Earnings Call: Q3 2018

Oct 24, 2018

Good morning, ladies and gentlemen, and welcome to the PolyOne Corporation's 3rd Quarter 2018 Conference Call. My name is James, and I will be your operator for As a reminder, this conference is being recorded for replay purposes. At this time, I would like to turn the call over to Joe DeSalvo, Vice President, Investor Relations. Please proceed. Thank you, James. Good morning and welcome to everyone joining us on the call today. Before beginning, we would like to remind you that statements made during this 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 are based on management's expectation and involve a number of business risks and uncertainties, any of which could cause material results to differ cause actual results to differ materially from those expressed in or implied by the forward looking statement. Some of these risks and uncertainties can be found in the company's 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 PolyOne website where company describes the non GAAP measures and provides a reconciliation from the most comparable GAAP financial measures. Operating results referenced during today's call will be comparing the third quarter of 2018 to 3rd quarter of 2017, unless otherwise stated. Joining me today on the call is our Chairman, President and Chief Executive Officer, Bob Patterson and Executive Vice President and Chief Financial Officer, Brad Richardson. Now, I will turn the call over to Bob. Thanks, Joe, and good morning. We are pleased to report record 3rd quarter adjusted earnings per share of $0.62 and that is up from $0.58 in the prior year. It's a 7% increase, which has been driven by our continued top line expansion. Our revenue of $833,000,000 was an 8% increase over last year. Investments in our commercial team have made performance like this possible. Our sales, marketing and R and D resources, which have increased nearly 5% organically this year led to a 6% organic increase in revenue. And whether it's more sellers in high growth regions, more personnel to lead marketing campaigns or additional R and D technicians to collaborate with our customers. We are We're conducting train and make us more efficient, more strategic so we can get better, target high probability high margin new business opportunities. And this includes investing in unique training among our sales force, to improve regional and cross business unit collaboration as well as sales effectiveness that best represents 1 Poly-one. Our intense customer centric selling seminars educate our teams on our portfolio, applications, new technologies and best practices. These sessions are happening all over the world and they're enhancing communication among our sales force. And quite simply, this is leading to more projects and more closed new business. Color And Engineered Materials led the way this quarter with sales growth of 11% and 7%, respectively, and expanding operating income 13% and 7%, respectively. The growth in Color was driven by new business gains in Consumer And Packaging end markets. There continues to be strong pull from the marketplace for our barrier technologies that prolong shelf life while improving recyclability processing efficiencies and food safety. The growth in Engineered Materials was driven by new business wins in the outdoor high performance end market. Our recent investments in this market and in composites is offering a marketplace performance enhancing capabilities in new and existing applications. Recall from our Investor Day in May, that we provided an overview of 4 key technology platforms, composites, fiber colorants, flame retardants, and barrier technologies. These platforms remain our investment in commercial focus. Combined with our ability to formulate innovative solutions will allow us to drive future growth. And it's our long term focus and commitment our 4 pillar strategy that has allowed us to deliver our 3rd quarter results despite weakening currencies and higher raw material and freight costs. Inflation is impacting all of our businesses. In terms of freight, costs were up $3,500,000 this quarter over the prior year. Our teams have been working diligently with but it is often the case that higher prices are inevitable. As you know, inflation has been a persistent theme throughout 2018 and Q3 was no different. With respect to raw material costs, nylon and butadiene, for example, which are key inputs for our Engineered Materials segment were both up more than 50% year over year. Inflation is What was new this quarter and really happened just in September was a slowdown in demand in certain North America end markets such as building construction and appliance, as well as in Asia. Performance Products And Solutions And Distribution were the most heavily impacted by these challenges, and that was observable as their operating income declined year over year. The demand slowdown was abrupt with certain customers delaying orders at the end of the quarter. They are citing concerns over tariffs rising input costs and weaker consumer demand as the primary drivers. I will have more to say On our long term perspective and strategy, our balance our outlook for the balance of the year after Brad provides a segment review and financial highlights. Well, thank you very much, Bob, and good morning, everyone. Let me first start with our GAAP results. GAAP earnings of $0.62 per share. Special items for the third quarter of 2018 did not result in net earnings per share impact as environmental remediation costs were offset by tax benefits recognized during the quarter. Adjusted EPS from continuing operations for the quarter up 7% from $0.58 in the third quarter of 2017, marking a new Poly 1 third quarter record. Color, additives and inks drove its performance with 11% sales growth, while gaining leverage on the bottom position related investments are working in this business. As seen by a 6% organic revenue improvement, and 6% growth from acquisitions, which was offset slightly by FX impacts of a negative 1%. Our performance is geographically balanced as and pricing initiatives helped to offset weaker demand conditions observed in September. Beverage Packaging and Consumer Applications in particular continue to perform well in all regions and wins in this market are improving overall margins. These customers' sustainability goals are increasingly focused on from oxygen scavenging additives and bottles to life locking additives to replace unrecyclable multilayer packaging are solving those problems and gaining market traction. Engineered Materials also had a strong 3rd quarter, and continued its positive trajectory, expanding revenue by 7% and increasing operating income by 7%. Underlying gross margin improvements from our composites portfolio drove this expansion. Our growing commercial team continues to use this technology to close new specialty applications to replace metal, wood and glass in various end markets. Such as next generation furniture, where we are having great success. Our composite material is improving the performance of Springs in office chairs, for example, leading to weight reduction, design enhancement, durability and ergonomics, in workplaces everywhere. Our outdoor high performance customers also benefit from the high strength anti corrosion and position performance achieved through the use of composites. For example, composite applications in end markets such as archery, helped to expand our outdoor high performance business 30% in the 3rd quarter. Growth with application like these, despite elevated raw material costs like nylon and butadiene, both up more than 50% over the prior year is allowing our EM segment to increase both revenue and operating income just as they did this past but margins were compressed due to higher raw material and freight costs, as Bob mentioned. Freight costs alone impacted operating income by about $2,000,000. We also noticed the softened demand toward the end of the quarter within the appliance and building and construction end markets as customers delayed orders citing concerns about consumer demand for these applications. This late quarter softening demand largely impacted PP and S, but also POD. In fact, POD volume was flat for the quarter entirely driven by a drop off in orders in September. POD margins were also impacted by freight increases, which are surcharges only partially offset as they were implemented in August. It remains, however, that our distribution business is the premier world class provider in this space with unmatched service. We do not believe we have lost any You will note that all of our segments continue to generate tremendous free cash flow, and we are on pace to deliver over $200,000,000 in total company free cash flow in 2018. We will continue to deploy that cash and organic growth initiatives and accretive bolt on acquisitions. The investments that have and will continue to fuel our growth We've also continued returning cash to shareholders as evidenced by our announcement earlier this month to increase our dividend by more than 11%. We finished this quarter with more than $480,000,000 in available liquidity allowing us ample ability to fund our dividend increases invest in our strategic growth areas, as well as opportunistically buyback shares. And in this recent market volatility and pull back, we will of course take advantage of such opportunities. Thank you. And with that, let me turn the call back to Bob. Thanks, Brad. So to recap, Color and SCM drove another strong quarter of growth at Polygon with both top line and operating income expansion. This was made possible, as I said earlier, by the important investments we've been making in commercial resources, specialty acquisitions, and innovation. With respect to innovation, consider the challenges companies are facing today in terms of consumer expectations around sustainability, what it means for their products and what it means for their business, Consider the challenges associated with the global political arena, which is introducing everything from currency volatility, turmoil in Turkey, and wide ranging tariffs. There have and always will be challenges, but we've built and committed to our proven strategy that not only helps us navigate them but to find opportunities therein. At our Investor Day, we highlighted what's sustainability means to PolyOne in the 4 cornerstones of people, product, planet and performance. And our technology platforms are inherently sustainable solutions for our customers Recycling is clearly at the forefront with local and global organizations beginning to and invest in infrastructure that will enable consumers to increase recycling. And we are there to support them as well as our customers and OEMs with polymer solutions that increase the recyclability of their products. At the same time, leading industry associations such as the American Chemistry Council are taking leadership positions to advocate for the tremendous value the Plastics spring. The benefits when one compares total cost of production and the lifecycle of using and recycling plastics in many instances is very clear. So there's broad work being done by our industry to first educate consumers, OEMs, and governments about the value of plastics, but also to engage deeply to be part of the multi stakeholder solution to an increased recycling at this important juncture. Earlier, I referenced our 4 key technology platforms and how they are well aligned with these important megatrends. Barrier Technologies and Additives improved shelf life. Reduction of material required processing efficiencies and food safety. In composites, which Brad mentioned, can lightweight just about anything, reducing environmental footprint, costs and fuel consumption. We really began building our platforms and capabilities around composites back in 2012. We later expanded our technologies with the additions of Gordon, Polystrand, focused on the next generation materials. And in June of this year, we expanded our portfolio even more broadly adding a high growth, long fiber technology component via our acquisition of industry leader Plastics comp. And we will continue fits as production can be done with less water required and wastewater generated. In our flame retardant material science gives consumers in the environment, increased safety and reassurances, brand markets like wire and cable, and construction to name a few. These are just 4 of the many areas we're innovating for our customers. And as you know, innovation is the lifeblood of a specialty company and our vitality index continues to exceed 35%. Which we view as World class. So I am incredibly excited about our long term growth prospects and emphasize our goals of delivering double digit EPS and increasing return on invested capital. We need to always keep this in mind and not lose sight of our longer term objectives as we along with many other companies faced near term challenges today. Higher raw material and freight costs aren't going away. And it is likely the same can be said for tariffs, which we expect will impact us directly by $5,000,000 on an annualized basis. Given what we import today. Although our business in Turkey is relatively small, we do expect recent turmoil there to impact us in the fourth quarter. But most significantly, customers are increasingly pointing to a slowdown in certain end markets in North America and China, and we are experiencing this firsthand as Brad mentioned in building construction and compliance to name a few. And I want to put September in perspective, so please consider these data points. For PP and S, combined sales for July August were 7.5% higher than last year, but September sales declined 12% compared to last year. For distribution, July August sales were up 15% while September sales were nearly flat. In short, the September drop off was abrupt. And if I look at the order rate for PolyOne as a whole, October for October, it suggests flat sales for the month ahead. And given increased prices, I believe this implies that unit sales are down slightly. Although color and Engineered Materials are expected to expand operating income in the fourth quarter, their growth may not be enough overcome what we are seeing and we believe that this would translate to EPS of approximately $0.41, which is flat with the prior year in the fourth quarter. Hopefully, what we are hearing from our customers and what we are experiencing today is short term. And during times like this, we have to remain even more vigilant strategy. We ensure it's built to last and we stay true to it in good times, and it helps us to navigate the challenging times. We recently completed our annual strategic planning process with our leadership team and board. And while implementing freight surcharges, and staying ahead of raw material inflation was a major part of the conversation. We talked more about PolyOne's underlying businesses. How we must invest and lead the company to achieve strong sustainable performance. We discussed how to maximize the momentum from our commercial investments where to make more and when. We challenged each other on our world class service model and asked how can we make this even better? And it's this type of approach, which has led to hallmark customer offerings like LSS Customer First, and IQ design. So we continue to ask the question and examine what investments into our customer's experience are necessary for our next innovative service offering. We studied our technology platforms to ensure they are still positioned well with high growth megatrends such as light weighting, recyclability and improved packaging. And our investments are aligned accordingly. To ensure our portfolio of solutions is broad and sustainable. We spent a lot of time discussing the customer experience. And what digital tools and service improvements can deepen our relationships with current customers and earn the trust of new ones. We focused on our people, how we will invest in leadership and next generation talent to execute our strategy and real the growth potential here at PolyOne. And of course, we will always always put our customers first. And provide exemplary service to help them innovate and grow We will now open Our first question comes from Mike Sison with KeyBanc. Your line is now open. Hey guys. I guess, Bob, when you think about the headwinds that you're facing both in demand and raw materials and as we head into 2019, what do you think the propensity for polyone to to continue to grow or hit your EPS growth goals at double digits going forward? I mean, obviously, we outlined our expectation for the balance of this year, as well as we can in seeing what we do right now. I think it's too early to comment on 2019, Mike, when we get through the end of the fourth quarter and, report our results in January. I think we'll be better prepared to do that. Certainly, with respect to, the investments that we have made in our commercial resources, where we are positioned from an innovation standpoint, and focus on sustainability. I think we're really well positioned to do that, but given these headwinds, that's certainly a challenge in the short term. Got it. And then in terms of the demand weakness and you obviously have a pretty good feel from your customers. Do you think September, October, maybe some of the fourth quarter will be more destocking? And once they get through that, could those could volumes rebound down the road? I mean, it's possible that there is a destocking effect here, because that is the type of feedback that we got from our customers. Backlog and pretty short window of visibility out into the future. What we did hear from customers was that they had more inventory on hand. In some cases, at the middle of September. And we're planning on taking any more in at this time. So it's possible that there's a destocking effect, which has impacted September and maybe October. But, what I have seen so far is that, I'm not seeing that go up appreciably in November, but again, it's a little too early to say. Great. Thank you. Thank you. Our second question comes from Frank Mitsch with Fermium Research. Your line is now open. Good morning, gentlemen. Good morning, Frank. Hey, guys. Obviously you put in surcharges, I guess, in August, you mentioned in light of the weakening and demand that you outlined, what has been the receptivity to these surcharges? And maybe you can worked it in with your thoughts on when we get margin recovery and expansion, in the businesses? Well, I mean, look, customers I think, 1st of all, customers really don't ever like getting a price increase of any kind, whether or not that's on the underlying material or service provided or surcharge. I think that their understanding of the present landscape, is better now than it was At the beginning of this year, everyone has an appreciation for what we are all facing And as a result of that, our ability to capture those, I think is really high. The reality is though when they got implemented in mid to late to August that just made it, we just couldn't cover everything that occurred in the third quarter. So I think From a freight standpoint, we should be in much better shape in the fourth quarter. What, of course, is still a challenge for us is on the raw material side, which I think we'll still continue to see inflation in the fourth quarter. I see. And then your expectation in terms of when you'll be able to push through pricing to offset those raws. I mean, is that a 1Q 'nineteen event or half 'nineteen event and all your 'nineteen event, what are your thoughts there? Yes. So I'm sorry, I missed the second part of your question there. I mean, of color in Engineered Materials, I think we have really good line of sight to, starting to see margin fansions. And you've seen some early signs of that through the middle part of this year, where I don't think that's going to be the case is in PP and S and POD. So with what I know or what I see right now, I think that can continue into the 1st part of 2019. From the line of Mike Harrison with Seaport Global And Securities. Good morning. Wanted to see if we could dig in a little bit more on what you're seeing Asia, specifically what end markets are you seeing that are moving lower? And are you seeing any signs that that there's sort of a temporary shift going on of manufacturers as they move some production out of China and maybe into other parts of Asia or other parts of the world? Well, we're certainly having, or we're certainly hearing from our customers concerns around tariffs, Mike, and that They are giving consideration to where their production should take place. So I think that's part of it. I think, to my Cissna's earlier comment too, there could potentially just be some destocking, in preparation for where those moves are taking place. So too early to say definitively on where things are going to land. But that could very well explain some of what we saw in Asia in the third quarter. For us, appliance was a comment that we made broadly mostly around North America, but I think that was also impacting Asia. Plus just general industrial applications if I looked at the biggest impact to us in China. All right. And I was wondering if you could talk broadly about what you're seeing in the Engineered Materials business maybe talk a little bit about the impact you're seeing from higher nylon prices, what you're seeing in wire and cable. I know that's been under pressure. Maybe also comment on the auto market? If I can take those in maybe reverse orders and just make sure I don't forget the beginning. But, look, from an auto standpoint, overall, we have a category called transportation when we think about our end markets, but it really is made up of, let's say, 2 thirds traditional auto and 1 third recreational vehicles and heavy duty. If you just look at auto, U. S. Auto, for example, that was for the quarter, actually down slightly. Whereas recreational vehicles and heavy duty were up and they had to kind of canceled each other out for the quarter. Which impacted EM really to the tune of probably just being flat in that end market, where EM is seeing great traction is in composites. When I mentioned the outdoor industry, that does include these off road vehicles that I had mentioned, and that's up. Brad mentioned archery as well. And those are the reasons why we're seeing expanding profits and profitability in that segment. So Pricing is actually, I we compare and contrast where we were in 2017 from a pricing standpoint. We are doing much better this year and getting ahead of it, moving fast. And again, to my earlier comment, customers, I think, have a better appreciation for the dynamics that exist today. It's not to say that they willingly accept these price increases. But I think they're more aware that they're coming. So that's I think being reflected in the better margin performance of this segment. Wiring cable and nylon impact in EM? So the nylon impact, again, I think we're actually ahead on price for a net positive. And then wire and cable, we have some new business that's actually coming to fruition, which is helping us to offset what I think is some slower conditions from a demand standpoint. Wire and cable though, Mike didn't stand out like appliance and building construction did. So, at present, we haven't seen the same, demand effect there. Thank you. Our next caller comes from the line of Colin Rusch with Oppenheimer. Your line is now open. Thanks so much. Gus, can you give us an update on the potential M and A pipeline. And how you see that potentially playing out over the next 6 to 12 months? Are there some later stage processes that you're going through at this point. And are there some assets that you might have to or might want to acquire as folks reconfigure their geographic exposure. Can you repeat the beginning of that, Colin, it broke up a little bit? Sure. Just looking at the state of the M and A pipeline for you guys? Yes. We have at the beginning of the year, I felt like things were a little slow and it's, always amazing how fast things can change in the course of a quarter or so. We have a really good pipeline and, a number of things that we're looking at right now. In fact, a couple of bolt on acquisitions that could come to fruition in relatively short order in Engineered Materials. So obviously, I can't say much more about that and it's never done until it is, but the pipeline is really robust. I'm not seeing anything from a seller standpoint that suggests that this point that they're doing that because of what's going capitalize on that, we will. So pipeline looks really good, some pretty cool specialty bolt ons. Okay. That's helpful. And then just in the PP and S, you could the headwinds, how much of that's coming from Asia and how much of that's coming from the U. S. With the construction slowdown? Well, construction, I mean, PP and S age is pretty small. Operating income there was down some year over year, so that does impact the bottom line. But with respect to the end market observations, that was predominantly at North American 1. Okay, perfect. Thanks so much guys. Thank you. Our next question comes from Robert Koort with Goldman Sachs. Your line is now open. In the context of the $0.41 for 4th quarter, can you give an update outlook for free cash flow generation in 2018? Yes. So Dylan, in my comments, we're on track this year. To generate about a little over $200,000,000 of free cash flow. So that's consistent with what we've been sharing with you. Got it. Thanks. And then I guess going into 2019, can you give it kind of broad outlook some of the puts and takes that we should expect going into next year? Puts and takes in terms of the operating performance or the free cash flow? Free cash flow. Yes. So, I mean, I think, look, the free cash flow in 2019 will be driven by the underlying earnings performance of the company. I do think maybe our capital expenditures, we've got a lot of we've been averaging about $75,000,000 in capital expenditures. I think it might be up next year just with, again, what we're funding in terms of capacity expansions. So that could be additional $10,000,000 or so. Our cash taxes may be up next year, just with the impact of tax reform here in the United States. But net net, I would expect that we would have another year of growth in our free cash generation. Thank you. Our next question comes from Kevin Hocevar with Northcoast Research. Your line is now open. Bob, I just want to a quick clarification. You mentioned that October sales were flat. Was that a POD? You were talking about POD right that. So was that a POD comment or was that a total company comment? That was then moving to a total company comment, but you can make the same statement about, really POD and, PP and S. Okay. Got you. And can you comment too on the slowdown in Asia? You had mentioned you gave us good color on the magnitude of the change in PPNX and PoD, how July August looked versus September. Can you give some type of comments on how the quarter progressed in Asia. Did you see similar, bigger slowdowns in September? Just any color you can provide on how the quarter progressed in Asia and how that's continued into October would be helpful. Yeah. And maybe I'll frame that in the context of the full year as well because I think if you went back too. The full the first half of the year unit sales were up 6% or 7% and for the quarter, they're up to. So it was still a growth period for us, heavily weighted towards July August. And I'm not sure that September effect manifested itself the same way in Asia as what we saw in North America. And there may be something to the destocking comment that was made earlier on the call. But from a sales standpoint, sales in July August were higher than they were in August, but not quite as extreme as some of the changes I mentioned for PoD and PP and S. Okay. Got you. And then in the building and construction end markets, You mentioned, John and Herman, is there destocking? Is it a greater slowdown? The conversation with customers, in some of our building products coverage, it sounds like weather is a pretty wet September. So that caused some slowdowns. Solid that caused some slowdowns in parts of the country. So wondering if weather had an impact at all, if you heard that and I don't know if you heard that that was an impact as well. I mean, it's possible that customers were citing that what I was getting back though, I think more loudly than weather was really around how much inventory they had on hand. It's possible that that was weather driven, but we didn't get sort of the driver of that. We were mostly hearing that candidly, they just got more inventory than they need or projected they do for, the near term. So it's possible that was a factor. Okay. And last question on so obviously raws have been a headwind here for a while and will continue to be I'm wondering if you can give some color on price versus raws, how that's, the net impact of that and how that's trended throughout the year. And as you look into the fourth quarter, has that been kind of stable getting any better as you've been realizing some price getting worse because inflation has been picking up. Like how has the net impact has that been trending? Yeah. So for color on Engineered Materials, it really has trended quite positively throughout the course of the year is Kevin, we had some challenges in 2017 at EM and to start this year. I would say that where we are right now, we are past that relative to pricing being ahead of raws. It's a little hard to bifurcate how the quarter would have shaken out for the company as a whole, not been, of course, for, what we saw in September for unit demand. So PP and S was sort of flat, except behind on freight. So freight was still a really net bad guy for PP and S. Then as you know on POD, for the most part, that's a pass through based on our supplier pricing. Yes. Got you. Okay. Thank you very much. Thank you. Our next question comes from the line of Lawrence Alexander with Jefferies. Your line is now open. Good morning. Can you, given the environment you're seeing, can you discuss a little bit how you're thinking about the pace of new hire, increasing staffing levels and the efficiency of your technical sales force? Yes, I had mentioned that, during our strategic planning session, a couple of weeks ago with the board. I said, Hey, look, there's a really, important theme that I want to convey this year which is around the efficiency of those commercial resources. We have, as you know, put a lot of investment into hiring over the last few years. And I believe that has been a big driver of our sales growth. But I also believe that, you can't just continue to only hire, you do have to continue to see efficiency gains from those resources. And so that was a really important focus I think we are seeing that right now. Lawrence, as you know, when we brought those resources on, our average seller territory size actually went down, right? That went down. So from an efficiency standpoint, that sounds like it's going backwards. But I think we're starting to see that actually begin to improve and expect that to be this case in 2019. Absent the macro stuff we've talked about here. Look, with respect to our hiring plans, No change to what we tend to do from a commercial standpoint. And sometimes when markets are like this, you can find really outstanding people who have been displaced for one reason or another. So at the moment, no changes to that. But I can tell you, without question we will be closely monitoring all of our other discretionary spending and expenditures, including CapEx as we go into 2019. It's not lost on us. We need to do that under the current circumstances. And can you give us a feel for how you think about, the response function if there is further erosion? That is like, is there a certain level of end market decline or customer behavior where you change course or is it more of a gradual iterative approach? Well, one of the things I think that we will be giving more consideration to is that, Brad had talked about CapEx and expectations for any constraints in a couple of places around in the world. It may very well be, Hey, if this continues to pull back and doesn't get better, those capacity constraints solve themselves, unfortunately. And maybe that ends up in a little less CapEx for next year. I really want to keep the long term in focus and think about where things are going to be in 3, 4, 5 years course and make the right decisions in that regard, but it's possible in the short term some of those things, correct in that way. Okay, great. Thanks. Thank you. Our next question comes from Jim Sheehan with SunTrust. Your line is now open. Good morning. In the 2nd quarter, you noted that you had closed 2500 new business opportunities. What did that number look like in the 3rd quarter? Pretty similar number. I would say that if it were July August, my expectation was that was going to be even better. But of course, with the September results, but really indicated that being the case. Great. And on raw materials, what proportion of your engineered materials consists of butadiene as the input. It looks like butadiene prices are starting to ease here. Do you think that butadiene is peaked and do you expect that to start to become more of a tailwind going forward? I would say that roughly 1 third of the segment, is a TPE material, which has a as a basic building block, butadiene going into the styronic block copolymer. So that helps to put hopefully sort of order of magnitude into perspective. And to the extent that butadiene does come down and eases some, I think that helps us. We have seen that in the past for that can be the case in periods of deflation where we can benefit from that. And hopefully that's the case in the near term here. Could you describe the lag that you have between when raw materials peak and when you start to see a benefit? Yes, I mean, look, for the most part, in, on our Color And Engineered Materials segments, that's pretty very close to arm's length transactions as we can relative to pricing. Obviously, we struggled with Engineered Materials in 2017 with some of the spikes. And there was a lag because we weren't able to get the pricing that we wanted to. So I think that with respect to, deflation, that can happen really inside of a quarter. So I think if we had deflation, we could see a benefit for that inside of 60 to 90 days. Thank you. Yes. Thank you. Our next question comes from Rosemarie Morbella with Gabella and Company. Your line is now open. Thank you. Good morning, everyone. Good morning. I was wondering, Bob, when you, your comments about the capacity, expansion or shortages in certain categories. Could you give us a feel as to what the categories are? I'm going to do this by well, I'll do it by region first, which is that, where we were most capacity constrained really was in China. And so we had been spending some time looking at where we would invest in a new facility. To, not only handle that constraint, but also to support future growth. Obviously, with everything that is going on and China, we have to take that into consideration. And if things change materially, that could change our perspective on that. But, so China was number 1. Number 2 really relates to being able to, broaden our composites penetration into Europe and also in assets. So have you changed your mind in terms of adding capacity in Europe? I understand that you may have vis a vis China, but about Europe. Can you give us a feel as what the economic environment demand environment is there? At this point, no, we haven't changed our perspective on Europe. I really haven't changed the perspective on China either. If optimistic about the future and where we'll be long term and still make sense to invest. So nothing new, we're aware of what's going on right now. I need to take that into consideration. But in the near term, I don't think it changes anything for us. And when you are talking about slowdown in China, does that encompass all of Asia or is it specific to the country? I mean, most of Asia for us is Mainland China. Of course, a lot of things that we make in China find their way to the rest of the world based on where our customers shipped them. So mostly, I'd say this was a China effect. India actually really did well for us despite a sort of devaluation of the rupee, which we've seen but mostly this is a China set of observations. Thanks. And if I may ask one last question, you'd talked about the decline in September for building and construction demand. Could it be that inventories that your customers had been pre buying in anticipation of price increases and therefore it would be a kind of a short lived type of period as opposed to being the industry itself being in trouble or slowing down? I mean, that is a possible explanation for some of the inventory. I don't think all of it inflation has been with us now for some time. And so where we may have seen that at the beginning of the year, know that that has carried forward to where we are today. With respect to, what our customers were telling us, it was mostly their concerns around end market demand, as being the bigger reason for concern and not taking additional product in September. All right. Thank you. All right. Thanks. Well, that concludes our calls. And questions. We appreciate everybody taking the time to listen in on our third quarter results and look forward to updating you on our fourth quarter and full year results in January. Thank you. Ladies and gentlemen, that does conclude today's conference. Thank you very much for your participation. You may all disconnect. Have a wonderful day.