Good morning, ladies and gentlemen. And welcome to the PolyOne Corporation’s Third Quarter 2014 Conference Call. My name is Tracy, and I will 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 being recorded for replay purposes. And at this time, I would like to turn the call over to Isaac DeLuca, Vice President of Investor Relations. Please proceed.

Thank you, Tracy. 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 maybe 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 actual results to differ materially from those expressed in or implied by the forward-looking statements. Some of these risks and uncertainties can be found in the company’s filings with the Securities and Exchange Commission, as well as in yesterday’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 the company describes the non-GAAP measures and provides a reconciliation of them to the most comparable GAAP financial measures. Operating results referenced during today’s call will be comparing the third quarter of 2014 to the third quarter of 2013, unless otherwise stated. Joining me on the call today is our President and Chief Executive Officer, Bob Patterson; and Executive Vice President and Chief Financial Officer, Brad Richardson. I will now turn the call over to Bob Patterson.

Thanks, Isaac. Good morning to those of you joining us on the call today. I’m pleased to report that despite European economic headwinds, we achieved another strong performance during the third quarter. We delivered a record $0.49 in adjusted earnings per share, that’s a 36% increase over the prior year and a third quarter record. With these results, we have achieved yet another significant milestone in our company’s history. PolyOne has now delivered 20 consecutive quarters of double-digit year-over-year adjusted EPS growth. That’s five straight years of strong double-digit adjusted EPS growth, a truly impressive accomplishment that we are suddenly proud of. I have no intention of seeing come to an end. Now Looking back we have done exactly what we said all along the way. We put our customers first in everything we do. We followed our four pillar strategy with our exception. We emphasized excellence and execution as a differentiator for us in the marketplace. Quite simply we have lived our core values of collaboration, innovation and excellence. When the street began five years ago, PolyOne was only a glimpse of the company we are today. Our transformation had just started to accelerate. Our innovation engine was getting warmed up. We invested heavily in commercial resources and marketing, technology, and sales. We also expanded our trustee portfolio of offerings with the acquisition of ColorMatrix, Glasforms and Spartech. These investments are now paying off. The robust pipeline of new products, enhanced customer solutions and underlying mix of earnings, that has never been stronger. Today, our innovation pipeline has $1.7 billion of market potential new products, the largest it is ever been. Some of these new products are real game changers that can quickly expand our presence and higher margin applications in market such as healthcare, consumer and packaging. Mix…

Well, thank you very much, Bob, and good morning, everyone. I’m pleased to share that our team has been working very hard on a number of fronts and delivered another outstanding performance during the quarter. As Bob mentioned, it was a very busy quarter for us, a one that stands out as another true statement that our mixed improvement strategy is delivering results. Regardless of economic conditions, we find a way to win and with the 36% increase in EPS versus the prior year, we have now been winning for over 20 consecutive quarters, five years of tremendous double-digit EPS growth. I’ve been with PolyOne for almost a year now and have developed a real appreciation of how mix improvement supported by a 43% vitality index drives results. This quarter is a perfect example. From a headline standpoint, revenue declined 5% versus the prior year to $958 million. But with the exception of weaker economic conditions in Europe and depressed sales to the wire and cable markets here in the U.S., this strategy of revenue optimization is all by designed to help us achieve and deliver better bottomline results. Let’s examine our revenue picture more closely. We took action in July to exit certain product lines in Brazil and you are all well aware of our ongoing initiatives to rightsize [Technical Difficulty]. These actions combined led to a pruning of $53 million of revenue yet operating income expanded 24%. Weaker economic conditions in Europe and lower demand in wire and cable account for another $8 million. Outside of these effects, revenue increased about 1% primarily coming from our targeted end markets, transportation, healthcare and consumer. This growth coupled with ongoing benefits from our work winning Lean Six Sigma program accelerated Spartech synergy capture and tighter controls in efficiencies related to…

Thanks Brad. It was indeed another great quarter notwithstanding the weakness we are seeing Europe. Our now five-year streak of double digit adjusted EPS growth is something we are very proud of but by no means are we content. It’s a streak we intend to continue to build upon, as we continue executing our four-pillar strategy across all of our businesses. I’m very pleased to have an exceptional management team in place with the experience, skills and leadership to continue this great momentum. We are working hard to build on management team through internal advancement and putting our executive team members in positions where our company and customers need them most. At the same time, we’ve got great programs in place to provide coaching and mentoring to a group of director-level talent that has the potential to perform at an even higher level. Our leaders are always delivering and not just in the day-to-day operations, but also on strategic projects that are helping us to drive growth. The third quarter included several highlights where our team introduced new products, improved operational efficiencies and expanded thoughtfully on high growth regions of the world. In September, we were honored to be selected by Uptime Magazine for its 2014 Best Emerging Maintenance Reliability Program Award. PolyOne earned the honor as a result of our three-year initiative to increase material supply reliability to our customers, improve the on-time delivery, increased equipment and asset longevity, all while improving safety. We successfully implemented our reliability program as an extension of our award-winning Lean Six Sigma program. Also on September, we opened a new facility in Pune, India. This state-of-the-art facility operates manufacturing the solid and liquid color and additive formulations. It includes development labs and houses the sales and customer service center for the region. Products…

(Operator Instructions) Your first question comes from the line of Frank Mitsch from Wells Fargo Securities. Please go ahead.

Good morning and congrats on a solid quarter. Bob, has the statute of limitations past to talk about New Jersey’s college football bidding Michigan’s?

Yes.

Damn, damn, we should have this call earlier. Hey, you know obviously lot of concerns with Europe, can you remind us as to how big that is for the overall PolyOne portfolio and what implications may that have in terms of being able to achieve the $2.50 for 2015? Is everything in place do you believe to get there?

Well, as a reminder on the size of Europe for PolyOne as a whole, it’s about 15% to 16% of our global revenues. But I would remind everyone that it’s about 35% of our two highest margin specialties businesses, color and engineered materials. So those are the two businesses that can be mostly heavily impacted by Europe. And we’ve seen some of that already in this third quarter. So look the slowdown in Europe certainly gives us some concern as we enter [Technical Difficulty]. We expect to deliver strong double-digit adjusted EPS growth. And look we have seven goals for 2015, including our margin targets and return on invested capital. And we are not changing any of those at this time.

All right. Full steam ahead then. And then obviously, the topline is coming off and obviously, a large part of that is pruning. You had mentioned Brazil. Latin profitability, can you talk about that? And when do you think we might actually get past the point of materially pruning on profitable businesses so that investors can see honest to goodness topline growth?

Well, with respect to Brazil, we are at about breakeven coming out of the third quarter. Our expectation is to get to single-digit type return on sales in 2015. We’ve got line of sights to getting there. With respect to pruning, some of the larger actions are obviously associated with the acquisition of Spartech. And as long as we are doing acquisitions like that, I would say the pruning actions could be large. But certainly with respect to our organic businesses, I don’t believe we will be seeing ‘material’ pruning actions going forward.

All right. Terrific. And then just to remind us, I think Spartech synergies were $0.07 Q1, $0.08 Q2, what do you think it was in Q3?

It’s about $0.08, maybe a touch better than that in Q3.

Thank you so much.

Thank you for your question. Your next question comes from the line of Mike Sison from KeyBanc. Please proceed.

Hey, good morning, guys. Nice quarter.

Hey, Mike. Thanks.

Good morning, Mike.

Bob, you talked about having line of sight in terms of meeting several of your goals for the segments in 2015. Can you maybe just give us some inside of where you feel most confident in terms of those goals in particular segments?

Yeah. With respect to our margin targets, I would say we’ve got a great degree of confidence with respect to getting inside or exceeding those ranges. If you look at where we are in the third quarter, clearly we’ve done the best in our Color segment and have the greatest opportunity to exceed the range in that business. Specialty Engineered Materials had a breakout quarter this quarter despite the challenges that we saw in Europe, so I am feeling very good about them. And I guess overall what I would say Mike is we feel very, very confident by what we are seeing from a margin target standpoint. There is no doubt that Europe impacts us most heavily in our highest margin businesses, but I still think that we are going to get inside or exceed the ranges as I just discussed. But from a growth standpoint, it could impact the topline going into 2015.

Okay, great. And then for the last couple years, acquisitions have played important role in generating growth for you guys. Can you give us an update on what you’re seeing in the marketplace? Are there any attractive opportunities that you’re looking at that could help ensure double-digit growth longer term for you?

Yes. We are always looking at deals of course and certainly those that help to expand our specialty portfolio of offerings. We have seen in the last I would say six to nine months or so that valuations have certainly ticked up to make it a bit more of a seller’s market, notwithstanding what we have seen perhaps in the last month or so. So we are just going to be prudent and make sure that we spend a fair price for deals as we look at them. I can’t comment specifically on any one particular transaction we might be looking at today.

Okay. And then finally, your ability to grow earnings here is impressive given sales declines and you talked about why. Just fundamentally, how long do you think you can continue to do that and how much more legs does the mix ability story have? And just want to get a feel for, at some point we probably should see some sales growth to get earnings growth, but maybe there is a lot more legs in the mix story than we think?

Well, what we tried to do this quarter was to give some more details around the specific drivers on revenue changes versus the prior year by articulating how much of an impact we believe this Spartech pruning had, our decisions around exiting certain product lines in Brazil, and the wire and cable markets that we’ve seen in the U.S. Ultimately, if you look at North America, we believe, growth was at about 3% and so we are seeing organic growth in the targeted end markets that we’re focused on and would expect to continue to see strong operating income growth on top of that. As I pointed out in the past, one thing to remember is that, we’ve got pockets of excellence in our Specialty platform and we’ve got other areas that have yet to get to our Specialty level of performance and I’ve highlighted Brazil in the past. We’ve taken actions to improve that and some of our other operations around the world specifically in Asia are not yet up to the operating margins we expect for this segment as a whole. So its not necessarily going to be a pruning story but there is a lot of opportunity to improve margins yet around the world.

Great. Thank you.

Thank you, Mike. Your next question comes from the line of Bob Koort from Goldman Sachs. Please proceed.

Thank you. Good morning. [Technical Difficulty] I was wondering if you could talk a little bit about what’s happen in Europe. I mean, I generally see your business has been a little less volatile than some other? So going from up 5 to down 5 seems pretty dramatic for your product line? Can you talk about maybe what happen with daily sales trends through the quarter, so is this more of a tough year-over-year issue or was there some meaningful sequential declines? And then also I know you mentioned Russia and Eastern Europe is a high margin area? Was the weakness in Europe confined a certain geographies?

Well, just to put things in perspective, one of our largest markets served in Europe is packaging. The recent article that came out on the 13th of this month, highlighting specific weakness in Germany’s plastics packaging industry were nearly 30% of producers expecting a decline in sales for the upcoming quarter or months ahead. Packaging is a big market for us and it is the biggest one that we serve in Europe and it’s also some of our highest margin business with respect to our liquid color and additives. Specifically, what we have in Eastern Europe and in the Russia specifically is about $15 million to $20 million in revenue and it is very high margin additives business for us that was disproportionately impacted in the quarter. So there is no doubt that that weighed on our results this quarter. Sequentially, Bob, yes, we are seeing a decline in sales in the third quarter versus the second quarter, so it’s not just a year-over-year impact.

And I’m wondering if you could talk in your distribution business in the U.S. Have you seen any influence from the declining oil price in terms of purchase deferrals as customers might wait to see they can capture a little lower resin prices going forward?

We might have seen that back in the second quarter and talked a little bit about some of that behavior taking place at the end of specific months. I don’t think we saw any of that here in September. But as I always point out, the fourth quarter is one where everyone, customers and suppliers alike, of course, are always looking at thereon and inventories with an extra degree of scrutiny. So that may happen in the fourth quarter but I don’t know yet.

Right. Thanks, Bob.

Yeah.

Thank you for your question. Your next question comes from the line of Laurence Alexander from Jefferies.

Good morning. I guess, first question, do you -- are you seeing any end markets where as we think about the bridge into 2015, we should be think about significant acceleration, either because of improving end market trends or market share gains, strategic product penetration?

Well, I think from a regional perspective, Lawrence that North America is going to continue to be strong. We haven’t seen any indications that that would not be the case. For us that’s heavily influenced by packaging and consumer electronics again. But also transportation and construction, so transportation has been doing very well this year, expect that to be the same into ’15. Construction has been somewhat of a disappointment in 2014. For us specifically, that’s single-family residential starts, which has done a little bit lower where we thought they would be and I don’t know that that’s going to pickup next year, but it could. So, I mean, that could be a good guide going into 2015.

And then as you think about the trade-off between your margin expectations where you’re coming in little bit ahead of plan and the demand headwind? Is the -- are your targets for 2015 benchmarks that we should judge you against, or are those goals that are easily achievable and there is a margin of error? Or how do you see the sensitivity, or is this going to be something that we need to revisit sort of in the February, March period when you have a little bit better sense of trends after the Chinese New Year?

I think -- make sure I understand your question here. I mean, with respect to the margin targets that we have for 2015, let me first say, those are not the end game targets for our businesses. They are really a stepping stone to ultimately getting our businesses to higher levels of profitability. At our Innovation Day in May, we talked about our specialty businesses having the potential to get to and exceed 20% return on sales. We still believe that’s the case. And we believe that our targets that we set for 2015 were aggressive at the time we set them, but I have confidence in our ability to get inside or exceed those ranges next year. I don’t have any different view on that. I’m not sure if I answered all your questions on that. But with respect to the demand conditions that we’re seeing right now in Europe, certainly that impacts color and EM the most but not to the point where I’ve got concern over those margin targets.

Thank you.

Thank you for your question. Your next question comes from the line of Mike Harrison from First Analysis. Please go ahead.

Hi. Good morning.

Good morning, Mike.

Just looking at the EM segment and the SG&A line in there, it looked like you were able to take that number down pretty dramatically, down to around $21 million in the third quarter. Can you talk about the actions that you took there and whether something around $21 million is a sustainable number going forward or was there something unusual?

The SG&A relates between [Technical Difficulty] to EM. Actually if you look across to all of our businesses, you would see some downward trend in SG&A. And just to be clear is really just G&A. And actually if you were to go in and look at our spending in the third quarter, our investment in commercial resources actually went up by $4 million across to all of our businesses. So we continue to invest on the commercial side but you are seeing a lower set of G&A cost, principally associated with the Spartech realignment, with the costs that we’ve taken out in Brazil and those are the two biggest effects going on. And so what you see in GSCM, I think is a good number to think about going forward.

And then in terms of the Brazil business that you exited, the $53 million, how would that breakout across segments and income? What was it?

Mike, just to be clear that the $53 million that was in my remarks was both the Spartech pruning and Brazil that is a combination. So Brazil was, call it, $6 million of that $53 million.

That makes more sense. And then the last thing I want to ask about is in PP&S. It sounds like the key drivers there is shifting away from being kind of a housing leverage story and more toward a mix shift tapping new markets, new applications, where vinyl is advantaged over other materials. How was that process unfolding and as you look at this quarter, was it more of the mix story that was driving the margin higher or is it volume that’s driving the leverage or both?

So really we are -- first of all, let me just give our PP&S team a lot of credit for their work over the years to help and diversify our end markets. That’s only being accelerated under Michael Garratt’s leadership and we really are focused on innovating in that business and getting us into healthcare, packaging and consumer applications, much like our specialty businesses. So we’re seeing that as a good guy from margin expansion story in Q3. We are also seeing the effect of some of the rationalization activities have taken place with respect to Spartech. A big piece of Spartech’s business went into the PP&S platform, lot of that business is transportation, appliance related, out of Mexico, and our business has done a great job of improving the profitability of that as well.

And -- sorry maybe just one more for Brad, can you talk a little bit about the impact that you would expect for FX on the top and bottom line, as we see a stronger dollar here?

Right. Certainly, I think in the third quarter, FX was not much of an impact. But as we look to the fourth quarter, certainly what happened to euro when it started to decline in mid-to late September, that will have an impact, a negative impact on the company in the fourth quarter.

All right. Thanks very much.

Thank you for your question, Mike. And next question comes from the line of Dmitry Silversteyn form Longbow Research. Please proceed.

Thanks. Good morning. I just like to follow-up on Mike’s question. I think I’m not sure what he was looking for but I’m looking for more of a sensitivity to change in FX to whether you not, you had some EPS sensitivity to every cent that change your FX or percentage, change your FX? That would be helpful.

Yeah. About 10% move in the euro is $3 million or $4 million roughly on an annualized basis for us.

Okay. Okay, 10% is $3 million to $4 million. All right. Great. Second question, I just want to clarify on the repurchase activity. You talked about completing the Spartech related repurchase by the fourth quarter, but them having $10.3 million still left on the authorization. Is that correct?

Yes.

Okay. I’m sorry, go ahead.

I just wanted to emphasis that one we’re always looking to strike a balance off course with how they return cash to shareholders. Really pleased with increasing our dividend in the last quarter, it’s something we’re very proud of, since we initiated in 2011. But certainly the amount we’ve being spending on share buybacks is larger percentage of that number. And we expect to continue to be buying back our shares particularly in an environment where the M&A options may not be as many as we’d like.

Okay. You mentioned in your PP&S business that you are looking at market outside of traditional PVC related housing market. But housing, I think is still a big part of what PP&S sells into and given your comments that construction industry or construction market in the U.S. haven’t been as strong as you expected it. We’ll see what 2015 looks like. But is the sort of the slowing housing starts having an impact on PP&S’ ability to get you 2015 goal? And if yes, what other business would need to do better and have a better line of sight in doing better to compensate for that and still get to the 250 and earnings that you are looking for?

Yeah, look we go back to, when we set our 2015 targets and we’ve talked about where we believe [Technical Difficulty] we sighted, I think $1.250 million. And one thing that’s been I’d say significantly different from our expectations at the time was the mix of starts and being more focus now on multi-family units versus single residential. And that’s not a good mix for us, as we do mostly single residential. So Korea has the headwind to the 2015 goals but as we look to all the leverage that we have in terms of how they expand their earnings per share between now and next year, I’d say we’ve got to get certainly more growth from our specialty business and continue to implement Lean Six Sigma everywhere around the world, specifically talk about some of our regions not yet being at our margin expectations and those will be key drivers for us going into next year.

Okay. And one final question European in the area yesterday talked about seeing a little bit benign raw material input cost particularly in Europe and with more oil prices and hopefully that leading into your downstream products and including some of the [reps] (ph) you guys buy, sort of what did you experience in the quarter in terms of your raw material cost and how do you look for that to develop over the next two, three quarters and if there is a difference between dynamics in North America and Europe, that would be helpful as well?

Yeah. I mean, off the top of my head, I can’t say the specific difference between Europe and North America. I know we did see an uptick in costs around PVC and plasticizers and butadiene a little bit. And I expect some of that to continue in the fourth quarter. Off the top of my head, I can’t give you a really good split between North America and Europe. So just setting those trends generally.

So overall you look further to raw material costs are probably gone up a little bit in the third quarter, would you expect that trend to continue then?

Yeah. I mean, if I took the whole basket of raw material costs, they have absolutely gone off.

Okay. Thank you.

Thank you for your question. Your next question comes from the line of Rosemarie Morbelli from Gabelli and Company. Please proceed.

Thank you. Good morning and congratulations.

Thanks, Rosemarie.

Just only the clarification first on the FX, your 10% change in euro versus dollars hits you -- well hits or helps by $3 million to $4 million. Is that on the revenue side? And if so, what is the impact on the net income or per share side?

The $3 million to $4 million was an operating income number, so it roughly translate that into $0.03 or so for the year.

Okay. Thanks. And so now looking at the decline in Europe, you said that of course it declined in Q3 versus Q2. But if you look at the third quarter on the monthly basis, did you start seeing it in the August or did you start earlier than that? And then, what are you seeing in October? Is the decline kind of accelerating, or is it at the same type of pace?

Probably really started seeing it in August and our initial reflections on that were, I’d say, mixed in the sense that August of course is typically a slower month for us in Europe, but it was slower than it was last year. So we really had some heightened concerns about it and then it slowed down even further than that in September. I am not seeing any kind of meaningful change in that trend in October to change our views on things right now.

Okay. And then looking at the working capital, Brad, you talked about more improvement coming. Could you help us understand where you are getting that lower working capital? Are you working on inventories? Can you give us a feel for what else needs to be done?

I think we’re a 10.3% on a trailing 12 months to-date basis. And when I talk about more opportunity, it really is on the acquired businesses that had been made in the last couple years of the color metrics business and the Spartech business. So that’s where we’ve been looked to drive kind of further improvements in the working capital.

Okay. So this is really part of getting the synergies in those operations.

Correct.

And you also talked about getting Spartech on SAP that seldom goes smoothly. Do you have a team in place that has already done that for the rest of PolyOne and are you -- do you have a high conviction levels that it won’t create any issues?

Yeah. I have a very high conviction level. I recognized kind of maybe some of the history that you might have, but I looked at our historical implementations here at PolyOne and we have a very, very good track record. We just went live for example on color metrics in North America in August. We’ll be going live on color metrics in Asia here next month. So we’ve had a very, very good track record of, one, meeting our deadlines, but, two, is staying within our overall authorization. So I feel very good. We’ve got a great team in place that is driving the Spartech implementation. So I have no worries about that.

Great. And then if I may ask one last question on the tax rate. What is your target? Where do you think you can get let’s see one or two years out?

Well, I think over the next several years with some of the planning projects that we have, I would like to see us get to the low [Technical Difficulty].

Okay. Thank you very much.

We’ve got time for one more question.

Thank you for your question. Your next question comes from Jason Rodgers from Great Lakes Review. Please proceed.

Thanks for taking the question.

Hi Jason.

Hello. Just looking at the topline for the quarter, could you break out volume versus pricing and mix?

I would just refer you to our 10-Q where you’ve got that by segment and in total.

Okay. The Q is out, okay.

It’ll be out in five minutes.

Okay. Thank you.

That’s the final question. Then I’d just like to thank everyone for dialing in today and your attention to our comments is certainly your support. We really have a great story. Here at PolyOne, we are very proud of achieving our 20th consecutive quarter of double-digit adjusted EPS growth, that’s five years of this great streak that we don’t plan on seeing come to an end. We look forward to sharing our results in the fourth quarter with you in January. And thanks again for dialing in today.

Thank you for participation in today’s conference call. This concludes the presentation. You may now disconnect. Good day.