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Edited Transcript of OMN earnings conference call or presentation 31-Jan-19 4:00pm GMT

Q4 2018 OMNOVA Solutions Inc Earnings Call

FAIRLAWN Feb 1, 2019 (Thomson StreetEvents) -- Edited Transcript of OMNOVA Solutions Inc earnings conference call or presentation Thursday, January 31, 2019 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 & Director

* Paul F. DeSantis

OMNOVA Solutions Inc. - CFO, Senior VP & Treasurer

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Conference Call Participants

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* Curtis Alan Siegmeyer

KeyBanc Capital Markets Inc., Research Division - Associate

* Edward James Marshall

Sidoti & Company, LLC - Senior Equity Research Analyst

* Jonathan E. Tanwanteng

CJS Securities, Inc. - MD

* Joseph Charles Catania

G. Research, LLC - Research Analyst

* Nicholas Cecero

Jefferies LLC, Research Division - Equity Associate

* Yifei Huang

Deutsche Bank AG, Research Division - Research Associate

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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 Fourth Quarter 2018 Earnings 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. As always, it's a pleasure to speak with you today. In a moment, I will provide an overview of our strategic progress during fiscal 2018 and our outlook going into 2019.

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

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

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Thanks, Anne. 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 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 and full year highlights. The Specialty segment recorded another quarter of increases versus prior year in volume and adjusted segment operating profit, 8% and 22%, respectively. We had good growth across many of our Specialty lines, including coatings, which benefited from our acquisition of Resiquímica, now OMNOVA Portugal, in September of 2018. During the fourth quarter, OMNOVA Portugal delivered sales of $10.7 million and was slightly positive in terms of profitability.

Performance Materials delivered adjusted segment operating profit of $1.9 million or 3% of sales. This was an improvement from the second quarter, which was our weakest quarter for Performance Materials in 2018 and about flat to the third quarter. The improvement from the second quarter was driven primarily by stronger profit contribution from antioxidants and coated fabrics. As of the end of the fourth quarter of 2018, we are no longer serving the commodity paper chemicals market.

Regarding raw materials, during the fourth quarter, we began to see some relief in styrene and butadiene pricing. The average price paid for butadiene in Q4 versus Q3 was down about 4%. For reference, in August of 2018, butadiene prices were up more than 75% from December of 2017. We expect prices to continue moderating through the beginning of fiscal 2019.

Net leverage was 3.2x adjusted EBITDA, which is flat year-over-year. We were able to keep net leverage flat, even though this year includes the full outlay for the acquisition of OMNOVA Portugal, but only a few months of its profitability. Excluding the impact of the acquisition, net leverage would have improved from the 2017 year-end of 3.2x to approximately 2.8x.

Cash generation continues to improve, with cash from operations at $56.7 million for the year versus $47.8 million last year, resulting from increased operating profit in the specialty businesses and disciplined working capital management. Working capital days were 46.8 versus 56.5 last year.

While we believe we're well positioned for continued growth in 2019 and are cautiously optimistic, the current macroeconomic environment remains volatile. And as a result, we do not intend to give a full year outlook for adjusted diluted EPS for fiscal 2019 until we have better long-term visibility.

As we discussed last year, our 2018 first quarter results were historically strong. We expect current market conditions and volatility to drive first quarter 2019 performance below last year.

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 & Director [4]

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Thanks, Paul. Good morning, everyone. 2018 was very important to OMNOVA's continued transformation to a more pure-play Specialty Solutions provider.

I'd like to highlight several important milestones we achieved during the year. As we've said many times, our most important strategic priority is to grow our specialty businesses, both organically and inorganically. 2018 was a breakout year for specialty growth. The fourth quarter marked our eighth consecutive quarter of year-over-year specialty volume growth. To help accelerate that growth, in September, we announced the acquisition of OMNOVA Portugal, which supported our strong specialty coatings growth in the fourth quarter. We also continued to grow the adhesives and sealants business by integrating our proprietary new hydrophobic polymer platform into a customer's retail caulking products. Our films business is growing in luxury vinyl tile, as the market shows strong support of the design and capability of our print and wear layer films.

The laminates business performed well during the year, although continuing pressure in the RV market challenged demand in the fourth quarter. Our oil and gas business finished the year strong with another quarter of volume growth, driven by our expanded product portfolio from the small acquisition completed last year and underlying market strength.

Our innovation pipeline, which is our investment in the future and an important driver of our specialization strategy, was again accretive to margins this quarter. Our marketing and innovation teams continue to focus on developing and commercializing higher-margin Specialty Solutions products.

During the quarter, we were pleased that our colleagues at OMNOVA Portugal introduced a new product, Resipur 9801, an unsaturated polyester resin binder for quartz composite countertops with high UV resistance. Also during the quarter, our laminates team was honored to receive the Golden Cylinder Award for our Bellini Bronze stone designed. The Golden Cylinder Award recognizes our leadership position in on-trend design and our significant technical capability in gravure printing.

Margins from new products included in our vitality index were 280 basis points higher than last year, led by Specialty Solutions, which improved its margins from new products by 360 basis points. In 2018, we achieved the vitality index of 21%, close to our overall target of 25%. Several new products were commercialized in 2018.

In oil and gas, Pexotrol 332 and Pexotrol 772 are the latest additions to our fluid loss control product line. Pexotrol 332 provides improved performance and a more ecofriendly alternative to asphalt and black powders in a variety of drilling fluids. Pexotrol 772 is the next generation of our high-temperature, high-pressure fluid loss control products, with overall better performance and improved efficiency.

In coatings, we introduced Pliotec LEB20, a water-based resin for exterior masonry, which provides improved color fastness, superior resistance to streaking from rain exposure and dirt pickup resistance.

In nonwovens, the Tribute Technology portfolio leveraged OMNOVA's unique ability to integrate resin bonding as 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 portfolio helps customers deliver a cost effective and environmentally friendly product.

In laminates, we introduced the surf(x) Matte Luxe finish, a soft touch surface with enhanced durability for manufacturing. Matte Luxe is a value-engineered alternative to painted cabinetry, with improved aesthetics, performance and cost advantages. These are just a sample of the products we introduced this year across our specialty business that will fuel our future growth.

Overall, the Specialty Solutions segment had a very strong 2018. Despite significant cost escalation throughout the year, the team successfully executed against our specialization strategy. Specialty volume was up 5.9%. Year-over-year sales were up 10.5%. And adjusted profitability was up 22%. At year-end, Specialty Solutions represented over 60% of the company's annual sales and over 90% of operating profit, positioning the company for continued profitable growth.

For the Performance Materials segment, our #1 priority is to expand margins and increase cash generation. In 2018, we took decisive action to improve our legacy styrene-butadiene commodity businesses.

Early in the year, we announced our plan to exit the commodity portion of our paper chemicals business. OMNOVA completed its exit from this historically significant business by fiscal year-end. Going forward, we will leverage our technology strength to grow in higher-margin specialty paper applications.

We also announced the closure of the Green Bay, Wisconsin plant and investment into our Mogadore, Ohio facility. Green Bay was our last high-volume styrene-butadiene-based manufacturing facility. The Mogadore investment will better position OMNOVA to serve our growing specialty business. Once complete, we expect these actions will contribute $7 million to $8 million of annual operating profit, primarily through our Performance Materials segment beginning in the second half of fiscal 2019. The time lines of the closure remains on track.

During 2018, the tire cord business saw favorable volumes, but faced increased price pressure from overseas competitors. In July, we announced that we would seek price increases as contracts expired and further optimize our customer mix. As these pricing initiatives began to take hold, we saw margin improvement in the back half of the year. We also discussed repurposing our tire cord reactors to allocate capacity to higher-margin products in our portfolio. The first conversion in our Le Havre, France facility was successful and the reactor can now produce tire cord products and our growing specialty elastomeric modifier portfolio. This flexibility will allow us to optimize margins in tire cord, while helping to drive our specialization strategy.

We also modified our selling models to dedicate experienced sales resources to certain higher-margin businesses within our Performance Materials segment. And we were pleased to see volume growth in both the antioxidants and reinforcing resins businesses in the quarter. Additionally, we began to see demand in our coated fabrics business associated with new wins in transportation and marine. These legacy businesses will play an important role by generating cash to fuel our growth, while helping to improve the overall profitability of the Performance Materials segment.

With respect to portfolio optimization, the acquisition of OMNOVA Portugal at the end of September has already begun to contribute favorably to our results. With annual revenues of approximately $65 million, this acquisition will increase Specialty Solutions sales by more than 10% and serve as a higher-margin replacement for the commodity paper chemicals businesses we exited at the end of 2018. The integration of OMNOVA Portugal is on track, and we expect to generate significant cost synergies as we streamline and standardize the business. We've also begun levering the new facility to reduce our reliance on outside tooling in Europe and to expand our geographic and customer reach.

Our One OMNOVA initiative has also contributed to our success during the year, as we achieved our targeted $3 million of savings through better, more efficient operations, resulting in a more strategically aligned lower-cost corporate support structure. Integrating OMNOVA Portugal into our One OMNOVA structure over the next year will be an important factor in generating our plant cost synergies, while positioning the business for greater agility to respond to customer and market needs.

Now turning to 2019. Our key markets are experiencing volatility from the current macroeconomic environment. For example, September was uncharacteristically one of the weakest months of 2018, followed by a stronger October, then a relatively weak November. Our customers are being judicious in their purchasing and inventory levels as they test to address an uncertain market environment. We expect this volatility to continue in the near term.

Even with this uncertainty going into 2019, we believe we are well positioned to perform better than our targeted underlying markets due to the following. With 8 consecutive quarters of year-over-year specialty growth and 4 years in a row of year-over-year EPS growth, we have demonstrated our ability to consistently execute our specialization strategy. We have significantly improved specialty segment margins, while driving Specialty to over 90% of segment profitability by year-end. We have improved the sustainability of our portfolio by exiting a declining commodity paper market and increasing our specialty portfolio through accretive acquisitions in the coatings and oil and gas businesses. We took decisive actions to close our Green Bay plant, moving us closer to a flexible, asset-light specialty manufacturing footprint, which is expected to add $7 million to $8 million of annual operating profit beginning in the second half of 2019.

We will also realize significant cost synergies from our One OMNOVA Portugal acquisition during 2019 and 2020 and have exciting growth and margin expansion opportunities ahead of us. We anticipate year-over-year declines in raw material cost, which will further support margin expansion across the business, as we continue to focus on value pricing. We have demonstrated sustainable cash generation, which, for example, allowed us to keep leverage flat, while we execute on strategic opportunities like the acquisition of OMNOVA Portugal.

OMNOVA has built a strong culture of disciplined expense management and demonstrated our ability to control cost. And most importantly, we have built a capable and engaged team across the company that recognizes the potential for our strategy and has been a critical component to its growing success over the past few years. Our team does excellent work, and I want to take a moment to thank them for all of their hard work in continuing to drive increased shareholder value.

Taking all of this together, even if the markets perform worse than currently expected, we believe our strength in portfolio and operating model will help us weather the storm and moderate the impact. Once the markets resolve themselves, we are optimistic that we are poised to further accelerate our specialization strategy and win in our targeted end markets over the long term.

In oil and gas, the industry is currently predicting in the mid- to high single-digit range, even though oil prices are expected to stay in the $50 per barrel range. While the number of wells drilled may come down slightly, customers are eager for products that drive well efficiency, which OMNOVA's oil and gas portfolio is now positioned to provide.

In laminates and films, the RV market continues to work through inventories and new model launches are being delayed accordingly. While the first half and full year is expected to be soft, the RV market is currently expected to see some recovery beginning in the second half. While the overall flooring market is expected to be down from 2018 levels in 2019, luxury vinyl tile continues to take share from alternative flooring products, and OMNOVA specialty film products continue to see strong demand.

The nonwovens market is expected to grow at mid-single-digits over the long term, driven by surface treatment innovations and accelerated adoption of nonwoven wipes in emerging economies. OMNOVA's new Tribute portfolio directly addresses this market's growing appetite for lighter and more environmentally friendly nonwoven products.

The global paint and coatings market is estimated to grow at GDP plus through 2021, with increasing demand in motor vehicle durable goods and industrial maintenance applications. OMNOVA's water-borne coatings portfolio will play an important role as we seek to grow our position in developing markets, while our intumescent resins and metal and wood coatings will provide growth opportunities in industrial markets.

In our Performance Materials businesses, secular dynamics such as the preference for hard floors are expected to continue to negatively impact demand in the carpet market. On the other hand, the paper market continues to shift away from commodity coated paper to specialty paper grades. And with our actions this year, we are better structured to address the paper market evolution with a more efficient, more focused paper business. Regardless of market conditions, we remain committed to our specialization strategy and believe it is the best long-term approach to delivering sustainable value for our shareholders.

Thank you. Paul and I are ready to address 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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Yifei Huang, Deutsche Bank AG, Research Division - Research Associate [2]

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This is David Huang here for David. I guess, first on Specialty Solutions, I understand you have roughly about 6% organic growth, volume and pricing x the acquisition FX. Can you probably break it down by volume and pricing for the 6%?

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

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Well, we had volume growth -- while Paul looks up the exact numbers here, we had volume growth of about 6% and we had sales growth of about 10.5% for our Specialty Solutions. So clearly, even with rising raw costs, we kept our prices ahead. So we had a good mix of volume and price.

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Paul F. DeSantis, OMNOVA Solutions Inc. - CFO, Senior VP & Treasurer [4]

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Yes, price was about 3%, if I'm looking at this right.

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Yifei Huang, Deutsche Bank AG, Research Division - Research Associate [5]

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Okay. And secondly, you're guiding Q1 to be down year-over-year. Can you probably just give us more color, the kind of assumptions that are baked into the guide in terms of your 2 segments, price, volume and probably your outlook on the end markets in Q1?

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Anne P. Noonan, OMNOVA Solutions Inc. - CEO, President & Director [6]

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Okay. Let me start with outlook on end markets. So as we said in our prepared remarks here, laminates, particularly in the RV segment, we expect to be definitely down in Q1 and are stating that. Additionally, it's important to remember, we exited paper in 2018. So it was a transition year. And so we have no paper -- no transition paper in our Q1 numbers. We also have assumed that carpet will remain rather weak as we go into the first quarter here. But it's important to remember, we still have some segments that are really performing quite well. An example we gave is our films business and luxury vinyl tile. Our oil and gas business is still very strong. As we look at our adhesives and sealants business, we're actually doing very well there for a new product. When I look at our Performance Materials businesses, both tire cord, reinforcing resin, antioxidants, they are all growing basically as the market is growing. And our coated fabrics is benefiting from some new business. So really the underlying markets, we're not seeing massive declines or massive acceleration of demand. But we do expect the 2 main segments to be in RV and transition paper that we'll see some downside. We do expect raw materials to continue to moderate down slightly, so we'll get some benefits as we hold margin. But overall, as we look at this quarter, they are the main assumptions that we've put into them, particularly around demand.

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Operator [7]

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

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

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So let's -- I wanted to ask -- you gave some figures through the first -- through the quarters in the fourth quarter. I'm curious if -- I know December is over. Do you have any data as far as -- you talked about weak-strength, strong-weak in the 3 months of the fourth quarter. If I look at December, and I don't know if you have the figures for January, but has that materially changed, that volatility that you kind of saw? Were you strong in 1 month and weak in the next? Or how did it work?

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

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It's always -- the first quarter is always a little odd for us. As you know, we go December, January, February, right? So December is always kind of that choppy start to the year, as everyone is off on holidays. And then February, you get the impact of Chinese New Year. So even in the normal year, we would expect that. I would say we don't see as many dips, but there is some volatility between the months.

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Edward James Marshall, Sidoti & Company, LLC - Senior Equity Research Analyst [10]

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Okay. And when I look geographically, is that -- you talked about the individual markets, but I'm curious if there's anything geographically that you could point out that may be impacting your guide a little bit? Because to me, it sounds like the volume side of the businesses that you laid out, absent maybe laminates and maybe even films, seem rather -- carpet and laminate seem okay. Doesn't sound like it's changing much yet. You're expecting kind of a weaker start to the year. So I'm curious, maybe geographically, is there some weakness that you're experiencing that's embedded in that guide?

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Anne P. Noonan, OMNOVA Solutions Inc. - CEO, President & Director [11]

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Yes, it's a bit of a mixed bag. China overall, as everyone knows, is a little volatile right now. But we actually have a mix of specialty and commodity in China. So I would say our specialty business is going very well, because it's our nonwovens that's going into diapers. So that business doesn't tend to move as much with macroeconomic impact. However, when I look at our tire cord business in China, it is impacted. You can see the auto impact there. Our tapes and adhesives is strong primarily because we've got new business and new products that's driving our growth. I would say Southeast Asia, we have anticipated that we'll continue to grow in our coatings -- paints and coatings, because it is actually stronger than China this year, not on an absolute percent basis, but it tends -- the demand we expect to be quite strong in Southeast Asia. Europe, we're assuming that it's down versus 2018, but not like in past years where you've declines or significant decreases. We think 1% to 2% on overall as we look at our planning. And then U.S., we're seeing some downturn. A lot of what we're seeing is choppiness. It's very hard to say. Because you've got our customers pulling back on inventory, building inventory, trying to gain the raw materials, going down to see if -- hold off on buying. So it's a little tougher to see. But as we look out, we see the U.S. being a bit down versus last year, but actually quite strong in the segments we play in.

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Edward James Marshall, Sidoti & Company, LLC - Senior Equity Research Analyst [12]

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So if I could just paraphrase what I think you're saying, almost sounds to me like that you're confident in the markets, but you want to be conservative in your outlook, because there's some things that are kind of pointing out that, that sound, in your word, choppy?

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Anne P. Noonan, OMNOVA Solutions Inc. - CEO, President & Director [13]

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Yes. I mean, there's choppiness, no doubt, and a lot of uncertainty, and our customers can't tell us what's going on. I would say that we're confident in our ability to outperform the markets we play in. If the overall market takes a massive decline, of course, we can't control that. But given the new products, given the work we've done around having a more differentiated portfolio, having less assets, more cash, SG&A control, we feel much better about how we can weather the storm in a downturn, Ed.

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Edward James Marshall, Sidoti & Company, LLC - Senior Equity Research Analyst [14]

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Got it. And if I look at PM, the spreads look like you're still trying to catch up on some of the pricing actions that happened last year, and I know you gave some good data on what's going on with butadiene through the fourth quarter here and maybe a little bit into the first quarter. Shouldn't we be seeing a positive spread as the pricing actions kind of lag the market, and therefore, you might see, at least in the first half of the year, some decent spreads over the raw materials -- over your existing pricing?

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Paul F. DeSantis, OMNOVA Solutions Inc. - CFO, Senior VP & Treasurer [15]

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Yes, Ed. So this is Paul. In the individual cases, where that's going to be the case, I think we'll see it. So we said we're already seeing some benefit in tire cord from the actions that we've taken. And where we have that pricing, that's the case. The thing that we're going to roll over in the first half of the year is the transitional volume as we exited the paper. That was fairly good margin business. And so that may cloud the entire segment's view a little bit. And then starting in the second half, we ought to start getting benefit from the plant closure, which will -- 75% of that benefit is going to go right to the Performance Materials business. So we're going to see some real interesting margin movements in the back half of the year, in particular on Performance Materials.

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Edward James Marshall, Sidoti & Company, LLC - Senior Equity Research Analyst [16]

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Got it. And absent the restructuring changes with the restructuring of Green Bay, I'm assuming a fair assumption for that margin of that -- of PM should probably be relatively on trend where you've been seeing in the last quarter or 2 kind of low single-digits. Would that make sense? Or do you see significant improvement throughout the year in 2019?

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

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I don't see a significant change in our mix. And our coated fabrics does have some strengthening on mix. So it's going to add a little bit to that, I would have to say. But if you look at antioxidants, reinforcing resin, they'll grow at the market and the margins will stay as healthy as they are today. So really the big impact is our restructuring, but coated fabrics could add a little positive to the mix.

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Edward James Marshall, Sidoti & Company, LLC - Senior Equity Research Analyst [18]

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Got it. And I don't know if I could -- you talked about the vitality index and kind of the basis point improvement on a year-over-year basis. I'm curious -- and you referred to the vitality products versus what you did a year ago. I'm curious if you could kind of talk about maybe vitality, what you're producing in the vitality index versus, say, commodity. What your traditional business, those that are not in that vitality index, what's the difference in the margin spread there?

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

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Let me understand your question, Ed. So the vitality index is -- our margin spread, we've been improving over time. And so in the past, as you know, this has been like a big force we're moving. So in the past, we had a lot of paper and carpet in it. And now, I would say, 80% of our innovation pipeline, as it continues to feed that vitality, is specialty. So that's what's driving the improvement over time. Our Specialty Solutions segment is all over 15% operating profit margin. So anything from a specialty perspective coming in has to meet that hurdle and some, because in the future, we'll need that to be richer. I would say the base -- it's accretive to the base business as we've moved over time, but it's still a work-in-progress as you work out the carpet out of that innovation pipeline.

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Edward James Marshall, Sidoti & Company, LLC - Senior Equity Research Analyst [20]

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Got it. So the simple answer is the difference between, say, specialty chem and PM, that margin spreads is the answer to that question.

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

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Yes. And as we richen the specialty part, that's part of our overall strategy that, that just becomes stronger.

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Operator [22]

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

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Curtis Alan Siegmeyer, KeyBanc Capital Markets Inc., Research Division - Associate [23]

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On 1Q, your expectations for -- to be below last year. I know the comp is difficult. But the raw material environment, as you said, is becoming a little more favorable demand. It sounds like there's some -- maybe some air pockets, but still firmly positive. So was just wondering if you could kind of walk through the key puts and takes in 1Q. And then how much accretion you're expecting from OMNOVA Portugal in the quarter? And then as we kind of progress through the year, how that looks?

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Anne P. Noonan, OMNOVA Solutions Inc. - CEO, President & Director [24]

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I'll just kind of talk through the market outlook a little bit, and then Paul might add a little bit more color around some of the key assumptions in here. As we said, laminates will be down and RV and transition paper is no longer there. Carpet will continue to be weak. And then most of our specialties after that are growing. I would say that they're growing ahead of their underlying markets, but the overall market is a bit choppy, Curt. So that's what's really -- when we look at demand, that's what we look at and say, okay, it's not the normal steady demand we see, it's more being driven by this choppiness in inventory levels and gaining the raw material price increase.

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Paul F. DeSantis, OMNOVA Solutions Inc. - CFO, Senior VP & Treasurer [25]

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And Curt, I would just add. If you go back and you look, our average EPS in '15 to '17 was about $0.03 on average. And last year, we had $0.09. We had a really strong first quarter. All of the business were hitting. All the cylinders were firing away. And so I think, given the puts and takes, our expectation is that this quarter, not all the cylinders are going to be firing. And with the uncertainty in the market, we think that it's going to come in below last year.

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Curtis Alan Siegmeyer, KeyBanc Capital Markets Inc., Research Division - Associate [26]

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Got it. And then on the OMNOVA Portugal accretion, do you guys expect a little bit in 1Q?

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Paul F. DeSantis, OMNOVA Solutions Inc. - CFO, Senior VP & Treasurer [27]

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Yes. I mean, that's -- the OMNOVA Portugal accretion will ramp up later on in the year. It's primarily a coatings business, and that's -- the 1Q is a pretty low coatings quarter. So I would expect to see more of a contribution starting kind of in Q2 and out from there.

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

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We've also assumed our cost synergy stays in over the next 2 years. So as we accelerate those, it'll have an impact.

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Curtis Alan Siegmeyer, KeyBanc Capital Markets Inc., Research Division - Associate [29]

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Got it. Makes sense. And then if I could just ask one more just on free cash flow items. As we think about free cash in '19, working capital was a positive in '18. Do you expect that to be the case again in '19? And then what should we assume for CapEx and then the tax rate for '19 as well?

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

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Yes, got it. Okay. So in terms of working capital, working capital is a key component of our comp. And so it's something that we're very focused on. We're implementing -- continuing to implement our sales and inventory planning process right now. So our goal is to drive working capital down. And so that will be certainly a focus that we pay attention to. In terms of CapEx, you'll note we were a little light compared to our $25 million that we've been at for the last couple of years. We're going to make that up. So we'll probably be in the $25 million to $30 million range this year as we round out our investments in the Mogadore facility. And then from a tax perspective, we use a flat 25% when we calculate our non-GAAP earnings, and we would expect to continue the non-GAAP 25% in 2019.

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Operator [31]

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Your next question comes from the line of Jon Tanwanteng from CJS Securities.

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

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Can you break out what the contribution from commodity paper was last year in Q1? On a revenue or earnings basis, is there something else we can use?

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Paul F. DeSantis, OMNOVA Solutions Inc. - CFO, Senior VP & Treasurer [33]

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It's -- the impact, we'll say, from Q1 last year to Q1 this year is a couple of million dollars, so decline on an operating profit basis. So that would be the impact, and I'm looking to see revenue. If I have it handy, I'll tell you in a minute.

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Anne P. Noonan, OMNOVA Solutions Inc. - CEO, President & Director [34]

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Revenue on a full year basis is about 40%.

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Paul F. DeSantis, OMNOVA Solutions Inc. - CFO, Senior VP & Treasurer [35]

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Yes.

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Anne P. Noonan, OMNOVA Solutions Inc. - CEO, President & Director [36]

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So it's about $12 million, I'd say.

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

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Yes, $12 million to $15 million in the first quarter, probably somewhere in that range.

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

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Okay, got it. And so with that gone in Q1 and really chem not quite getting up to that level of making it up, do you expect to be down year-over-year on a revenue and earnings basis?

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Anne P. Noonan, OMNOVA Solutions Inc. - CEO, President & Director [39]

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Yes, it'll probably offset each other a bit with respect to revenue. And that's kind of been part of our strategy. But I think where we see the bigger dip is in the laminates and RV, is where we'll be down. And carpet will continue to be down as it was in Q4.

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

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Got it. Okay. That's helpful. And then in terms of Q4 results, and Specialty particularly, that was a really great growth number year-over-year. What was that without the Portugal contribution on an organic basis? And what's preventing you from achieving, I guess, similar results going forward? Is it just the laminates that you're talking about? Or is this something else that's going on?

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Paul F. DeSantis, OMNOVA Solutions Inc. - CFO, Senior VP & Treasurer [41]

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Yes. So excluding the OMNOVA Portugal would have been down 1% to 1.5%, somewhere in that range.

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

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Volume.

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Paul F. DeSantis, OMNOVA Solutions Inc. - CFO, Senior VP & Treasurer [43]

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In volume, yes, volume, with obviously a big mix, because we have lots of items that were favorable, I think, and went through that -- the detail, what was favorable in her part of the script. So from a go-forward perspective, I think Anne has laid out that Q4, Q1 looking a little similar in terms of what's -- where we're seeing good success. And so oil and gas was one that was good in the fourth quarter. We think that will continue strong in the first quarter based on our initiatives, adhesives and sealants and the like.

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Anne P. Noonan, OMNOVA Solutions Inc. - CEO, President & Director [44]

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Yes, I would just add. Our underlying markets, we -- Paul said at the offset, we're cautiously optimistic about where we are, barring any major markets turn, decline. We're just not seeing it now in our Specialty segment. And so to your question, can we continue, absolutely, we can continue to grow those stronger specialties, but they'll be a little choppy depending on what's going on with tariffs, trade wars, et cetera. And we are very definite about RV being down particularly in the first half.

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Jonathan E. Tanwanteng, CJS Securities, Inc. - MD [45]

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Okay, great. And then just back to the Portugal asset. What is your assessment of the acquisition thus far? You've had under your hood for a couple of months now, maybe a little bit more, and kind of the synergies that are available as you run through that 2-year time frame?

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

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Yes, we review this very often. The team has done a very nice job on integration. We're all ahead on time line from the point of view of the key milestones that we had. And the cost synergies are rolling up to exactly what the team had estimated upfront. Now they have real concrete plans, and they're actioning ahead. We're very pleased with the team that we've inherited, their excellent R&D team, excellent sales team. And we're really just kicking off on some of the commercial synergies right now and trying to really drive those. But so far, touch wood, it's been a pretty good integration, good cultural mix with our team, I would say. So we're pleased.

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Operator [47]

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Your next question comes from the line of Laurence Alexander from Jefferies.

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Nicholas Cecero, Jefferies LLC, Research Division - Equity Associate [48]

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This is Nick Cecero on for Laurence. Just kind of wondering, the working capital days, it was about 10 days better year-over-year. And I was wondering what levers are there to left to pull, because you mentioned you'd like to improve that number further.

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Paul F. DeSantis, OMNOVA Solutions Inc. - CFO, Senior VP & Treasurer [49]

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Yes, one of the big levers to pull is inventory. So we have -- we've spent a lot of time and money this year working on our SOIP process in order to invest in that and in order to drive that. And we've really made progress on it. We think we have a lot more progress yet to go. And so that's -- managing our inventory properly doesn't affect the customer at all, but has a real impact on us and our cash flow. So that's a big focus for us in 2019, and we think we have a lot of opportunity to drive that number.

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Anne P. Noonan, OMNOVA Solutions Inc. - CEO, President & Director [50]

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We've also been working very hard on collections. Our sales team has got into metrics. They don't get paid without it. So it really has driven some good performance here at the end of 2018 and into 2019.

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Nicholas Cecero, Jefferies LLC, Research Division - Equity Associate [51]

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Okay. Perfect. And then maybe if you could just give us an update on your innovation pipeline. And then if we look out over, say, the next 3 to 5 years, where do you see the most opportunities for growth are?

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

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Yes, the innovation pipeline remains strong. We continue to richen that mix of specialty. I would say where we have our biggest opportunities, laminates continues to reinvent itself. And we win by design. We win by innovation every time on laminates. So the team has got a nice cadence there. So I believe there's no reason why that will not continue. When I look at our nonwovens area, the Tribute Technology portfolio is very strong for us. It's an area where we will have a unique competitive advantage, and we're really pushing that into the market right now and getting some favorable response. Our unique hydrophobic platform in the adhesives and sealants area is really starting to pay off. We've been very pleased with that, and we continue to get more interest in different applications there. So that pipeline is pretty rich. And our oil and gas has some very strong products in the pipeline today. And then coatings, really the challenge for coatings now is what we have out there, really driving that water-borne and really driving across the regulatory desire for water-borne versus solvent, and continuing to commercialize those products is very important.

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Nicholas Cecero, Jefferies LLC, Research Division - Equity Associate [53]

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How much opportunity do you think is out there, switching over to water-borne from solvent? Because we've heard it from quite a few chemical companies that this is a big opportunity. Is there any way you might be able to quantify that?

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Anne P. Noonan, OMNOVA Solutions Inc. - CEO, President & Director [54]

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We look at it as how we analyze all of our new products as how much is basically just replacing what we have already and then is there incremental growth. And we actually do see incremental growth with the water-borne. From OMNOVA perspective, it will allow us to grow more, for example, in China where the regulations are being strictly enforced and rather rapidly. And we do not have any significant position in coatings in China. So for us, there's a lot of headroom to grow. If we look at Southeast Asia, there's a big drive there also for growth. And then our traditional market, which we had in Europe, continues to be a mix of, frankly, the dry resin solvent and gradually moving to solvent-borne. But we get a very nice mix and price from that business as well. So we're not exactly pushing back too far. But our customers on the more stringent applications, they will take their time going to water-borne. The -- it takes a long time to get specced in, in coatings. So there's not an exact number. I would say if I were to hazard a guess, for us 5% to 10% above where we are, a mix of geographic and just ability to grow at our current customers and new applications.

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Operator [55]

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Your next question comes from the line of Joseph Catania from G. Research.

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Joseph Charles Catania, G. Research, LLC - Research Analyst [56]

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Just a quick question on CapEx. It seems it stepped up in Q4 in Specialty Solutions. Just want to see if that was a onetime thing? Or if that's where you're driving CapEx in the coming year with that taking up overall?

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Paul F. DeSantis, OMNOVA Solutions Inc. - CFO, Senior VP & Treasurer [57]

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Yes, the primary driver of that was the investment in the Mogadore plant in order to -- as we're moving production over from the Green Bay plant, we're also taking the opportunity to upgrade our equipment and our capabilities in the Mogadore plant to be able to serve as specialty even more flexibly than we've been able to do that before. So that was the primary driver in the fourth quarter. That will continue on into the first and second quarter until we get that fully migrated.

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Joseph Charles Catania, G. Research, LLC - Research Analyst [58]

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Okay. And I know, Anne, you talked about the ideal operating profits between the segments. Right now, you're at 90%. Where do you think it goes ideally over the course of time?

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Anne P. Noonan, OMNOVA Solutions Inc. - CEO, President & Director [59]

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Well, 90% -- I think over time, 90% is probably a good number, because we intend to increase our profitability on the Performance Materials side. I would say we're ahead of target on our Specialty Solutions. And because we made this decision to exit commodity paper, it tells us the market was moving and declined 2 years ahead of where we originally anticipated. That pushed us back a little, but ultimately, we want to get that Performance Materials segment to 10% operating profit margin. We'll continue to drive the Specialty Solutions to over 15% to 18%. And the blend of the 2 should give us over time a 15% segment operating profit margin in the near- to mid-term, as we drive the specialization.

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Operator [60]

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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 [61]

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Okay. Thank you for your questions. This has been another very busy year for OMNOVA as we continue our strategic turnaround.

Although 2019 is beginning with uncertainty, our specialty businesses have strong growth momentum after delivering a breakout year in 2018. And we've taken decisive action to stabilize our Performance Materials business and significantly improve its margins. We are pleased with the strategic successes we've seen thus far and are optimistic that over the longer term, our continued execution of the strategy will continue to drive increased shareholder value.

Thank you for taking the time to participate in our fourth quarter earnings call. We look forward to speaking with you after next quarter to review our continued progress as we drive the business to a pure-play Specialty Solutions company. Thank you.

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Operator [62]

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