Avient Corporation

Good morning, ladies and gentlemen, and welcome to the Poly1 Corporation 3rd Quarter 2019 Conference Call. My name is Shannon, and I'll be your operator for today. At this time, all participants are in listen-only mode. We will have a question-and-answer session at the end of the conference. As a reminder, this conference is made recorded for replay purposes. At this time, I would like to turn the call over to Joe DeSalvo, Vice President, Treasurer, and Investor Relations. Please proceed.

Thank you, Shannon. Good morning, and welcome to everyone on the call today. Before beginning, we'd like to remind you that statements made during the conference call may be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements will give current expectations or forecasts of future events and are not guarantees of future performance. They're based on management's expectation and involve a number of business risks and uncertainties, any of which could cause actual results to differ materially from those expressed and or implied by the forward-looking statement. Some of these risks and uncertainties can be found in these filings with the Securities and Exchange Commission as well as in today's press release. During the discussion today, the company will use both GAAP and non-GAAP financial measures. Please refer to the earnings release posted on the PI-1 website where the company describes the non-GAAP financial measures and provides a reconciliation from the most comparable GAAP financial measures. Unless otherwise stated, operating results referenced during today's call will be comparing the third quarter of 2019 to the third quarter of 2018 on a continuing operations which excludes the PP&S business that is presented as a discontinued operation. Also note that included in attachment eight to the earnings release issued today is an updated summary of the prior period earnings per share showing the impact of the discontinued operations. Joining me today on the call is our Chairman, President, and Chief Executive Officer, Bob Patterson, and Executive Vice President, Chief Financial Officer, Brad Richardson. Now I will turn the call over to Bob.

Thanks, Joe, and good morning, everyone. I'm proud that for the third quarter, we delivered adjusted EPS of 44 cents. That's a 7% increase over the prior year. Our investments in recent acquisitions and sustainable solutions, combined with our cost reduction initiatives, continue to offset a weak demand environment. Specialty engineer materials led the way this quarter, growing operating income 7%. highlighted by our recent acquisition of FiberLine and New Business Gains Composites Portfolio. In fact, organic sales of composite technologies grew 8% in the quarter, and operating income more than doubled over the prior year. Composites, along with performance additives, are two of our high-growth technology platforms, and the difference these technologies are making is reflected in our now less cyclical, more specialty portfolio. With the announced agreement to divest our performance products and solutions segment, we have taken yet another step to further establish us as a specialty company. Following the sale, 80% of Poly1's EBITDA will be generated from specialty formulations, and that's up from 7% from when we began our specialty journey. This latest portfolio enhancement reduces our exposure to cyclical end markets, while at the same time strengthens our balance sheet Proceeds from the sale will provide us increased financial flexibility to accept growth by acquiring additional specialty technologies and investing in innovation focused on sustainable solutions. More on this strategic approach is captured in our just released sustainability report. It's our first ever at Poly One, and I'm going to spend some more time on this topic in my closing remarks. To our customers, colleagues, and friends in the PP&S business, we are excited about your future with SK Capital. We are grateful for your partnership, innovation, and the success we have had together. Since 2006, we have invested in and grown this business, and it has played an important role in our transformation. As we look back on this time, that growth has come from organic initiatives, such as investing in commercial resources, achieving a high level of operational excellence, and, of course, training and innovation. But as a future, the business needs an owner like SK that will look to add acquisitions and incremental investment to help the portfolio achieve an even higher level of performance. SK has big plans for the business, and customers should know they are in good hands. And we count ourselves among them, as PP&S will continue to be a supplier to Poly1 and an important partner for our distribution business. Our distribution is having a record year from an operating income standpoint, and it continues to be a cash flow generating machine. Despite challenges in certain end markets, our distribution benefits from a high degree of healthcare customers as well as engineered resins. Although sales are down, margins have improved on better mix, pricing, and controlling costs. You know, the reality is, overall, macro conditions haven't changed since the beginning of the year, which is why I'm particularly proud of how we differentiated our performance in the quarter and demonstrated our ability to grow the bottom line in this environment. To be clear, some of this is from prudent self-help actions we took earlier this year. We have reduced costs, controlled discretionary spending, and increased our commercial focus on pricing and new business gains to improve mix. And this is what a specialty company does. Our most recent performance demonstrates the growing strength of our portfolio and how our investments and other strategic decisions are paying off in these uncertain times. More on this in a moment, but next Brad will provide a segment review and go a little deeper on our performance for the third quarter. Brad? Well, thank you very much, Bob, and good morning.

Let me first start with our GAAP results. We reported GAAP earnings per share from continuing operations of 30. Special items in the quarter resulted in a net after-tax charge of $10.5 million compared to a half a million in the prior year. The increase in special items is primarily related to the earn-out adjustment associated with the FiberLine acquisitions. as the business's performance has been exceptional, exceeding our original expectations. To reinforce Joe's earlier comments, our results are presented on a continuing operations basis, which excludes the PP&S segment, which is presented as a discontinued operation. Adjusted EPS for the quarter was 44 cents, 7% higher than the prior year third quarter. This increase includes a headwind from a higher effective tax rate. At a constant tax rate, EPS would have been up 10%. Driving an adjusted EPS was a 5% improvement in operating income. Contributions from our fiber line acquisitions, our growing composite portfolio, and barrier additives continue to perform and differentiate us. in what can only be characterized as a challenging economic environment. And as Bob said, we are benefiting from our earlier efforts to reduce cost and improve pricing. From a regional perspective, organic sales in Europe were down 11%, primarily due to weak demand in automotive applications and unfavorable foreign currencies. Foreign currencies negatively impacted the region's overall sales by 5%. Asia's sales were down 7% as growth in the packaging end market from our barrier additive technologies was more than by weakness in the automotive and electronic end markets. Weaker foreign currencies impacted overall sales in the region by 2%. Still, Despite the top-line weakness in Asia, operating income grew 11% for the quarter due to improved mix from our wins in higher-margin specialty applications. As you know, the early days of our transformation are more known for mix improvement than margin expansion. But clearly, it's still a focus of ours, as exemplified by the Asia results this quarter and will continue to be. In reviewing our segments, SEM expanded revenue and operating income 10% and 7% respectively. Strong performance from composites and North America wire and cable, along with mixed improvements, were able to offset an FX and weakness in Europe and Asia. Driving the mixed improvement for SEM were wins in healthcare applications. where sales into this end market improved 19% in the third quarter, and that follows a 25% growth in the second quarter of this year. Examples of wins and applications that are driving the steady growth include a sensor delivery device for a glucose monitor. The applicator inserts a small sensor just beneath the skin, which continuously measures glucose levels and sends the data wirelessly to a smartphone. The customer chose Poly1 because of our material science expertise in medical-grade solutions and sophisticated formulations of FDA-compliant medical-grade polymers. Poly1 brought value to the OEM manufacturing network through both design and processing support to create consistency and accelerated product development. Another contributor to our recent SEM healthcare growth is the expansion of our NEU platform, which supplies formulations for catheter extrusions. These include specialty radiopaque and precolored materials, as well as molded components used in intravenous minimally invasive therapies. These are just a few examples of how we continue to innovate for our customers and improve our portfolio of specialty offerings in less cyclical end markets. Looking at our color segment, revenue and operating income were down 6% and 7% respectively. Weaker foreign currencies impacted both sales and operating income by 2%. From an end market perspective, growth in packaging and healthcare was more than offset by weakness in transportation applications, and more recently in North American consumer applications. The packaging end market continues to be a growth story within color, as we've mentioned. Sales were up over 3% for the segment in the quarter, driven by continued market demand for our barrier additives. Asia led the way in market with 8% growth this quarter. And at center stage was once again our Lactra SX additives serving the expanding drinkable yogurt market. Similar to SEM, healthcare sales were also up in color, growing 7% in the third quarter. Recent wins include a new application for a melatonin-related product where we were able to provide a solution that not only met the desired aesthetic intent design but but also provided the required UV protection for the pharma contents. Melatonin is UV sensitive and easily degraded. Our solution met the technical requirements so well that our colorant was included in the patent filed by the OEM for this application. Another example including winning a personal care product application for an existing customer who was launching a private label branded product to its customers. a prominent global retailer. Because of our longstanding expertise in this market and ability to provide consistent solutions used in this particular medical Class I application, we earned the business. And yet another example includes a great collaboration effort between our color and distribution teams. Our distribution team received the lead, and we ultimately won the business over the competitor for a healthcare housing application. We were selected by this customer based on their speed-to-market requirements for a custom color design and the OM's desire for a single point of contact. Our supplier relationships and distribution enabled us to obtain the resin quickly to then expedite the color design and sample to the customer. With an on-target sample, the application was approved and immediately followed by commercial orders. As a response, and an accurate design enabled the win for Poly One. It's also a great example of the strategic fit of our distribution business and how we can leverage the customer and supplier relationships to grow all of our businesses. And speaking of distribution, it had yet another quarter of operating income growth. The segment grew operating income 7% on operating margin expansion from improved and pricing. The mix improvement was primarily related to gains in the outdoor high performance, which now makes up approximately 8% of POD segment revenues. In the third quarter, volume was up 18% in this growing end market through a combination of new wins and expanding with existing large customers, particularly in the recreation and ATV applications. I'd also like to add to what Bob said about POD's presence in healthcare. In 2013, about 20% of segment revenues were healthcare. Today, it's nearly 30%. Healthcare is a growing point of differentiation for our distribution business, and it's contributing to our company's ongoing movement towards higher margin, less cyclical end markets, regardless of the segment. So from the call back over to Bob, I wanted to highlight the recent 4% increase in our dividend, marking the ninth consecutive year of increases. The latest increase reflects our track record of growing earnings over the long term and our confidence to continue doing so in the future. cash in the same ways that we have in the past to benefit all of our many stakeholders. That is, investing in innovation and acquiring specialty companies to deliver differentiated performance. And rewarding our shareholders through earnings growth, our quarterly dividend, and opportunistic share repurchases. With that, I'll turn the call back over to Bob. Well, thanks, Brad. Our prepared remarks today have been clear.

I'll continue. Related to our sustainability report, certainly it does cover a number of things such as environmental, social, and governance activities as we go to market, but it goes well beyond that. It demonstrates how we are adding value to all of our stakeholders and positively impacting the planet and our communities. It also provides an inspiring look forward at what's to come. For those of you who have read our two previous annual reports, we approach sustainability from the standpoint of four cornerstones, people, product, planet, and performance. The four Ps are inextricably linked to one another, and our recently issued report provides a tremendous amount of insight into the progress we have made in each area. For example, we share our environmental performance metrics and renewable energy outlook. Product stewardship and supplier expectations are also discussed. We review some of the many leadership development, technical trainings, and other educational offerings, which work in concert to help us attract, retain, and promote tomorrow's leaders today. We also address how Poly1's formulations, in particular, will play an important part in improving sustainability in nearly every industry. In the report, we showcase how our performance additives for packaging help reduce material usage, energy requirements, and ultimately spoilage, while increasing protection for food and beverage content. Many of our additives also improve recyclability of packaging, thus promoting a more circular economy. While other additives we offer rely upon renewable energy applications. Our eco-conscious formulations like NYMAX utilize reclaimed nylon in our formulations, a growing interest among brand owners. And at the core of any polymer solution is the opportunity for lightweighting when used as a substitute material for metal, glass, or wood. Our composite solutions take material replacement and reinforcement to a new level. They open endless opportunities for lightweighting, improving strength, and resistance, and in the transportation industry, this all translates to reduced carbon emissions through better fuel efficiency. These are just a few of the many product and innovation examples we highlight in our report. Again, I urge you to read the report. You will gain a deeper understanding of the growing need for our sustainability-based material science. In turn, our stakeholders will see the clear alignment with our investment in each of the four Ps. You will see the many reasons why Poly1 is in an excellent position to contribute and grow as customers in real time in a changing landscape and regulations of plastics globally. It's inspiring, and I think you'll understand why. Despite all the macro noise, we feel better about our future than we ever have before. Our specialty transformation, which began in 2006, continues with an enhanced portfolio of technologies, with operational and commercial excellence to serve customers everywhere around the world, and with a unique way now to help enable the sustainability challenges of today and tomorrow. Our near-term focus is on finishing 2019 as strong as possible and with momentum. It's certainly been a choppy year in many regards, but we have grown the bottom line, and we reiterate our positive outlook for EPS growth this year and expect fourth quarter EPS to be about 10% higher than the prior year. As I said on our last, we are managing for today while leading for tomorrow. That concludes our prepared comments for today's call. We welcome any questions that you may have.

The call lines are now open. As a reminder, you will need to press star 1 to ask a question. Please limit your questions to one question and one follow-up question. Your first question comes from Mike Harrison with Seaport Global. Your line is open.

Hi, good morning. Can you hear me okay? Yeah, Mike, we can hear you. Thanks. Appreciate the chance to ask some questions here. I wanted to ask about the composites business. You referenced the growth rate, I believe 8% is what you were seeing there. Do you feel like that business has slowed or decelerated at all with some of the macro uncertainty? And can you maybe comment on the pipeline of new applications that you're seeing within that business? Sure.

It's actually been the opposite. We haven't seen it slow, and, in fact, I think it's been picking up as demand for those applications seems to be moving in a different direction than some of the other macro pulls. That may be because we are heavily aligned now with FiberLine and the fiber optic infrastructure build-out, which will and does include 5G. Also, I think there's just a lot of demand for composites for reinforcement materials that a number of industries are looking at. So we've seen growth from FiberLine this year, but we've also seen growth from our legacy composites business, Mike, really all around the world.

All right, and then also wanted to ask a question about your sustainability efforts. You just won level of detail there, and I look forward to looking through that report. But I know one of the issues you've been working on, and you mentioned recyclability. Can you talk a little bit about kind of what inning we're in in the process of making plastics more recyclable and whether you see that being driven more by regulations or or is it more of an economic decision on the part of your customers where the cost of recycled resin might be lower than virgin?

Well, I think we're in the early innings, and I really do believe that's being driven by, first, consumer preference, and then, second, a brand owner desire to serve that preference. So I think there's a lot of customer pull for sustainability initiatives, And what I love about our portfolio is that it is really going to enable that. As you know, we're not a base resin manufacturer, but rather a formulator. And many of our formulations are aimed at doing just that. If it's to help use less plastic in some cases, or I think what you'll see in the future is just a higher use of recycled content. And that, I think, has been a big area of focus for brand owners, many of whom, as you know, are stating some public goals about where they want to be in five or ten years from now. And I think that's a good thing for our portfolio.

All right. Last question I have is maybe one more for Brad. I just wanted to get some guidance on the corporate segment. Wondering if that $18 million number for Q3, does that reflect a full quarter of of stranded costs from the PP&S business, or maybe how should we think about that $18 million number as we look into Q4 in 2020?

The answer is yes. So all of the periods adjusted for the retained cost, so those would be part of our continuing operations. I think the 18 was maybe a little on the low side. I would say it's going to be more like 19 to 20. on an ongoing basis. But as you know, our plans are, between now and the end of 2020, would be to take about $12 million out of our retained cost. And that's our plan for 2020.

All right. Thanks very much.

Thank you. Your next question comes from Mike Sisson with Wells Fargo. Your line is open.

Hey, guys, you know, nice quarter there given the difficult environment. Hello? Can you hear me? Yes, we can hear you. Yeah, so I might have missed this. I apologize. But in terms of your guidance for 2019, I think you guys said fourth quarter 10% year over year. I think I missed the full year. But could you give us the basis for the fourth quarter? Is that based on the 25 cents pro forma ex-PPNS? and then what the basis is for 18?

Right. It's based on, if you look at the attachment eight and the release, that has a split of continuing ops and disco ops. So the 10% increase is using last year's fourth quarter from continuous, which was 24 cents.

Right. If you look at attachment eight, we fine-tuned the numbers here, and so 24 would have be our fourth quarter of 2018.

Got it. Okay. And then, you know, Bob, you're getting a lot of cash here soon in the fourth quarter. Can you maybe walk us through what sort of the plans are there? There's, you know, I think there's press saying Clarion's business is up for sale. Is that of interest to you? And, you know, how fast do you hope to deploy some of that cash back into either acquisitions or debt pay down, et cetera?

Right. So, I mean, we will immediately put, you know, the cash proceeds to work in paying down the revolver balance. There will be some remaining cash that sits on the balance sheet, at least for the time being, with the expectation that we can put that to use, again, to support our growth initiatives going forward. I can't comment on the clarion speculation.

Okay. And then last one on 2020. Can you maybe... frame up how earnings growth looks next year and, you know, in a difficult environment, just maybe walk through some of the things you can control where you see some growth and, you know, what type of earnings growth Poly1 can provide given, you know, you're much leaner and generate a lot of costs there.

Well, I think we're going to defer, you know, our comments broadly on 2020 until we get to the end of this year and, you know, release our numbers in January. What I can say is that I believe there's still going to be strong pull for composites and sustainable solutions. I think those things will continue to see a positive trajectory in the way that we have seen them play out this year. I think when we get to the end of the year, we'll put a little bit more clarity on some of the bigger industries and macro dynamics, primarily around auto in Asia and Europe. If I look back on this year, you know, those have been the two areas of, you know, most significant demand decline that we've experienced. So I don't really want to prognosticate on those two at this point, but hopefully we're in a better spot to do so in January. Got it. Thank you.

Your next question comes from Helen Roosh with Oppenheimer. Your line is open.

Thanks so much, guys. Could you talk a little bit about input costs and what your opportunity is there to, reduce costs over the next period of time. But then also talk a little bit about the opportunity to integrate some renewable input materials so that you end up with a bit better, you know, full cycle life with some of these products.

Yeah, I mean, the first thing I'd say is that we have – there have been a little bit of a difference in a couple of, again, the base resin inputs that we have. you know, I'd say that is helping a little bit in the current period, but not a significant amount. But then, of course, there also are some ongoing, I'd say, inflation in areas like nylon, and now maybe that's just a hangover from prior year costs, but we're still seeing that up some. So if I looked at a whole basket, Colin, and maybe it's all down to that or something, it's pretty close to zero. You're Next question, I believe, relates to what opportunities we may have, you know, for a greater degree of recycled content. And, you know, I think there's a tremendous amount of opportunity, but that has to be done in concert with what our customers want, right? So our customers need to specify, you know, I think material content that works for them. I think we're going to see a lot more pull for recycled content, and we hope to support that.

Okay. I'll have some follow-ups on that I'll take offline. And then in the specialty materials business, you know, the operating markets are holding kind of flat even as you grow. You know, what sort of opportunities are you seeing to increase or expand operating margins as you continue to grow that business?

Yeah, I mean, the first thing I'd say is that bringing FiberLine in, that was at a little bit lower operating margin than where we were. From a legacy perspective, that's pretty consistent with acquisitions we've made over the last four or five years, as you know, and the intent is to expand that over time. So I view that actually as a good thing, so we're in good stead there. But it is influencing the year-over-year comparisons. Your second question on that was what with respect to margins?

Just the opportunity to expand operating margins on a percentage basis.

Oh, yeah. Right. So, I mean, obviously, FiberLine and where we are with respect to composites presents a good opportunity. As you know, I mean, the legacy composites business inside of Poly1, you know, to date still has a relatively low return on sales because of the significant amount of investment we've made. And so as that grows, I think that will have the greatest impact on margin improvement.

All right. Thanks so much, Gus.

Sure thing.

Our next question comes from Ben Callow with Baird. Your line is open.

Hey, thanks for taking my questions. I guess first maybe going back to Mike's question, just how do we think about your debt capacity if you want to make an acquisition out there, what you feel comfortable with following the sale of PPNS? And then number two, just following on to the EM margin question, Could you just talk through, you know, kind of the Q over Q decline? And I think you said that's related to composite growth, but just maybe more detail there. Thanks.

Yeah. I'd say, first of all, with respect to leverage, our, you know, view on that is conservative. We have said that for the right, you know, acquisition, we can certainly take leverage, you know, above, three times. Obviously, with the sale of PPNS and cash on the balance sheet, we'll be sitting, you know, so that's pretty low from where we've been historically. You know, to the extent that we're going above that, obviously, we've got to have, you know, line of sight to getting back down below that number, again, in the event that we do an acquisition. So, I'd say our view on that is still pretty conservative, Ben. With respect to engineering materials, again, I think the biggest thing that's kind of influencing things is the addition of fiber line. But I would also point out that, you know, the European auto decline in demand has sort of disproportionately impacted our EM business in that region. And that's another reason why the margins are down this year versus last year. Those are the two biggest reasons for that.

Thank you. Your next question comes from Jim Sheehan with SunTrust. Your line is open.

Thank you. Good morning. Good morning. How would you characterize your interest in expanding your existing MasterBatch's business? Is the broader MasterBatch's business attractive, or are you really just focused on niche specialty areas of that market?

I mean, I think the broader MasterBatch business is very attractive and continues to be. It's... I think going to be an enabler for sustainable solutions going forward. I mean, for example, just the use of a higher degree of recycled content for beverage packaging, for example, is going to require, I think, additional color in order to facilitate that. Certainly additives will enable it as well. But I feel very good about the overall color portfolio. We have a tendency to point out, I guess, probably in the last two orders, some of the additives and, you know, specifically sustainable solutions because they've been growing this year. But that's not to detract at all from the balance of the MasterBatch portfolio.

Good. And you sound pretty bullish on barrier technologies and sustainability overall. I'm just wondering – How are customers deciding what materials to use? Are they sticking with PET, or are they switching more to aluminum containers, and how are you trying to balance that?

Well, I think you are seeing some experimentation, if you will, with doing some things a little different out there from a consumer perspective. But broadly speaking, I believe consumers are still – using the materials that they have historically for food and beverage containment. But where they're looking to make changes is to try to increase the degree of recycled content. Certainly, there's a focus on using less overall, if they can as well. And that could be thinner gauge material and or, you know, an absence of material. So, I'd say the Biggest push on material substitution is probably around using a higher degree of recycled content versus an outright switch to something different.

Can you comment on where you see your customer inventories and when would you start to expect some restocking next year?

Again, I'm going to defer probably, you know, comments on 2020 until we get into January and see if we've got some better clarity on that. You know, hopefully we do. As I pointed out earlier, maybe to Mike's earlier question was, you know, we've seen pretty significant in auto in Europe and Asia. And I'm not really, you know, don't really have a clear vision on when that actually starts to improve. So hopefully we see something between now and when we report back in January. Thank you.

Your next question comes from Dimitri Thorstein with Buckingham Research.

Good morning. Thank you for taking my question, guys. Good morning. Just one thing I'm curious about. some of the economically challenged regions like Europe and Asia Pacific, what were the trends like during the quarter? In other words, were they sort of getting weaker as the quarter progressed, or was there some level of stabilization? And then, you know, kind of how do you look, you know, within that context on the fourth quarter, kind of going beyond the earnings guidance that you provided, if we think about sort of, you know, above the EBIT line items, where do you see kind of growth? as regions are going in the fourth quarter?

Yeah, I'm not sure that I would say there was, you know, any noticeable difference between, let's say, July and, you know, the other months of Q3. I will say that there's a general observation about the two regions and specifically auto. They were down more in the third quarter than they were in the first and second quarter. And that may just coincide with time of year. I'm not sure. But with respect to our estimated 10% increase in EPS in Q4, that takes that all into consideration.

Okay. And then your outlook on raw materials, you mentioned that in the quarter there were an aggregate down about 1%, so almost flat year over year. Would you expect that to get better in the fourth quarter on year-over-year comps, or are we sort of at the end of the modest difficulty that we had in raw materials over the last year and a half?

I mean, again, I think it's really difficult to ask that answer for the portfolio in its entirety, but I'm expecting to see probably something that looks a lot like what we had in the third quarter with respect to year-over-year changes. maybe it starts to get a little bit better, but really that remains to be seen as the quarter plays out. At this point in time, I'm not seeing much different.

Got you. A question you mentioned in the press release and in your prepared remarks, seeing some cracks in domestic consumer market demand. Were you referring to any particular segments of your business or segments of the economy where those consumers in the U.S. are slowing?

I think... More so than anything else is probably some. We have called it consumer, but it may be right on the edge of saying consumer electronics. As you know, it's not a perfect sign somewhere things go into from an end market standpoint. But I'd say I'd point that out as one area that seems to be a little bit weaker this year than it was last year. You know, I don't know whether or not that's a tariff thing or trade thing. I don't really know. I mean, our customers say that to us sometimes, but it's really hard to determine if that's the case. You know, for us, we focus on our new business gains and care of the customer. And from that standpoint, I think things are going well as they could be.

Okay. Thanks, Bob. Yep.

Your next question comes from Bob Court with Goldman Sachs. Your line is open. Bob Cort, your line is open. Please check your mute button.

Good morning. This is Don Campbell on for Bob. On the color business, you know, in the first half of the year, it seems like there's pretty decent margin declines on a year-over-year basis. It actually improved this quarter where it was relatively flat in terms of margins year-over-year. Can you give kind of a breakdown? You know, I think volumes still were relatively pressured this quarter on a year-over-year basis. So can you give me a little bit of a breakdown of what improved this quarter to make that differential between this year and last year's margins a little bit smoother?

Yeah, I mean, what's a combination of a number of set of actions that we've sort of called self-help here over the course of this year. There have been some cost reductions. But we've also worked on pricing and probably benefiting a little bit here from mix in the third quarter, notably around additives and the sustainable solutions I mentioned, carry a little bit better margins than some of our other products. And I think what is lending to it. So I think what you're seeing in the third quarter is really just sort of cycling past where we were last year and finally seeing some benefit from those actions. Got it.

That's helpful. And then for the barrier additive technologies, I think you guys said it grew 3% this quarter. How does that compare, I guess, to the last handful of quarters? I'm just trying to get a sense of whether that's decelerating or accelerating in terms of trends.

Yeah. I mean, look, we did see some stronger sales in that market in the first quarter, but I'd also say there's some seasonality effect to that, and a lot of that, of course, is outside the U.S., so I'm not sure I would conclude that while it is a little bit slower growth in Q3 from where it was in Q1, I'm not putting that in the alarming category. I think we'll see more as we get into fourth quarter. But, you know, customers in every industry are thinking about how much inventory they have and why and always concerned just in general about what's going on with the macro economy. Got it.

Thank you.

Your next question comes from Lawrence Alexander with Jefferies. Your line is open.

Good morning. How much was FX as an impact on profits for Q3 and your thoughts for Q4? And then on the Q4 outlook, are you factoring any significant year-end destocking or shutdowns by your customers?

So FX, I think, was about a $1.5 million bad guy for the quarter. A lot of that shows up in color. Some in engineering materials, as you know. And I think we're going to continue to see a little bit of a headwind in that respect. It's been interesting over the last eight quarters, the dollar just doesn't seem to be – or actually, the dollar is doing well. The euro hasn't been – pulling back up where we hope that it might. With respect to stocking, you know, I think our customers, you know, basically are very cautious about the year and how the next year starts. And so, I think they've been kind of on high alert here for a period of time. So, I'm not sure if there's something unusual in the fourth quarter. Typically, you do see much lower levels of inventory at the end of the year, and I really don't know if that's going to be different this year than what we experienced last year.

And with respect to the sustainability push that you were emphasizing this morning, how much of this is going to lead to a change in skill sets or hiring patterns, and how much of it is just disclosing, reframing initiatives that you had already well underway?

Well, one of the things I'm really, you know, proud of what we have done is, you know, Lawrence, you've added a lot to commercial resources over the last four years. Oftentimes people hear commercial and they think sales. But for us, that really has been sales, marketing, and technology. And, in fact, the technology increase has really been on par with sales. So it's almost been a one-for-one as we've added somebody in technology. And I think that's aligned with having a greater degree of engineering complexity in the portfolio, but a lot more focus on these sustainable solutions. And that is inside the business units as well as what we sponsor at corporate from a research and development standpoint.

And then lastly, are there any end markets that have longer selling cycles that we should see shift a factor in your growth algorithm in, say, three to five years?

Well, look, with respect to sustainability, you know, particularly for food and beverage packaging, that has historically been a long sales cycle just because of, you know, FDA and related issues. regulatory requirements. What I do think you will see is brand owners pushing for that faster. So, if they look to use more recycled content or streamline their products, they'll be pushing that faster if they can. I think it will still be a relatively longer sales cycle, but I do think that's one that could actually get a little bit faster. Outside of that, I wouldn't say there's any change to how I'm viewing sales cycles today versus, you know, a year or two ago, with healthcare being the longest, you know, and some of the other, I'd say, maybe standard packaging was being shorter.

Thank you.

Sure thing.

Your next question comes from Kevin Hosmer with North Coast Research. Your line is open.

Hey, good morning, everybody. So, in... Just curious, in this, you guys referenced earlier the $1.51 in EPS from continuing operations that you highlight at the end of this press release. When you announced it with PPNS, you had $1.54 in there. So I'm wondering what the delta is, that $0.03 delta. Is there more stranded costs maybe than you initially thought, or why the slight difference in those numbers?

No, Kevin, really what As you can appreciate, when we had to split the PPNS out, there was a lot of work that we've done since that announcement on our overall effective tax rate for PPNS, as well as from continuing operations. So the change really associated with the tax rate.

Okay, gotcha. Makes sense. And then, Brad, the cash generation this year has been really good, and working capital in particular looks like you've managed that quite well. So I'm wondering what you attribute that to, and does anything reverse out perhaps in the fourth quarter? What is your outlook here for free cash generation, and are there more opportunities to buy your working capital even lower?

Well, I think it will. I mean, we have the normal seasonality in the fourth quarter typically. There's a further release of our working capital. As you know, this has continued to be a strong focus of the corporation. It has been for a long time. I appreciate your comments on that. The free cash flow this year from continuing operations is about $135 million, and that funds $60 million of our capital investment, which is really a large chunk of that associated with supporting the overall growth. So that's kind of what we're thinking in terms of the overall cash generation for the year.

Okay, perfect. And last one for me is with the PP&S divestiture, outside of the stranded costs, are there any top-line synergies that you might lose from between things that might be sold through the distributionists or any procurement synergies, anything like that outside of the stranded costs that might go away when you lose that business?

I think, Kevin, first of all, we have a supply agreement that will be an ongoing part of how we work between distribution and PP&S. It will be one of the largest suppliers that we actually represent on our line card, and I think a very important relationship. So, you know, I think the Gion brand views that as a very good and effective way to go to market. Obviously, as a supplier that we represent, we need to work hard and make sure that they feel that way a year and two and three years from now so that we continue to have them as a supplier. So I don't see that changing. I think we have a very good relationship and we'll continue that way. I don't know that there's really an impact here on the supply chain with respect to purchasing, primarily because, you know, the underlying base resin going into PP&S, you know, PVC, for example, is not something we use in our other businesses. So there may be some small things here and there, but nothing really to point out as significant.

Okay, perfect. Thank you very much.

Sure thing.

Your next question comes from Rosemary Morbelli with G Research. Your line is open.

Thank you. I apologize if it has been somehow bumped out of the call, so I missed some of the comments. Do you think, Bob, that there is enough recycled material currently to supply customers? Should they move very quickly towards increasing that particular level?

I don't. I think that's one of the challenges that the world is facing right now is that brand owners are making some pretty big statements about where they want to be in 10 years with respect to the use of recycled content. And presently, we don't have enough supply to meet those needs. So fortunately, I think we have organizations like the Alliance to End Plastic Waste that's very much focused on improving the amount and degree to which we can harvest recycled content, but right now that's a huge challenge.

So with this in mind, now we hear from a lot of large beverage companies that they are planning in switching from plastic bottles, single serve, to aluminum cans, and some of them have already announced that they are going to add capacity. So if this is actually the case, how much of an impact is it going to have on your barriers technologies? I am assuming that a lot of that is going into those plastic bottles caps, or maybe I am wrong.

No, a lot of the barrier technology is going into food and beverage applications, and PET for beverages, for example, is a really good place where that works. So Look, to the extent that somebody switched out of a PET, like, 20-ounce bottle and went to an aluminum can, yeah, that would impact us. We are really seeing that in very small areas, the ones you've talked about. I'd say we're getting way more pull from customers, though, to actually help them continue to use PET, but to do so with a greater degree of recycled content. So, what I'm hearing from really is more of a ladder than an outright switch out of material content.

Okay, thanks. And I have two quick questions. Your EPS growth of 10% in the quarter, does that include additional share buyback or is it just pure operations improvement?

That's just operational improvement.

Okay. And then could you remind me of the size of the revolver you are going to pay down?

Yeah, Rosemarie, if you look at our queue, which will be filed here momentarily, there's about $194 million on the ABL right now that will be paid down.

Okay, so that's inside a bit of cash in hand to play with, if I can use that word. All right, thank you.

All right, well, thanks, Rosemarie. We appreciate your question and all the others that we got today. We apologize for what seemed to be a little bit of technical difficulties on the call. We did hear everyone okay, but we know that there were some people who were bounced and fell off. So we're available to answer questions and take those over the course of the year, too, as you have them. But for now, we just say thank you for joining us on the call today. We look forward to updating you on our progress at our next regularly scheduled call in January. Take care.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.