Good morning ladies and gentlemen and welcome to the PolyOne Corporation’s Second Quarter 2015 conference call. My name is Stephanie and I will be your operator for today. At this time, all participants are in a 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. At this time, I would like to turn the call over to Eric Swanson, Director of Investor Relations. Please proceed.

Thank you, Stephanie. 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 expectations 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 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 second quarter of 2015 to the second quarter of 2014 unless otherwise stated. Joining me today on the call is our 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 Eric, and good morning. I’m pleased to report record second quarter earnings per share of $0.57. That’s a 12% increase over the prior year. We achieved this record performance despite continued weakness in the euro and challenging market dynamics facing our industry. The weaker euro alone reduced earnings per share by $0.02 when compared to last year. We don’t report our results on a constant currency basis, but if we did, adjusted EPS would have grown by 16%. It was a very strong quarter for our established specialty segments, color additives and inks and specialty engineered materials, both of which set second quarter records for operating income and return on sales. They were joined by an outstanding performance from distribution, which delivered record return on sales of 7.2%. Year-over-year, our adjusted earnings per share has now increased for 23 consecutive quarters, an impressive streak few companies can claim. We understand and work hard to find ways to win and to grow despite a challenging environment. For the quarter, our adjusted consolidated operating margin increased to an all-time high of 10.4%, which underpinned our double-digit growth. Expanding profitability, even in trying times, should come as no surprise to those that have watched our specialty transformation unfold. We are one quarter away from delivering six years of quarterly EPS growth. If you only remember one thing from this call today, it should be this: our specialty strategy continues to deliver. Although progress may not always be linear, as evidenced by our turnaround of the former Spartech businesses, there is no doubt that specialization is the right path for our customers, our shareholders and us. As a specialty company, we are investing in innovation like never before. Our current pipeline of new innovations has $1.9 billion of market potential. Our vitality index,…

Thank you Bob, and good morning everyone. I’m pleased to provide additional comments and color on our second quarter results. The difficult macro conditions Bob alluded to provided another opportunity to showcase the strength of our specialty strategy. Driven by record performances from our color, engineered materials and distribution businesses, we overcame notable headwinds including the weak euro and a slowing Asian economy to deliver a record adjusted EPS of $0.57 per share. On a GAAP basis, EPS increased from $0.33 to $0.74. Special items in the quarter resulted in a net after-tax benefit of $15.9 million or $0.17 per share, and included the following: a tax benefit of $23.9 million primarily related to our ability to use foreign tax credits on our U.S. federal income tax returns, and pre-tax realignment charges of $7.4 million primarily related to Spartech. Our color additives and inks business posted exceptional results with operating income increasing despite a weaker euro, which negatively impacted year-over-year operating income by over $2 million for the segment. Continued strong growth in our high value services and our additive portfolio drove improvement in operating income to $39.6 million for the quarter. This represented a return on sales of 18.2%, the highest in the company and an improvement of 170 basis points over the prior year. Europe led the way in color with a 26% increase in OI despite the weaker euro. Global specialty engineered materials also posted strong year-over-year improvement with operating income of $20.1 million. This was a second quarter record, and return on sales increased to 14.4% from 12% last year. At design structured and solutions, our plan to improve the business is working. The beginning effects of our operational improvements are just starting to hit the bottom line. Operating income increased 40% over the first quarter…

Thanks, Brad. Our specialization strategy continues to drive our strong performance. It is our focus on innovation and exemplary service for our customers that truly defines who we are and differentiates us from the competition. In June, I was in Shanghai to celebrate our most recent investment in innovation with the grand opening of our new innovation center. This facility is located in a high tech industrial park in Shanghai and will help us better serve our customers while further enabling innovation and speed to market, and it also helps to bring our specialty businesses together to foster cross-business collaboration. This has never been more important in Asia as the economy shows signs of slowing. In the first half of 2015, our sales in Asia declined 1.5% versus the prior year; however, operating income grew 9% and operating margins expanded more than 140 basis points. Our team’s ability to increase profitability in this environment speaks to the importance of mix improvement and the investment in innovation needed to support it. At a time when others might be cutting back on investments in Asia due to macroeconomic concerns, we are continuing to invest so that our customers can innovate and grow. Asia is the right place to be long term, and we remain confident in our ability to grow in the region. In May, I travelled to Europe where I saw firsthand our efforts to drive growth in an environment that continues to be plagued by macroeconomic uncertainty. Our team is doing a fantastic job proactively managing through this environment, including ongoing challenges in Russia, the euro devaluation, and the recent crisis in Greece. On a constant currency basis, operating income in Europe increased 9%. This tenacious approach to business continues today and our core values of collaboration, innovation and excellence…

[Operator instructions] Our first question comes from Mike Sison with Keybanc. Your line is open.

Hey, good morning guys. Nice quarter in a tough environment.

Thanks Mike.

Bob, you noted double-digit EPS growth in ’15 again. If you take a look at the second half of the year and kind of frame up where consensus estimates are at, it’s pretty big growth - 30%, so any chance you can give us a little help what type of growth you can generate in this environment?

Yes, I mean, coming out of the first quarter, which was very challenging for us, we have not seen customers replenish inventory after the significant destocking in Q1. We don’t think we made that up this year, and then we see some continued weakness with a slowing economy in China. At this point, we’re not predicting any change in Europe or the euro dynamic, so despite these challenges, we expect our EPS can be up about 10% for the full year for 2015, and that sort of helps you frame out how we see things for the next six months.

Right, great. Thanks. Then on DSS, I just wanted to--you won $25 million new business, sales are down a lot in the second quarter. What gives you confidence that you can maybe stop some of the sales leakage on the outside? I think previously you thought operating margins could improve to a good level by the fourth quarter. Any changes to that outlook?

Well one, I hadn’t previously mentioned any attrition data in the past, but I know that’s really narrowed down to a very small number now, so I know we’ve got a handle on either leakage and/or pruning, depending on what the reason was for the losses. Those gains are all positive and should start to contribute to the second half of the year. Previously we had talked about possibly getting back to 7 or 8% exiting the year. With where we are right now, I think that’s probably a challenge, but we could get closer to 7% in Q4. It’s really dependent upon how fast we can bring in the new business gains I just referenced.

Great, thank you.

Thanks Mike.

Our next question comes from Frank Mitsch with Wells Fargo Securities. Your line is open.

Good morning, gentlemen, and hey Bob, thanks for referencing that Guns and Ammo Magazine. I also thought the article on Winchester’s train and defend was pretty interesting in that issue as well. I haven’t heard you talk about home runs much. Can you expand upon that - time frame, order of magnitude, et cetera? This is new news coming from you.

Yes, to put things in perspective, when I’ve referenced singles or doubles in the past, as you know, oftentimes specific applications can be $1 million to $2 million, maybe $3 million. We’ve talked about some of our sales in consumer markets being up around 10 or so, and I think this has the opportunity to be twice that high on an annualized basis.

And care to venture a time frame?

Well, I think that we could see maybe it would be something in the low single digits here over the course of the next 12 months, and ramping up after that.

All right, great. How should we think about the interplay on raw materials and pricing? That’s something that we thought we’d be seeing a bit more of a benefit, et cetera, so how should we think about the raw material benefits for PolyOne in the back half of 2015?

Yes, well I think in terms of the level of raw material benefit that we’re going to receive has really been realized through the first half of this year. I wouldn’t see any further margin expansion beyond that, just as a result of anything happening with raws. In fact, some raw material prices are starting to tick up. I’d also point out that while it’s difficult to quantify, for us in the second quarter there were obviously a multitude of force majeures in Europe. I don’t believe that affected us directly, but I think it affected a lot of our customers and their ability to produce, and as a result we’ve juggled our supply around quite a bit. So I wouldn’t have anything incremental in the second half of the year from where we were in this first half.

All right, terrific. Lastly, you mentioned in the discussion on PP&S that there was some products moving to Spartech that didn’t occur, and that was part of the reason for the results being off a bit. Can you expand upon that? How big is DSS for PP&S?

First of all, it really was one specific customer, and when we did the acquisition, we knew there was a piece of business that would be going away as a result of that customer bringing certain manufacturing in-house. As you know, inside PP&S we do have some contract manufacturing business that actually grew substantially when we acquired Spartech, and there was one major customer that we knew would go away. I thought that would have happened last year; as it turns out, it really came out sort of at the end of ’14 and the beginning of ’15. But the net addition, I think, from Spartech into PP&S for what we acquired in that side was probably around $150 million initially in revenue.

Okay. All right, terrific. Thank you so much.

Our next question comes from Bob Koort with Goldman Sachs. Your line is open.

Thank you, good morning.

Hey Bob.

Bob, I think you mentioned that that de-stack occurred in the first half as customers maybe reacted to the economy and the drop in oil. We’ve had oil in a range here for quite a while, but I think you mentioned you don’t expect any restocks, so what is it that’s different about the way customers are managing working capital, or do you sense there’s fear there’s another leg down in commodity pricing and maybe they’re waiting for that?

Specifically on restocking, I was really referencing what we just saw specifically in the second quarter in the sense that, while I think orders picked up in Q2 vis-à-vis the first quarter, it wasn’t a result of actually putting more product on the shelves. So I think customers are cautious, I think they are running with lower inventory levels than they have in the past, and that may ultimately be as a result of being cautious about the economy overall.

I think you referenced Asia having some challenges. I think you mentioned sales were down just a bit in the second quarter. I guess that’s 15 or 20% of your specialty businesses over there. Can you characterize--I guess maybe I was under the presumption you had more of a consumer orientation to some of those applications, but is it a pretty broad representation across the economy there? I would have thought maybe you could still eke out some volume growth as you’re further penetrating those markets.

Well, you’re spot on with respect to consumer is an important market for us. Much of that actually makes its way back to the U.S. and Europe from a manufacturing standpoint - it’s just made in Asia, and I would say that was a market that was down for us in the second quarter on consumer products. But in the other observations, I don’t have one other specific end market that I would point out as being uniquely different than the others there.

And if I might ask Brad, you mentioned the use of cash flow. Obviously the share repurchase ramped quite a bit in the second quarter. Is that opportunistic? Should we expect similar rates if you’re not buying things? Can you help us, barring an acquisition, what the capacity and preference is for that pace of share repurchase?

Yes Bob, again, we purchased 600,000 shares in the second quarter. Again, I would characterize that, as you just did, as opportunistic, and I would see us continuing at that pace.

Great, thank you.

Thanks Bob.

Our next question comes from Ben Kallo with Robert W. Baird. Your line is open.

Hi, this is Tyler Frank on for Ben. Thanks for taking my question. Outside of Europe and outside of Asia, can you just comment on how things are progressing here in the U.S. and then in Mexico as well?

Sure. I’ll say first of all, it’s really been in North America where we have seen really the most significant impacts of raw material volatility, specifically the rapid decline in the first quarter, so that really set things back in that quarter. We did see a pickup in the second quarter, but year-over-year sales were still down primarily as a result of lower selling prices in our distribution business, which is for the most part set by the market and/or our suppliers. From an end market standpoint, I would sort of echo a comment that I made earlier, which is that I think everyone is being very cautious at this point. Generally speaking, I think people are optimistic about the North American economy still moving forward in a positive direction, but at what level we’ll see growth, I think it remains to be seen but probably lower than people thought starting the year.

Great, thank you.

Our next question comes from Dmitry Silversteyn with Longbow Research. Your line is open.

Good morning, guys. A couple of questions, if I may. First of all, I’ve seen a decline in margins of engineering materials in this quarter, certainly on a sequential basis, and given that color and additives saw a sequential increase in margins, it seems to be a little bit of a breaking of a pattern. So can you talk a little bit about what’s driving the engineered materials profitability mix, whether it’s particular regions or markets or something non-recurring year-over-year or sequentially?

Yes, really it’s three things. The first is we did see the first quarter was a stronger quarter for engineered materials with respect to sales in the consumer market than what we saw in Q2. The same thing is true for our composites business, which had a very strong first quarter. I’m not drawing any conclusions from either of those two data points that somehow there’s a bigger problem, and I really just think that’s just a quarterly fluctuation. Then, the third element of their performance vis-à-vis Q1 was some incremental spending on sales and research and development, which is really twofold. One is we have hired additional sellers, and secondly we did launch our new innovation center in Asia, some of which is borne by the EM segment.

Okay, got it. So if I’m looking at engineered materials for the second half of the year, should I be thinking about sort of mid-teens to EBIT margins, rather than high teens that you’ve been able to deliver for colors?

I believe that EM still has the opportunity to expand margins between now and the end of the year. You did see some mix impact in Q2 again that was slightly unfavorable to Q1. That can recover in Q3 and Q4. It may not get to the same level that color is. I expect color finishes the year ahead of where EM is from a total percent of sales standpoint.

Got it. In terms of acquisitions, you mentioned--you talked about your pipeline being solid. Are you looking at sort of bolt-ons, or are you looking at some of the transformative deals? And if it’s the transformative deals, how do you think about them in the wake of the experience with Spartech over the last couple of years?

Well first of all, I would tell you that the experience that we’ve had with Spartech doesn’t in any way change how we feel about that acquisition. I still feel like it was an outstanding deal, and while we’re having a challenging year this year, that is just illustrative of how challenging the business was that we acquired and how much time, energy and investment it would take to turn it around, much in the same way it was, I think, with the early years of PolyOne. So my reaction first and foremost is I’m very pleased that we did the Spartech deal. If I had another opportunity like that, we would try to make it happen. So I’d say we are looking at transformative deals, but we’re also looking at bolt-ons. It has been a challenging environment in terms of being a buyer and trying to be prudent about price. I believe that real, true specialty companies can command a premium multiple, and that’s okay to pay that; but right now, the expectations seem to be for very elevated multiples for just about any deal that’s out there, so we’re being cautious right now with respect to M&A. I think that will pay off in the long run.

Okay, so in the meantime, I guess share repurchases would be the preferred destination for capital in the absence of M&A?

Well, what’s happened is that over the course of the last year and a half, obviously we’ve picked up the remaining shares from Spartech. If we don’t see acquisitions that we think make sense, then we’ll continue to return the cash to shareholders through share buybacks.

Okay, thank you, Bob.

Our next question comes from Jason Freuchfel with SunTrust. Your line is open.

Hey, good morning. Did weather conditions in the quarter either positively or negatively impact demand for any of your end markets in the quarter?

I don’t think there was anything material to write about. It’s possible that heavy rains here in certain parts of the U.S. had an impact on construction, but nothing I would cite as material or large.

Okay, and in the DSS segment, do you still expect new equipment to be operational in the fourth quarter?

I don’t think the new equipment will be in in the fourth quarter. I think it will be sometime in 2016. I don’t have a revise estimate for you on when that will be in, but we will shortly.

Okay, great. Thank you.

Our next question comes from Mike Harrison with Global Hunter Securities. Your line is open.

Hi, good morning. Bob, just to follow up on that previous question, can you kind of walk us through what operational changes are going on in the DSS segment kind of between now and the first quarter, first half of 2016, and also comment on where the on-time delivery number was in Q2 relative to the number you mentioned at your investor day?

Sure. To take the first part, we have really been focused on improving operational efficiencies, and by that I really mean specifically reducing scrap generation. In some of our larger sheet production facilities, we still are producing what I would deem to be an unacceptable level of scrap, some of which is due to having the outdated equipment, again to reference the previous comment on getting new lines, but some of that is also just getting up to speed with our own leadership teams and operational teams as those are, in many cases, in new locations from where they were last year. We’re making absolute progress in those areas in terms of reducing scrap and improving the operational efficiency. With respect to on-time delivery, I would say that we probably moved that up maybe 2 or 3% in Q2 versus Q1, but certainly starting to get better coming out of the end of the second quarter.

All right. The $25 million of new business that you won in DSS, is that part of the $60 million that you expected to win during the course of this year, or was that incremental?

That was part of it.

Fine. The last question for me is just looking at the top line down 12%, and I’m sure this will come out with the Q, but can you break out what the FX and pricing headwinds were, and also talk about where we are still in terms of pruned business so that we can try to get to some sense of where the underlying volume growth or organic volume growth was? Thank you.

Yes, overall FX was just a little bit below 3%. If you look at what I sort of pulled together as the total impact of Spartech and/or ongoing integration with all the Spartech businesses, that’s probably 6.5 to 7, and then raw material impact is another 3. So all those are going in the negative direction, and that leaves you with about a percent, let’s say, which is really the Accella acquisition plus flat from an organic standpoint beyond that.

Thanks very much.

Our next question comes from Rosemarie Morbelli with Gabelli & Company. Your line is open.

Thank you, good morning everyone. Bob, looking at the 7.2% margin on the distribution side, this is really high; and you commented on that as well. Was it something specific to this second quarter, meaning a change of mix or changes that you have done internally in terms of your operations?

Well, if you went back in time, Rosemarie, to some of the comments that we made in 2014 about our distribution performance, we really didn’t feel like we had as much discipline as we should around the rigor with which we actually processed the transactions, incorporated pricing, et cetera, so I feel like we’re doing a better job overall in that respect. To some extent, this is also the impact of just what happens in a quickly decelerating sales price environment, where to some extent you can see higher margins as a result of just lower selling prices, so that’s an element of this too that I’d say plays out in the second quarter. For the most part pretty much across the board, our suppliers set the price in this particular industry, and we’re trying to just manage the on-hand inventory quantities that we have the best that we can.

Okay, so we should--I mean, assuming that raw material costs stay around where they are today and therefore so will your selling prices, is that a margin that we can look at for the balance of the year, or was again something special in this quarter?

Well, I’d remind everybody that we do have seasonality in this and really all of our businesses. Our second quarter is typically the strongest, so my expectation is that margins do come down some in Q3 and Q4 for distribution, but that’s driven more by seasonality more than anything else. Our long-term vision for POD is 6.5 to 7.5%, as we outlined at our investor day in May.

Okay, and then if I may, 21.8% gross margin for the quarter, again I understand that this is a strong quarter seasonally, but does it affect your overall gross margin as much as it does your POD?

Are you talking about for the balance of the year?

Yes.

Yes, I think typically what you’ll see is that in the second half of the year, margins do come down and that’s a result of seasonality, and that’s across all our businesses, not just POD. There could be some benefit, as I might have been mentioning with Frank on an earlier comment, just related to consumer and EM having a little bit better Q3, but on balance I just always tell people, generally speaking, you should expect that Q3 is below Q2 from a margin standpoint.

And if I may ask one last question, you have talked about the weak euro. Could you give us a better feel as to what you are seeing in terms of the demand in Europe?

Well, I’m sort of cautiously optimistic. Even despite all the challenging headlines and everything that I said, I do believe that there seems to be some early signs of improvement. It just seems like every time we see a good sign, there is something else that comes up that takes the headlines, so it’s really mixed at this point. I think we’re finding a way to win ourselves with our own new business and improving profitability, and that’s really how we’ve been able to grow there, so I still have sort of mixed observations on Europe at this point.

Thank you.

Yeah. We’ve got time for one more call.

Our final question comes from Jason Rogers with Great Lakes Review. Your line is open.

Yes, thanks for taking the question. Was just wondering if you could talk about the second half of the year as far as your expectations on the sales performance on an organic basis.

Can I comment on, did you say, second half sales growth?

Yes.

I mean, look - you’ve seen obviously in the first half of this year, the sales have been below 2014. The main drivers of that have been the weak euro, lower hydrocarbon based raws primarily impacting PP&S and POD, and then also the year-over-year integration impact from Spartech. So my sense is those carry through, through the balance of this year. There’s a chance that we could see growth in Q4, but we will see organic revenue growth in the first quarter of 2016.

Thank you.

Well thanks everybody for joining us on the call today. As always, we appreciate your interest in PolyOne and looking forward to speaking with you at the end of next quarter, if not before. Take care.

Thank you. Ladies and gentlemen, that does conclude today’s conference. You may all disconnect, and everyone have a great day.