Earnings Call: Q2 2018

Jul 24, 2018

Good morning, ladies and gentlemen, and welcome to the PolyOne Corporation Second Quarter 2018 Conference Call. My name is Liz and I will be your operator for today. At this time, all participants are in a listen only mode. As a reminder, this conference is being recorded for replay purposes. This time, I would like to turn the call up to Joe DeSalvo, Vice President, Investor Relations. Please proceed. Thank you, Oz. 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 be of current expectations or forecast 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 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 posted on the PolyOne website where the 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 second quarter of 2018 to the second quarter of 2017, unless otherwise stated. Joining me on our call today 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. Well, thank you, Jill, and good morning to everyone joining us on the call today. I'm very pleased to report that PolyOne continued our strong start to 2018 with record 2nd quarter adjusted earnings per share of $0.71 up 13% over the prior year. Our Color Additives And Ink segment led the way with a 17% increase in operating income. It was a comprehensive broad based effort by this color segment as organically every region improved their year over year results and we benefited from the recent acquisitions of ECAP, Mesa and Rowland. Our Engineered Materials segment also delivered year over year operating income and margin expansion and did so for the first time since we began experiencing significant raw material inflation last year. In addition to seeing pricing gains, the segment benefited from operating income growth in our composites platform which has been an expansion of our commercial organization as well as acquisitions and they are paying off not only in Engineered Materials, but across the entire company. For the second quarter, revenue increased 12% over last year with 6.5% being organic. We continue to emphasize both quality and quantity as our sellers customer service reps and technical teams are collaborating to actively pursue new business opportunities. And oftentimes this has meant shrinking average seller territories to spend more time polyone specializes in niche specialty applications that are often smaller in size, but higher in margin. To put things in perspective, we closed 2500 new opportunities this quarter alone. And oftentimes, we are doing this by leveraging cross selling across businesses at existing accounts. One great example last month was in Engineered Materials, which earned supply material for IV catheters in China. This opportunity originated from a seller in our distribution segment who recognize one of their customers needed advanced healthcare materials. They engaged with our SCM team who acted quickly and won the business. It was a great team effort, a cross sell and another telling example of what we call 1 PolyOne, showcasing the combined power of our expansive portfolio. There are many, many examples like this and they underpin our organic sales expansion, but acquisitions also play an important role and expanding our portfolio of specialty solutions. In this quarter, we were excited to welcome Plastics comp to the PolyOne family. Plastic comp expands our composites platform with long fiber technology. And we have known and admired Steve Bowen and his team for a long time, and had many years of collaborative work history together before joining forces as 1 a couple months ago. Plastic comp as a leader in high performance outdoor applications and also holds attractive positions in healthcare and consumer end markets which fit perfectly with PolyOne. We invested in this business because the growth potential is tremendous. On a standalone basis, but also in terms of what we can do together. We seek to expand our offerings outside the U. S. And an additional market such as transportation as we capitalize on the megatrends of light weighting and material reinforcement. Our overall Engineered Materials portfolio has been a source of pride for PolyOne for over a decade and instrumental to our specialty transformation. Which is why this segment's performance over the previous 18 months or so had been frustrating as margins were impacted by raw material inflation and challenging end market dynamics. While we stayed the course, continue to invest in commercial resources, and completed the recent acquisition of Plasticscom as I just discussed. And so it's pleasing to see this segment deliver year over year operating income growth of 8% and margin expansion. But we still have a lot of room for improvement and growth, which I expect customers and investors will see as upside for us in the future. At this time, I'd like to hand the call over to Brett to provide a closer look at our financial performance. Well, thank you, Bob, and good morning, everyone. I'd like to first start with our GAAP results. In the second quarter, We reported GAAP earnings of $0.64 after tax charge of $6,000,000 and legal costs. Adjusting for special items, EPS from continuing operations for the quarter was $0.71 per share. Up 13% from $0.63 in the second quarter of 2017, marking a new PolyOne record. As Bob mentioned, this improvement was driven by strong operating performance, particularly in our Color business, which delivered a 17 color generated an impressive 22 percent improvement from 2017, with both underlying organic growth and contributions from acquisitions. I'm very pleased to report that Rutland and Mesa continue to exceed our expectations. Orders for these businesses are very strong, and integration is ahead of schedule. Key actions include improving safety performance, bringing our technology teams together, collaborating for and operational excellence. We're also investing in new lines at their facilities to meet increasing demand and to help us pursue incremental business opportunities. As Bob mentioned, Color's organic performance shows impressive results across the board with Europe leading the way. Given all the attention on plastic in our industry, and in Europe, in particular, it may come as a surprise that this was one of our best performing regions for Color. The team has closed 44% more opportunities so far this year compared to 2017. Many of which are going into beverage container applications. Engineered Materials also had a strong performance in Europe this year, and this has clearly delivered generating $166,000,000 of sales for this segment as a whole, a new quarterly record. As Bob said, we have been working on many facets of improving SCM's performance. And so these results are very encouraging. Particularly when you consider the backdrop of raw material inflation and supply shortages Looking specifically at our SEM business in Europe, nylon prices are up 34% year over year in the region, but the team was still able Mix has also improved with wins in low smoke non halogen products. We highlighted our Investor Day in May. Which had been a major focal point for PolyOne. This has been a growing market due to new wire and cable regulations in Europe. It's no longer the wire and cable formulations of yesterday. It's becoming more and more technical and PolyOne has taken full advantage by leveraging our material science expertise and broad solutions portfolio. Raw material inflation and supply chain shortages weren't isolated to Engineered Materials as all segments experienced these impact. In addition, freight costs have increased substantially and we saw this most heavily impact our North American businesses in polyone distribution and Performance Products And Solutions. Distribution continues to deliver world class service for its customers, as it reached all time high revenues of over $320,000,000 for the second quarter. That's an 11% increase over the has executed above and beyond normal market for industry norms. And they have done this with innovative go to market services such as inside sales, web based lead generation and expert logistics to name a few. But with all these positives, the bottom line results were disappointing as this segment was particularly hard hit by increases in freight costs, and supply dynamics. Incremental freight cost alone on same store sales were up $1,500,000. And timing of price increases these are short term dynamics we will overcome. The fact of the matter is that in North America, drivers and trucks are in short supply and diesel costs are going up. We are implementing surcharges that will incorporate these costs as we don't see these pressures going away anytime soon. And similar dynamics exist for Performance Products And Solutions, where despite a 4% increase in sales, OI was flat to prior year due to increased freight costs and elevated raw material inputs. The incremental freight impact alone reduced OI by one $500,000. But while these additional costs impact our year over year comparisons, all of our segments continue to generate tremendous free cash flow as they always do. I'm pleased to note that we are on pace to deliver $200,000,000 to $220,000,000 of total company free cash flow this year and we have approximately $485,000,000 in liquidity. This allows us ample ability to fund our organic growth initiative and add bolt on acquisitions, while also funding our expanding dividend and opportunistically buying back shares. Thank you. And with that, I'll turn the call back to Bob. Bob? Well, thanks, Brad. For those of you who weren't able to attend our Investor Day in May, I invite you to review the webcast posted on polyone.com. You'll hear more detail from each of our segment presidents Brad and me about our long term strategy to drive double digit EPS expansion each and every year and improve return on invested capital. One aspect that unfortunately can't be captured in a webcast is the excitement, buzz, and experience of holding this live event in conjunction with the NPE Plastics Exhibition, which was a resounding success. We generated nearly 250 qualified leads over the 4 day period, some of which have already passed through our sales qualification process and are entered in the PolyOne sales funnel. Investor Day was only 2 months ago, and we are delivering on our commitments. We continue to invest in commercial resources, which are up 3% from where we finished last year and 4% over the prior year, putting us well ahead well on track to deliver 6% to 8% annually. These resources as you have seen are crucial to generating our organic growth going forward. But these aren't just sellers and this is an important point because I think that is often assumed. The reality is that we have added more resources in technology than in any other category. We have done this because increasing the health and vitality of our products and solutions is absolutely critical to driving our long term success and we continue to But of course, we don't have the market cornered on good ideas and we have and we'll continue to pursue attractive bolt on acquisitions that bring us new or complimentary technology. Finally, we'll achieve our goals by developing future PolyOne leaders through our leadership development programs and a global economic environment or competition for talented human capital challenges all companies, We aim to stand out as a great place to work and as a great place to build careers. We are already doing this by empowering our associates to be leaders and courageous decision makers. We are making sure each and every employee knows we understand and appreciate the value of their contributions as we All of this and everything we've reviewed today is about creating a world class sustainable organization built around people, products, planet and performance. The 4 elements of sustainability we outlined at our Investor Day. This was a great second quarter for PolyOne and by building the right product portfolio and sustainable business practices, it's going to be another great year. Much of this call focused on understanding the past quarter, which we were very pleased with all things. But I want to end putting it in context of where we're going, not just next quarter, but over the longer term. And I'll remind everyone of the key drivers and commitments we highlighted at our Investor Day. Our commercial investments Our M and A strategy and integration playbook is proven and adding value with more of the same to come. Our technology platform have us positioned very well with high growth megatrends and our organic investments are aligned accordingly. And these activities through excellence and execution have us fully committed to achieving our stated goals of delivering double digit annual EPS growth. And expanding return on invested capital to 16% to 17%. This past quarter represents another step in that direction and I look forward to updating you again in about 3 months on our continued progress. That concludes our prepared remarks. We'll now open the call for Your first call comes from Mike Sison with KeyBanc. Your line is now open. Bob, in terms of EM Engine Materials, it looks like you've turned the corner there. The growth looks are you sort of caught up with raw materials and do you expect that business to continue to grow in the second half of the year in terms of EBIT? Yeah. I think that, we did put a lot of pricing actions in play, really at the end of last year, And on our last call, we said that, we've got another round of inflation and I don't see that going anywhere. But up. So pricing continues to be an area of focus for us and, believe that we did get ahead of it this quarter, but recognize that we got a lot of work to stay in that position for the balance of the year. I think we're a little bit ahead of where we thought we would be, but look at the second half is still having OI growth in Q3 and Q4. Great. And then maybe just on acquisitions, maybe talk about the environment a little bit. It's an area that really certainly could boost your growth longer term. Any thoughts in terms of size, multiples? Is your pipeline pretty active? I think the pipeline is in really good shape. We continue to look at the preponderance of those happen to be smaller bolt on acquisition. Not to say that we wouldn't do something that's larger in size, but it just seems that the ones that have a tendency to be actionable, our smaller in size, likely family owned or entrepreneurial on. But that fits really well with us in our invest to grow strategy. As you know, Mike, we really don't look at if the primary investment thesis is cost synergies, that's probably not a good reason to do a deal. And for us, we typically look at ways that we can add commercial resources to help drive growth. So, I'd expect to see more of the same. And right now, that's what the pipeline looks in front of us. Great. Thank you. Your next call comes from Mike Harrison with Seaport Global. Your line is now open. Hi, good morning. Hi, Mike. This is morning. Just wondering if you could maybe address a couple issues around the raw material and freight costs. Number 1 is, as you're focusing on your pricing efforts, how much do you feel like that dragging on your volume growth to the extent that you're prioritizing margin recovery over volume growth in some situations? That's a really good question. And I did feel that way for the majority of last year and The first quarter of this year, I felt like it eased a little bit, but not much in the second quarter. And that's something we had talked about in internally. Look, as you know, in PolyOne, our marketing organization is the one that sets prices but our sellers are the ones that and energy. And I do think that that can stifle growth. It's not a missed opportunity, but I think it's what it means is that even our customers have a hard time focusing on new applications and application development in an environment where just seems that there is no end to raw material inflation. So I can't put a number on that for you, Mike, but I can tell you that's a stress on the organization but it's also a stress on our customers. I think everybody feels the same way. All right. And it seems like you're mentioning, with regard to raw material cost inflation that you're seeing some supply shortages So are the issues that you're seeing right now related to incurring higher costs to get supply, or are you seeing situations where you're unable to get supply? And if you're unable to get it, how does that affect your business? I would say in very limited cases that we've been unable to get supply And what's happened though, of course, with limited supply in areas like nylon or floral polymers, It just means we need to do a better job of planning in advance to make sure that we have what we need When you combine those supply chain shortages with challenges around shortages in trucks and truck drivers, that really just makes the entire supply chain more complicated. And so where we've seen an impact this year is that our on time delivery has fallen 95% to 91, largely because we're just not getting stuff in when we had planned. So I don't believe that we missed any business as a result of the supply chain shortages, but I do think it added a lot of complexity. To our ability to deliver for our customers. So we managed through that very well, and I continue to see that to be a challenge for the second half of the year. Alright. Thanks very much. Sure. Thanks. Your next call comes from Colin Rusch with Oppenheimer. Your line is now open. Thanks so much. And I guess we won't we want to start with the Plastic Comp acquisition. And can you talk a little bit about, how you see that helping build out the advanced composite portfolio and what the timeframe is around lightweighting and mill replacement opportunities that you're seeing on the market right now? Yes. Look, for the most part, when we have talked about composites at polyone and our advanced composites flat form. We have done so around really 2 technologies being thermosets and thermoplastic composites, which primarily exist in the form of tapes that can be shaped and formed. What Plastics account brings us is long fiber technology, which can be injection molded. And it's something that we had partnered with Plastics comp in the past. For application development. So we've got a long history with them, but, I really must defer to them in terms of their area of expertise because they are far better at it than we are. So I feel like it just adds an extra dimension of composite offerings to our portfolio, in terms of how the 3 work together. And I think your next question may have been around, maybe just sort of the near term advancement of that platform and strategy. As you know, we've made a lot of investments over the last 2 or 3 years with respect to composites and have effectively about breakeven and in the second quarter, we did earn a profit on our composites platform. And that's partially due to a little bit from what we got from plastic comp, but most with improvements in polystranded gordon. So I think all signs are pointing in the right direction. And what I love about composites overall, as you know, is it really does represent the next generation of material replacement or reinforcement for metal glass and wood? That's incredibly helpful. Thank you so much. And then just looking at the incremental opportunities in EM around cost management, can you talk about areas of focus. I want to think kind of in a couple of different avenues over the next 3 to 6 months and then over the next 12 to 18 months. If you could talk about specifically where you think some of those areas are that you can really drive some incremental reduction? Well, I mean, look, as you know, lean 6 Sigma is a huge part of our culture and, sort of the underlying basis for formal process and efficiency improvement. There is always work for us to do in that regard. I think the last 18 months, though, we have been consumed with really 2 singular or 2 areas of cost increases, which is been on the raw materials themselves. And ultimately, the freight and logistics costs to get material to us and to our customers And so those are the two areas where we're focused on most. And the reality is that we've had to spend a lot of time with our customers having pricing discussions. So I think we're turning a corner here with respect to showing some margin expansion, but it's It's early. We still got a lot of, I think, inflation ahead of us here for the balance of this year that we'll need to work on. And so it's a little it's difficult to see how that plays out for the near term. But what I would tell you that matters more than anything else is ultimately the products and services that we provide and focusing on specialty niche applications. If we had more commodity products, I think we'd be in a worse situation than we are. But I think that's our focus on specialty that allows to actually advance and grow in this environment. Your next call comes from Bob Koort with Goldman Sachs. Your line is now open. Good morning. This is Dylan Campbell on Good morning. So when you guys talked a lot about GSM and kind of the improvements you're making there, can you just give us a little bit more context of In 1Q, you saw a greater 200 basis point decline year over year, but 2Q margins were actually open. And I know you mentioned pricing initiatives at the end of 2017. So can you kind of walk us through differences between 2Q and the successful improvements you had there as compared to what happened in the first quarter? Yeah, I actually think you did a pretty decent job of summarizing it right there in terms of, there wasn't any magic to the quarter or unique item or event that I would point to. I think that We started diligently working on pricing actions in the second half of last year. And not to the extent that we were offsetting those raw material costs. And we did have some pretty significant spikes from an index standpoint that really were sort of announced in Q1, Q2, impacted us in Q2 and Q3 last year. And the reality of that was still a lot of that was rolling over. And I think you just saw the tail end of that in Q1. Now there were other areas of inflation. And I'd say this is probably the change, which was that we really saw a steep increase in as Brad mentioned, a 34% increase in nylon. And so I think a new wave of inflation was upon us. But we already had so much, I think, momentum in action around pricing that it just made it easier for us to deal with that than we did last year. So I really just look at it as a continued execution of the actions we put in place at the end of the year. But I also think that the market is really actually starting to realize this isn't going to change and that inflation is here to stay. And that we're all going to bear the burden of these higher costs. Got it. That's helpful. And for probably one consolidated, can you just help us there's $90,000,000 of incremental or $90,000,000 or so incremental cost of goods sold in 2Q 2018 versus 2Q 2017? You just kind of provide in dollar amount or a rough breakdown on how much of the increment was raw material inflation versus higher logistic costs? Yes. I mean, on the, if I just looked at what was sort of a maybe a pure inflation around raw materials, because we obviously had, growth this year, right? So I need to, this is taken that into consideration. Probably about $20,000,000 to $25,000,000 in raw material inflation alone. And then freight costs in total were up $4,000,000 or $5,000,000 for the quarter, but probably 3 of that was what I would describe as pure inflation to help with that in perspective. Your next call comes from Kevin Hocevar with Northcoast Research. Your line is now open. Bob, to that last answer, 20,000,000 dollars, $25,000,000 of raw material inflation this quarter, what would be the expectation for that going forward based on the different moving pieces in the commodity in the commodity baskets you're seeing out there? I don't think that's going to change. I mean, predicting the future is always of course a very very difficult thing to do, but with what we're seeing entering. The 3rd quarter right now, I don't think that's going away anytime soon. So everything else held equal, we're probably talking about similar numbers. Got you. Okay. And then, curious too, so, a decent chunk of your products are designed to replace things like steel metals, things like that. And some of those are seeing quite a bit of inflation. Obviously, you're seeing inflation is well. But kind of curious how that dynamic is playing out with your customers or some customers more open to discussing changing materials given the the dynamics that we're that are at play or wondering if that's helping at all. Well, I think to the extent that other materials become more expensive that, that helps our case and our cause. One of the questions we often get is we'll look if tariffs impact the price of metals, for example, does that make your offerings more attractive. And I think that it certainly can. This is longer term kind of stuff we're talking about. And I think that it's a great opportunity for composites to step up and play a bigger role in in replacing metal glass and water reinforcing those materials ultimately so our customers can spend less on them. So I do think that there is a really good opportunity and that composites plays very well into that trend. Okay. Got you. Thank you very much. Your next call comes from David Catter with Baird. Your line is now open. Good morning guys. Thank you for taking the question. First of all, can you remind us kind of on the dynamics or pricing increases. Once you kind of get the ball rolling, is it easy to implement there and kind of what are your expectations going forward? How easy is it to implement I don't think I would ever describe a price increase as easy under any condition. One comment that I may have made just a few moments ago is that I do think that the market is much more aware that inflation appears to be a longer term trend. So when we saw some spikes at the beginning of last year, there might have been some and all this will pass or go away. And in 1 or 2 cases, like maybe butadiene, that was true. But in all other areas and base resins and nylon, it has been that's been not been the case where they continue to go. So I wouldn't say it's ever easy, but maybe the market understands that we seem to be in a permanent inflationary environment at least for the near term, which might mean that the conversation is less of a surprise, but it isn't easy. Right, right, understood. And then maybe quickly on the global trade environment, how do you guys for that? And how are you guys viewing kind of a potential tariff situation? Look, when we look at our own manufacturing book print. For the most part, we make what we sell into those markets where our customers exist. So for example, when we're serving customers in China, in all likelihood, we're making that product in China. And so when we look at the direct impact on our own supply We always have to look past ourselves and say, how does this impact our customers? Because I think many of them are impacted by tariffs and that could be a bigger potential issue and or opportunity. And I just think as this tariff thing plays out, companies are going to spend more time thinking about where they're going to manufacture. And for us, serving our multinational OEMs well, wherever they need us to as a part of our differentiation. So however, this plays out. I think we just need to stay nimble and make sure our customers get the service they need. And maybe last one for me on the acquisition front, would you ever consider using stock for an acquisition? Is that always going to be something that you do in cash? I mean, not for these bolt on acquisitions, we have ample liquidity and cash flow to fund those. It's really a great source of pride for us candidly as we looked over the last 6 or 7 years when you see how many bolt ons we've done and bought back shares and increased our dividend. And on all of that with a relatively flat net debt to EBITDA ratio of 2.6% or 2.7%. So In the near term, I don't ever see that being a possibility. In the event of a significant or much larger acquisition, that would be the case. But as I've commented earlier, such a deal is just not in the pipeline right now. Understood. Thank you. Your next call comes from Lawrence Alexander with Jefferies. Your line is now open. Hi, good morning. It's Dan Rizzo on for Lawrence. How are you? Hi, Dan. Good morning. You mentioned, strength in Europe being a little surprising. I was just wondering if I know the changes with potential bans on single use plastic or just the changing environment at all has any impact on you or your customers? Either positive or negative? Yes. Look, absolutely. And right now, as you know, plastics are, I think, under a act or certainly a great deal of scrutiny. And look, when we see the images of marine litter or marine life, the and entailed in debris. We all shutter at that and recognize we have a responsibility to take better care of our planet So I think there's a lot of work that all of us in this industry need to do to help. I think that the proposed ban in Europe is aimed at trying to accomplish that. When we look at the 3 categories that are identified for market restriction, we don't participate in those Where we do see some potential changes coming is in beverage containers, which is is a significant end market and application striction. It's presently targeted for redesign. And that means things like caps and lids must be attached to the bottle or the beverage container and that separate waste collection management recycling awareness initiatives needed to take place. So at present, we're doing what we can to help the industry improve awareness around recycling. And as those types of changes take place for beverage containers, We think we're well positioned to take advantage of that. So, I think we're in pretty good shape in that regard, but probably mark changes to come in the future. Okay. Thank you for that. And then just one other question. You mentioned just now that net debt to EBITDA has been at 2526. I don't know, just with a potentially rising industry environment, would you look to move that lower? Or I mean, you're just comfortable with where you are keep kind of doing what you're doing, so to speak? Yeah. And we have had additional interest expense this year on our floating rate debt, and that's One of the things that impacted the quarter, that doesn't change our perspective on leverage and I'd say look to the extent that we had the opportunity to use cash for a bigger deal. As we've said all along, we could see that leverage ratio going past 3 and being quite comfortable with that. So I don't see the changes in interest rates really impacting our view on leverage at this time. Thank you very much. Your next call comes from Dimitri Silverstein with Longbow Research. Your line is now open. Good morning guys. Congratulations on a good quarter. Hi, Dimitry. Couple of questions. First of all, I just want to understand the gross margin cadence in your distribution system, or distribution business, inflating resin pricing typically to be a positive for margin, but new margins have been comping in a gross margin line negative for the both quarters this year so far. So I'm just wondering if it's a mix issue, if, perhaps wrong and the inflationary environment is not positive for margins in that division. Can you talk a little bit about what sort of how should we think about margins for the distribution business going forward? Right. So directionally, you're correct. And on point, which is that in an inflationary environment, typically you would expect to see that we could that we would see a little bit of margin appreciation as a result of selling lower cost inventory into that higher price environment. But not all pricing is the same on our distribution business. And really what you have this year in terms of comparing Q2 to Q1 or Q2 this year to Q2 last year is that Prices went up last year on businesses where we've effectively got the ability to do what I just described. But this year prices have gone up where we're effectively earning a fixed sense per pound, if you will, Dimitry. And so it is a mix issue, but it's not because of selling 1 or more of the other. It's because of just how the pricing evolved And last year, in second quarter, I think we had very high margins. 7% for us, I think, is a really good quarter and pretty high. That reflects that. We've just really kind of had the reverse impact this year, even though prices have gone up. So as I think about the balance of the year, I think the distribution business is going to be challenged with additional freight costs and those dynamics. And I think you're going to see being flat at best for the balance of this year with respect to OI compared to prior year. Got it. Got it. Thanks. That's all for Bob. And then just on the composites business, you made a lot of deals there that the slightest one obviously expands your capabilities even further. You've got long fiber. You've got Cheryl fiber. You've got thermoplastics, thermostatings. Is your composite business does it have now all it needs to have or a lot of the things that it needs to have to be sort of turning the corner more convincingly in terms of growth profitability? Or is there still investment to be made? And it's still a little bit of a green banana at this point? I still think we can benefit from additional investments. And I'd tell you, we're diligently focused on those from both an organic and an M and A standpoint. As it happens right now, I think with the addition of plastic comp, we just completely accelerated our ability to deliver LFT solutions for customers where we couldn't in the past. So that's a real home run for us from an offering standpoint. When I look at the investments now, it's really about expanding those technologies that we have. And so that's not to say that we couldn't do something different from an M and A standpoint or add something else but we've made really good strides here, I think, with those recent acquisitions. But in fairness, there's markets that we don't really paid in like aerospace for composites, which, other companies really kind of own that space, we don't. So when I look at the universe of composites, there are certainly additional capabilities that exist out there that we don't have. Let me ask you the question a little bit differently, Bob. What is preventing this business unit within your engineering materials from being a profitable operation before the end of this year? Okay. So that's really just time question. And look, we invested a lot, as you know, in Gordon and Holly Strand and Glassforms before that. And that's really all about driving sales growth. So we've put a lot of resources into it. If you took those 3, so I'm excluding plastic on from this equation. If you took those 3 alone, In total, we had a commercial team of probably 10 to 14 and now we've got 45 to 50 And so what I really love about where we are is we're identifying a lot of applications and these are applications that require specification and time to ultimately bring to fruition. This is a revenue play. Right now, Dimitry. And so it's just all about time with respect to driving those specifications. And when we do, I think we're going to see pretty serious expansion in profitability. I was happy to see us go into the black here on that business in the second quarter of this year. So that's a major step forward. Okay. So basically we just need now revenue or volume leverage, if you will, that cost model to get your profits to become visible. Correct. Okay. Thank you. Yes, thanks. Your next call comes from Jim Sheehan with SunTrust. Your line is now open. Thanks. In distribution, could you comment on where you see customer receptivity to these surcharges you're putting in place to offset the freight inflation? And also, what percent of that business is on fixed margin per pound? Well, I guess the comment on customer receptivity is probably the same as I made earlier on the call about pricing in general, which is that nobody says thank you for a price increase. And so it is unfortunately, it's a distraction for our team. It's something that we have to do. And look, I recognize that it's a challenge. So I don't know how to describe that environment as being good or bad. It's always tough. And at this point, I'd say we're probably looking when I look at the underlying business within distribution, probably 25% to 30% of that that's probably based on cents per pound. Great. Thanks. And on raw materials inflation, you called out floral polymers as a particular area where you're seeing some supply shortages. What are you seeing in terms pricing and tightness in that market in the second half of the year? Keep in mind, I mean, that's a really small business for us. But one that, is also a really high performing business around for us, it's about doing colors, okay. So we're doing colors for Fluoropolymers. And ultimately, we get the fluoropolymer as really the base resin or carrier, if you will, to bring color to our customers who are then themselves, manufacturing a product with a Fluoropolymer resin. So it's impacting them with their ability to get the Fluoropolymers and us. But prices are up across the board. The most significant increase though for us really in the second quarter, as Brad mentioned, was really around nylon is up about 35%. Your next call comes from Jason Rodgers with Great Lakes Review. Your line is now open. Yes. To what extent did pricing offset raw material on freight costs in the quarter company wide? And how should we think about that pricing cost dynamic in the second half of the year? Yes. I mean, I think that pricing did offset raws and, and it really does vary by segment because the reality is I think we probably got there and, color on Engineered Materials, but we did not, in distribution, for example, and also had margins contract a bit in PP and S. So I think when you look at those margins, that helps to sort of tell that story. And then your forgive me, your second question was what? Oh, the pricing cost dynamic in the and a half, in which you're putting those? Yes. I mean, look, I think I don't think this is going to change much and I hope that I'm wrong and it goes down. But at this point, as we go into the third quarter, it seems like inflation is here to stay. Certainly diesel costs are going up and there is a shortage of trucks and truck drivers, which is making things more complicated for all of us. So moment, I don't see any change in those dynamics. And is the target for EPS, is it still around that 15% level for the year? I'd say, look, the only thing that's really changed since we talked at the last quarter really is the change and I'd say everything pretty much held equal, with the following adjustments. I think distribution is down some as I just described. That's being offset by a little bit better performance from EM, but let's call that a push. And so what we're really left with is, weaker, foreign currencies because when we were on the call at the end of the first quarter, the euro was at $1.24 roughly at about $1.16. So in cents terms, that's probably about $0.03 a quarter for the balance of the year. But otherwise, we're still on pace to do what we said. So on a net basis, I guess, Okay. Thank you. Your next call comes from Rosemarbelli with Gabelli and Company. Your line is now open Thank you. Good morning, everyone. Good morning. Bob, you mentioned some challenging markets, and I was wondering if you could give us a little more details as to which ones and why are they more challenging than others? If I said that, I think I was just referring to the dynamics that we're experiencing with, supply chain and raws. That was not a comment about end markets or anything that we're seeing specifically in that regard. So overall, I think the economy is actually doing pretty well and that's true for all regions and across our businesses. So for the most part, I think I'm positive on the markets that we've play in and participate in. So, if I said that, then I think it might have been related to that not on the end markets. Okay. And then so staying with that particular topic, so looking at competition. So you are raising prices more or less catching up with the raw material costs, you need to get over those increases in order to see a margin improvement. What is the competitive environment? Do you see your competition doing the same thing? Do you feel you are losing business because others are happy to sell the pounds at a lower price? I do think that the competition is experiencing the same inflationary factors that we are look, it's always companies oftentimes say, well, geez, we're trying real hard, but the competitors are not. And I think everybody right now is probably doing their best to try to get, price increases to help offset the raw material dynamic. I'm not always sure I can say that when you experience a spike like we did in maybe the 1st or second quarter of last year. Different companies have different ways of reacting to something that they may perceive as temporary. But I think with inflation, everyone's perception now that it's here to stay that you're seeing a lot more acceptance by that in terms of competitive dynamics as well as how customers are perceiving that. So, and I don't know if that's a good way to look at things, but it seems like more people are kind of on board that inflation is here as they And looking at your freight surcharges, are they, I mean, shouldn't they be fully offsetting the the higher cost in that particular category? Well, they should be. I will let you know how that goes at the end the third quarter is, for many of our businesses, the increases are effective August 1st. So a little behind where we should have been, I think, but that's also something I think around the market sort of perception of that it's really here to stay. And not a short term dynamic. So I think we'll have more to say on that on our next call. Okay. And if I may one quick one, What is the size of your composite businesses currently? As you know, on it roughly about, I think, $80,000,000 at our Investor Day. And you can pick up in the 10 Q how much revenue we had from plastic comp in the month and kind of extrapolate from that, but that's about where we are. Okay. Thank you. All right. Well, thank you very much, Rosemarie and for everyone who had questions on the call and for everyone who participated, We look forward to updating you on our third quarter performance in October. Take care.