a couple of things around that. We would look at divesting those that are less accretive to the business, obviously. What we look, though, at some of these underperforming, like tire cord, I'll give you an example here. It's kind of stuck in our facilities. It's not one that we can easily separate. But what we're looking at there is actually repurposing some of those reactors to put our higher-margin products in there that then will allow us to bottom slice out some of the low-margin customers from that particular product line. So it's a combination of always looking at optimizing the portfolio as we go along.

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Daniel Dalton Rizzo, Jefferies LLC, Research Division - Equity Analyst [29]

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Okay. And then, I'm sorry. You mentioned that inventory destocking in laminates. I'm sorry, what end market did you say that was in?

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

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I couldn't hear your question, Dan. Could you just say it one more time?

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Daniel Dalton Rizzo, Jefferies LLC, Research Division - Equity Analyst [31]

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In your prepared comments, you said -- you mentioned inventory destocking. I think it was a headwind in laminates. I was wondering what market you were referring to. I missed that part.

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Paul F. DeSantis, OMNOVA Solutions Inc. - CFO, SVP & Treasurer [32]

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Yes. We were in the RV. We're talking about RV.

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Operator [33]

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Your next question comes from the line of Curt Siegmeyer from KeyBanc.

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Curtis Alan Siegmeyer, KeyBanc Capital Markets Inc., Research Division - Associate [34]

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In the Specialty Solutions segment, you guys called out strong volume growth in a number of markets, coatings, adhesives and sealings, films, elastomeric modifiers and so forth. But total volume growth was only 2%. So I was just wondering, with so many categories contributing positively, was there another market segment that maybe pulled down the overall kind of growth average?

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

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Yes. I think if you look at it, as we said in our prepared remarks, laminates was down year-over-year, and that was largely driven by RV just, moderating our growth given to inventory adjustments in the RV area and basically a wet spring and summer. Also, oil and gas was down a little bit year-over-year because -- but it's been very strong for us all year, so it's not -- on a full year basis, it should be very strong. It's really just timing of orders in the oil and gas, not a demand issue.

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Curtis Alan Siegmeyer, KeyBanc Capital Markets Inc., Research Division - Associate [36]

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Got it. Okay. And then just a follow-up on the specialty EBIT margins. I know you mentioned oil and gas as one reason for the sequential moderation. But when you kind of look at 6% organic growth and only 4% EBIT growth year-over-year, is that entirely the oil and gas situation or is part of that raw materials as well?

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

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Yes. I mean, there are some -- there were some -- yes, I mean, there were some movement in raw materials as well. I mean, it -- but it really is the underlying mix of the different businesses that we were selling and the relative margins in those underlying businesses. We didn't really see -- there wasn't any giant, large move one way or the other, and overall, we saw the volume continue to increase, as you said. We were about flat to margins compared to last year, when we had a very strong margin third quarter. So on a sequential basis, there is just some mix in business that's driving that.

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Curtis Alan Siegmeyer, KeyBanc Capital Markets Inc., Research Division - Associate [38]

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Great. And if I could, just a quick follow-up. Can you remind us what percent of your debt is floating?

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

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100% right now.

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Operator [40]

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Your next question comes the line of Edward Marshall from Sidoti & Company.

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Edward James Marshall, Sidoti & Company, LLC - Research Analyst [41]

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I just wanted to talk about one point on the business before we get to the capital and capital structure. I'm curious, what about the tire cord? I know that you put in some price elements in 2Q or at the end of 2Q, beginning of 3Q. I kind of get a sense of, did they take hold? Did you see that improvement? Is that what drove a portion of the improvement in Performance Materials?

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Anne P. Noonan, OMNOVA Solutions Inc. - CEO, President & Director [42]

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Well, there were a couple of factors on Performance Materials, but let me address tire cord first. So we did see some price traction on tire cord, but frankly, the profitability is still unacceptable. And that's why our next step here will be to repurpose assets that we currently make tire cord into some of our more higher-margin products, particularly in Minhang. And so that should over time here get back to the profitability we want there. In Performance Materials, I would say that AO is coming back strong because we got through the plant issues we had last year. And in coated fabrics, we have new business that has been basically generated and is on line to come on here in 2019, and the end of 2018. So in both AO and coated fabrics, there was a volume and profit play, so they contributed to the improvement quarter-over-quarter.

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Edward James Marshall, Sidoti & Company, LLC - Research Analyst [43]

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Got it. So I wanted to ask, that $20 million repurchase, we'll go to the capital structure, for a second. What's the time line that you kind of anticipate that? I mean, is that something you anticipate before the end of the year? Is that something that kind of just flowed through? Is it opportunistic? Any thoughts you can put on.

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Paul F. DeSantis, OMNOVA Solutions Inc. - CFO, SVP & Treasurer [44]

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Sure. So yes, we have the discretion to do that when we think it's the right time to do it. So it's -- depending on how we look at the market, how we look at where our stock is trading, how we look at our other cash needs in the business will have an impact on how that $20 million gets spent. And so that's something that we are going to continue to evaluate, but I really can't say more than that.

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Edward James Marshall, Sidoti & Company, LLC - Research Analyst [45]

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I guess, I want to make sure that this is not -- you're not satisfied with the level of debt that's on the balance sheet currently. I know you added another transaction, but I just wanted to get your sense on that.

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Paul F. DeSantis, OMNOVA Solutions Inc. - CFO, SVP & Treasurer [46]

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In terms of -- so I think -- let me make sure I understand. So when you say satisfied with our level of debt, do you mean too high, too low, the right leverage ratio? I'm not entirely clear what you mean by that.

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Edward James Marshall, Sidoti & Company, LLC - Research Analyst [47]

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How do you view the balance sheet? How do you view the debt on the balance sheet today? And what's your expectation?

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Paul F. DeSantis, OMNOVA Solutions Inc. - CFO, SVP & Treasurer [48]

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Yes, okay. So you've seen us paying down debt. And if you think about return on paying down debt, that gives you -- the cost of debt is 5%, you get a 5% return on that. So when we started to think about our uses of capital, the primary and best use of capital, we think, is investing in our business on an organic basis, and we've been doing that. And I think you probably noticed, we've been pretty tight with that spending. So year-to-date, we've only spent $12 million or $14 million of CapEx. So annualizing that number, we're not going to get to our $25 million. So we're really spending what we think we need to spend of that. The next step is a value-accretive acquisition. We just announced one. We think that we're going to get good returns on this acquisition and especially as we start to really bring it in into our portfolio and extract the synergies. So the next step, looking at what we would do with that cash, is to say, are there opportunities in our own stock either to offset dilution or maybe go a little further depending on what we see before we get to paying down debt, especially because we're now looking at another year of good cash generation. And so we think we're at the point now where we look like a lot of other companies like us who are returning cash to shareholders as well as doing bolt-on acquisitions and the like. And so we went through that analysis, and we thought now is a good time. We thought the $20 million was an appropriate number for us. And we'll look at it and see how that works over time.

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Edward James Marshall, Sidoti & Company, LLC - Research Analyst [49]

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Right. Does that mean that you will pay down debt next year or will not?

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Paul F. DeSantis, OMNOVA Solutions Inc. - CFO, SVP & Treasurer [50]

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So we may pay down debt. So for example, we took on a little bit of debt to buy Resiquímica, and it's very likely we'll pay that down out of our cash flow that we continue to generate. So we'll be trading around that debt. We're watching our EBITDA, we're watching our debt, and we're watching all the uses of cash, but we wanted to make sure that we have a balanced approach to that cash.

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Operator [51]

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(Operator Instructions) And at this time, there are no further questions.

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Anne P. Noonan, OMNOVA Solutions Inc. - CEO, President & Director [52]

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Okay. Thank you for your questions. This has been a very busy quarter for OMNOVA, but one in which we feel we've made important progress against our strategic initiatives. Our specialty segment is continuing to show growth in both profitability and volume. We are working through significant changes in our Performance Materials business to ultimately deliver 10% operating margins and consistent cash flow. The bolt-on acquisition of Resiquímica is an important milestone for us as we continue to drive our specialization strategy. And as a result of disciplined capital management and sustainable cash generation, we have reevaluated our capital allocation strategy, and our Board of Directors has approved a $20 million share repurchase program. Thank you for taking the time to participate in our third quarter earnings call. We look forward to speaking with you next quarter to review our full year and our continued progress against our strategy to drive the business to a premier global specialty solutions company.

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Operator [53]

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Ladies and gentlemen, a digitized telephone replay is scheduled from 1:00 p.m. Eastern Time today until October 10 at midnight. Also, an audio replay will be available on the OMNOVA solutions website, www.omnova.com, until noon Eastern Time on October 10. That does conclude your conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.