Good morning, ladies and gentlemen, and welcome to the PolyOne Corporation First Quarter 2016 Conference Call. My name is Channel, I will be your operator for today. [Operator Instructions] 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, Channel. 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're based on management's expectation and involve a number of business risks and uncertainties, any of which could cause actual results to differ materially from those expressed 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 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 first quarter of 2016 to the first quarter of 2015, 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, everyone, joining us today. For the first quarter, we delivered record-adjusted earnings per share of $0.56, a 22% increase over last year. This marks our 26th consecutive quarter of year-over-year adjusted EPS growth, 24 of which have been 10% or better. This strong first quarter performance leads off what we expect to be a year of double-digit earnings expansion for PolyOne in 2016. The top line results for the quarter show a sales decline of 3% versus last year. However, price deflation related to lower hydrocarbon costs and a weaker euro reduced sales by 8%. Thus, underlying growth for the quarter reached 5%, 4% organic and 1% from acquisitions. And what a powerful combination to have underlying sales growth and margin expansion as return on sales reached a new first quarter high of 10%. I'm pleased we have momentum early after exiting 2015, a year in which we faced a number of headwinds, not the least of which was our DSS segment performance, which was below our expectations and yours. I know their performances weighed most heavily on investor's minds. After our fourth quarter results were announced, investors rarely asked questions about anything else. I can appreciate that, and I understand. I also appreciate your patience as we execute our plan to transform the former Spartech segment into a specialty business, and as such a transformation by PolyOne's early days will take time. Today, I am pleased to report that we have made progress at DSS this quarter, and we will discuss that in more detail. However, this is not the headline story today. The headline story today is how the investments we made last year built upon an increasingly strong specialty foundation, established over several years before that, are paying off now and will…

Well, thank you very much, Bob, and good morning, everyone. I'm very pleased to provide additional comments and perspectives on our results for the quarter. On a consolidated basis, adjusted EPS increased 22%, as Bob said on the strength of investments made last year, which fuels our organic growth and margin expansion. We continue to run our business with an invest-to-grow strategy, where cost-cutting is not our path to prosperity. In fact, last year, we hired over 50 additional sales associates and we also expanded in marketing and technology. This is what it takes to truly drive sustainable growth with a specialty focus. A common theme across our remarks today will be the relative strength of North America versus Europe and Asia. As Bob mentioned, we delivered 5% sales growth, excluding price deflation and a weaker euro. This was entirely driven by North America, as Europe and Asia were essentially flat. Our Color business established new first quarter records in operating profits and profitability. OI increased to $35 million and operating margins hit 17%, an 80 basis point improvement over the prior year. On a constant-dollar basis, sales were effectively flat versus the prior year as gains in health care, appliance and fibers was effectively offset by weaker results in packaging and consumer. As with our other businesses, Color increased its commercial resources in 2015 and SG&A increased by about $2 million in the quarter. Other factors impacting the quarter were a weaker euro, which reduced OI by $1 million, which was effectively offset by the addition of Magenta. Specialty Engineered Materials also reached new record levels of profitability in Q1. SEM grew operating income to $23.4 million, with operating margin of 15.6%. From a top line perspective, sales ticked up slightly as the addition of Kraton's TPE business plus…

Thanks, Brad. I love what you said about playing to win, I couldn't agree more. And playing to win as a team is powerful. Everyone knows the phrase that a chain is only as strong as its weakest link. There are many examples where this is absolutely true, but it doesn't fit every situation and I don't believe it applies to PolyOne. At PolyOne, we are a team. And while one of our segments, DSS, has been struggling, it didn't weaken our chain. We have 5 segments. They don't always all have perfect quarters for years, but we all play to win as a team and we find a way to win as a team. In fact, I submit that our results last year galvanized us and strengthened our resolve. We invested in the face of adversity and delivered double-digit EPS this quarter as a result. The increased commercial resources immediately benefited POD and PPS this quarter and will soon benefit our other segments, which I said have longer sales cycles. And this includes DSS. During the quarter, I visited a number of DSS customers, and I am pleased to report that all viewed us as a critical and important supplier. Some, but not all of them, were impacted prior -- by our prior year integration challenges. But for those that were, they were unanimous in saying that these problems were behind them and us. I tell you, these visits pumped me up. We are overdue for some good news in DSS, and getting it first hand from our customers made it all the better. The conversations quickly turned to innovation, and now we can help partner with these customers. We've held technical seminars demonstrating our full range of capabilities, such as combining GLS TPEs, machine and packaging materials, for…

[Operator Instructions] Our first call comes from the line of Mike Sison of KeyBanc.

Bob, when you think about PP&S, your margins were impressive. I think already at the high end of your new 2020 goals. How much of that improvement is sustainable, maybe from your product mix strategy and maybe some of it might be a little temporary given the -- maybe some restocking and demand from customers?

I look -- when you look back on the first quarter of last year. I mean, clearly, that was a disappointing beginning to the year where we did experience destocking. And I do believe that, to some extent, Mike, we have benefited from year-over-year comps and that didn't recur this year. So some of that margin expansion may come from that. When you look at the underlying growth, I think it reminds us just how powerful a little bit of growth can be, and so it remains to be seen. I think as the second quarter plays out, which is typically one of our strongest, it really is our strongest for the company as a whole, we have a better sense for that. But I think most of it is going to stick.

Great. And you talked about, I think, Global Color and Engineered Materials picking up in terms of earnings growth in the -- for the rest of the year. Can you just walk us through what's going to drive those businesses in the second, third and fourth quarter?

Yes. Look, I -- one of the things that I really highlighted in my previous remarks was the investment that we've made in additional resources, and I think that will gain traction as the year plays out. Look, to some extent, we -- if nothing happens with the euro from here on out, it actually ceases to be a bad guy and it's been one now for about 5 or 6 quarters in a row. So I think those are couple of things moving in our direction, plus just the ongoing growth of both businesses. If I could put one thing on my wish list, it would be a little bit better growth in Europe because I think that would probably drive things faster than anything else.

And our next question comes from the line of Frank Mitsch of Wells Fargo Securities.

Let me add my congrats to Steve as well, even though he's not there. But hey, I feel a need to follow up on PP&S. I look back and this is actually the best quarter since 2007, which is when the housing market was rocking and rolling. And Bobby just answered the questions, saying that your thinking at these levels can continue. What are you seeing about the competitive environment out there and again, the sustainability of this -- the best levels in close to a decade?

I look from a competitive environment. I don't really have any new news than probably what we've shared in the past that remains a competitive market and perhaps one of the most so from a pricing challenge perspective, I think our team has done a really good job, though, when you look back and compare us against 2007 in terms of improving the underlying mix of our business, it's so much less dependent on housing now than it ever has been before. That gives me more confidence on the sustainability going forward. Look, I'd also say last year was a really tough year for all aspects of that segment, not just vinyl. It also included the results of the operations we acquired from Spartech, which were down significantly, very much challenged by underlying price changes last year. And so like I said, I know the margins looked high and you have to go back a long way to see and be comparable at that levels, but I feel very confident about our ability to continue to drive growth from here.

All right, that's certainly encouraging. And speaking about volumes around the world, you said that North America is doing better than what the headlines would be indicating, although you also said that Europe and Asia weren't all that great. Any green shoots there? Anything you can discuss in terms of volume breakdown by geography and expectations?

Yes, I mean, overall, if you look at consolidated organic numbers we talked about being up 4% and North America was up 5% or a little bit better than 5%. So we had a little bit of retraction in Europe and Asia, which really is candidly a mixture of different end market effects plus just a couple of programs that lapped themselves in EM. So from a green shoots perspective, nothing that I would really point to in saying, hey, this end market or that one is taking off. I have believed for a period of time though that packaging should improve in Europe, and I really think that's going to drive margins and growth, particularly in Color as soon as that happens.

And our next question comes from the line of Bob Koort of Goldman Sachs.

On the POD, I seem to recall at the beginning of the quarter when you report the end-of-the-year numbers, your next volume were fairly strong, but substantially less than the double digits you reported. So was there something in particular about March that exploded for you? And then what's the daily sales rate looked like in April so far? I just wonder if there might be some prebuying and then a lot of polymer price hike?

Yes. When I -- if I just think back to my comments after announcing the fourth quarter results. At January, I think we would've commented -- it would've been up probably about 4% or so for POD. We had a very strong February, in fact, and not just the March affect. So February was very strong and March was also very good. Bob, those kind of things do happen sometimes where people get anxious about price changes and may move purchasing ahead or back, depending on which way they think it's going to happen. So it is possible there were some impact from that in the first quarter and maybe that is also something that impacted PP&S. But I really couldn't quantify it for you.

And sales rates through the second quarter so far had been consistent with the first quarter?

So in terms of what we're seeing in April, these businesses are continuing to deliver growth. It's not quite at 11% or 12%, as we talked about in distribution, but still up in April so far. But we don't have -- finalized April numbers yet.

And can you talk -- you mentioned 4% rightfully, about a 4% volume growth through the quarter. What is the bigger color in EM businesses do? And how varied was it geographically?

Yes. I mean, so EM was up slightly. Color was down slightly for almost a push. And when you look at things geographically, it actually will resonate just like our earlier comments, which was strong performances in North America, effectively offset by some weaker performances in Europe and Asia. And that really is true, Bob, for both those segments.

And our next question comes from the line of Jason Freuchtel of SunTrust.

Going back to the established businesses. Was the strength you experienced in 1Q that's putting us in Distribution? Do you want your expectations coming into 2016? And so far, are you seeing any examples of contribution from your sales force additions and your Specialty segments at this point?

I mean, I would say that when we announced our fourth quarter results, and to Bob's earlier point, we had talked about January sales growth being up sort of in the 4% type range for those 2 businesses. And so with February and March results coming in being stronger than that, that was better than I would have probably predicted. If you'd ask me back in our call at the end of January, we are seeing traction with our new sellers in both Color and EM. But when I talked about traction, it's often really measured in terms of how well are we foreseeing with respect to getting new specifications and/or customizing applications for them. So that traction takes time and the sales cycle for EM can be 18 months or longer, depending on the end market.

Okay, great. And it looks like your inventory position increased slightly relative to last year. Is that primarily a function of having to hold more inventory you transition to DSS business to new production lines? Or are there other factors there influencing their inventory position?

Well, we did acquire Kraton and Magenta. And I think if you took out their numbers, we're probably pretty consistent and looked about the same as where we'd be last year, maybe down a little. If you look at DSI, we're about flat year-over-year.

And our next question comes from the line of Tyler Frank of Robert Baird.

It looks like DSS performed better than expected. Did you guys think that you've reached a bottom at this point? And should we expect performance in those segment to ramp throughout the year?

Well, we -- look, I mean, clearly, that year-over-year decline in operating income is something that we had projected on our last call. We did a little bit better than probably some of the comments we've made then, and I really give the credit to our team for doing that. But I don't know if it's the appropriate time to say we are ramping up or whether or not, we just need to move sideways here for the next quarter. I still believe that we'll start to show improvement here in the second half of the year. So my view on that really hasn't changed from the last time we spoke, and I think that's probably a pretty accurate reflection of where I think things will play out this year.

And our next question comes from the line of Mike Harrison of Seaport Global Securities.

I was wondering if you could talk a little more detail on DSS about the volume growth that's going to be happening going forward. It seems like now that you've lost some of these higher volume, commodity-type application, you can start to attack that market in a little more PolyOne-typical fashion, that is lower volume, more specialty-type products. And I was wondering how confident are you that you can start to get traction and to try to attack it that way. And are your operation, the former Spartech operation, and some of the changes you've made in the consolidation, are they equipped to make some of those lower volume runs? Or will it be a challenge if you shift from higher volume batches to lower volume batches?

Well, let me comment on the revenue side of the equation first. And the -- clearly, the average customer size and profile for DSS has changed considerably from when we acquired Spartech. And now you look at DSS with having a $400-plus million run rate in revenue, and no one customer really accounts for more than probably $11 million or $12 million of that. So that profile is really starting to look a lot more like PolyOne, and so I think you're spot on there. And when I look at recent wins in the last 3 to 4 months, they have been in the $1 million to $2 million to $4 million range. So my expectation is, that is the path forward for us. And the challenge in front of us really is getting our plants capable of running smaller batches more efficiently, and that's really the exact same challenge that our Color and EM businesses faced 10 years ago. So it's the same challenge we have in front of us. To answer your question, are we prepared? I would say, we're not where we want to be yet, but we're making good progress.

And then in terms of the Color business, you mentioned that packaging was lower. Is that just a market decline? Or was there some business that you had last year and you lost? Or can you just talk about some of the dynamics and maybe the path forward on packaging?

Yes, the comment that I was making was that it was really twofold. One was I just didn't see a level of growth that we thought we would in Europe. And then I tried to turn that into an observation, if you will, about what's on my wish list because if we did see growth there and I think we should to the balance of this year, that would help out Color from a margin standpoint, probably more than anything else. So hopefully, that helps to clarify my comments. There's no real significant observation to make on packaging other than that.

And our next question comes from the line of Laurence Alexander of Jefferies.

This is Dan Rizzo on for Laurence. You had talked about packaging, but just some with your other -- you didn't break it down geographically, but just some of your other end markets, like -- particularly like transportation. Can you just give pricing color on what you're seeing there?

Sure thing. I mean in terms of North America, and I know that that's a comment that resonate through our remarks today, we did see an uptick in transportation across the board that was really more of a North America thing. It was not a big increase, but it's also a large part of our business that does drive some of the growth. We also experienced growth in appliance and also in fibers as well as in industrial applications.

Okay. And then one other question. In terms of pricing, I know there were some concessions, but now they may have shift a little, but what can we expect going forward?

Well, it varies by business. And the reality is, is that if you look at Distribution, for example, we really don't set prices in that business. That's done by our suppliers. And to the extent that we have a little bit of inflation going forward, we would see pricing start to increase. That impacts different businesses in different ways. But on balance, I view a little bit of inflation as a good thing for us.

And our next question comes from the line of Kevin Hocevar of Northcoast Research.

I'm wondering if you could -- you mentioned in the press release and I think you mentioned on the call, an expectation to grow adjusted earnings double digits here in 2016. So obviously that's a pretty wide range. So I'm wondering if you can help us narrow that down because I'm wondering if this level of growth is sustainable for the full year because we'll have OI growing double digits in the Specialty, Global Color and Engineered Materials, sounds like relative sustainability of PP&S margin. So I wonder if you could help us narrow that down a little bit further.

Well, we expect double-digit EPS growth for the year. But just specifically answer your question about whether or not this first quarter growth rate will carry through for the future quarters, I don't think that's the case. I think you'll see that double-digit growth rate moderate here in the second and third quarters. As I said, I think to some extent, we are benefiting from a low comp last year in the first quarter. I don't want to take anything away from our results, but that's a fact. And so that largely is what drives my statement about seeing some moderated growth here in the latter part of the year, but still very good growth. And I think that's about as much as I can probably narrow that down for you, Kevin.

Sure, that's great. And in terms of these traditional commercial resources. Is there any way to quantify the type of benefit you saw from that in the first quarter and what your expectations are for the full year? Is there any way you can break that down for us?

Not to the extent that you'd -- would be really helpful. I -- if we look at obviously seller performance and -- we certainly measure how well everyone does year-over-year. But I really don't want to say, hey, we hired a new seller and that person did x amount of growth and they are entirely responsible for that. I mean, we have a very powerful coaching and managing network of sales managers, directors and leaders, and I think they're the ones that really deserve the credit for bringing new resources in and making them immediately productive. But there's no one statistic I could give you, Kevin, that would say, hey, per seller we generated x amount of revenue and have that really be meaningful because it just vary so much by business.

And our next question comes from the line of Dmitry Silversteyn of Longbow Research.

A couple of questions. First of all, on the PP&S margin, obviously, a very strong extension sequentially year-over-year depending on how you look at it. How much of that is sort of your pivoting away from the construction into more medical and LED and other market applications? How much of that was raw materials benefit versus volume growth benefit? I'm just trying to understand sort of the sustainability of this new level of profitability. And as I look at sort of end market performance expectation for the balance of the year and as well as raw material expectations for the balance of the year, how should I think about modeling that business going forward?

Yes, I mean, it's difficult to break down into a specific, let's say, 3 or 4 step numbers of where that growth is taking place from -- I mean, look, everybody's been really asking some great similar questions and I think rightfully so. Look, there's no doubt that we're benefiting this quarter from an uptick in volume growth there at a time when I think we've got underlying good dynamics from a raw material standpoint. I think that, going forward, that as we get into the second quarter, you could see some of that pullback because I don't think we'll have the same year-over-year underlying comps. But I really couldn't give you more specifics on where that's going to land in the second quarter. Typically, the second quarter is a better quarter for us in that business. So I really hope that helps us to continue improve. And I know that was a very general response to your question, but that's probably the best I can do.

That's fine, that's fine. Maybe I can ask this a little bit differently. Do you need the strong construction market in North America in 2016 to maintain this level of performance? Or have you moved enough away from it where if these other markets grow and we have another, let's say, okay year in construction, that business will still perform for you?

No. Look, I think that we have absolutely improved our mix over the years as you followed us, and you know that. But construction is still a big market for us, and that business doing well in North America is helpful. It's not as helpful as it was, but, look, I think if it went backwards or went flat, we would still be able to grow. But I'd also say that construction is a good guy for us this year, so that's helping.

Got you. Okay. And then final question on Engineered Materials and -- I know it's been sort of beat to death a little bit, but I'm just looking at operating profit year-over-year, and it was sort of flatfish but your gross margin improved. So is this -- what I'm seeing basically is to use the expansion in your sales organization and higher SG&A that's causing operating profitability to flatten out, and we should expect that to pick up over the next year, let's say, as some of these sales cycles start bringing in new business?

I think I follow you on that. I mean, you're making a good point, with the additional resources that we added in both Color and EM have no doubt increased SG&A. And so until those new sellers and resources start to deliver, I think we see a little bit more muted growth. Margins have improved, and these new sellers are absolutely focused on winning the right business and new business that allows us to do that. I hope that, that's answered your question because they are focused on more than just the top line number, it's also about improving margins as well.

Got it. Okay. Yes, I was just looking at your gross margins or gross profit, specifically EM improved more so than operating profit. So I just want to make sure that there's not a mix issue, that this is really just extra cost you put in at the end of last year to drive growth going forward.

Yes, yes, thank you.

And our next question comes from the line of David Stratton of Great Lakes Review.

The number of new project opportunities in Color and Engineered Materials, I'm wondering if that's inconsistent with prior quarters? Is that maybe being impacted by economic conditions overseas? Or are you seeing those opportunities accelerate with the new sales force addition?

Well, keep in mind that our average transaction size is $24,000. So it's hard to put an exact number on how many new projects we're working on. I mean, look, I can tell you that, with respect to the consolidated results for our segments, we have momentum. When I look at our sales funnel, it's better and has more in it, particularly in the best view opportunities than we have had before. And a great example of that is, and as I look at this first quarter results, our Distribution business had more new business gains last year than in a year before that. So momentum is all going in the right direction there from a new business gains standpoint.

And then the impact on sales and EPS on the euro, do you have that for the quarter?

It was about $1 million [indiscernible]. Sales number was, what number, $12 million?

Sales number was about $9 million.

Nice, obviously $12 million. That's right.

And then finally, are there any further plant consolidations planned in DSS? Or is the focus more on just executing with existing operation?

Yes, I mean, look, I will just -- if I -- I guess I'll go back to some comments I made at our call in January, which was we are in the process of closing our Wichita, Kansas facility. We don't have plans to close any other facilities. And candidly at this time, as I look at DSS, there's no doubt that we have capacity. But our first priority is to improve on-time delivery, quality and operational efficiency and have happy customers. And I don't want to take any more cost out. That's not going to be how we do that. So at the moment, what we're really focused on is that front-end part of our business and don't have any additional cost actions at this time. That gives us time for one more question, if we can.

And our next question comes from the line of Rosemarie Morbelli of Gabelli & Company.

I was -- you increased your sales force by 10% last year. What is the game plan for this year? Do you feel that you need to add another 10% or 5% in spite of those added to the longest cycle operations have not yet contributed?

I don't know the stated goal this year. We will increase our sales force. It will not be at the 10% level that we did last year. And look, I expected to -- every year, we have some level of attrition and turnover. And so probably be able to give you a better sense for that at the end of the second quarter. But we have every expectation of continuing to invest in sellers as well as marketing and technology.

Okay. And then looking at PP&S. I mean, you have to be -- and I think you said that you were, you benefited from the housing in spite of its smaller exposure. Could you talk about different other markets where you saw a better-than-anticipated type of growth rate?

Yes. And I -- hopefully, I'm not overstating the comment about housing. I was trying to comment that it's still a significant end market for us and construction helps us. But we did see, like I said, a good quarter. And appliances as well as in industrial applications -- and again, this is really sort of a North America set of observation because that's really where PP&S is.

Any specific area in industrial as we keep reading about the fact that industrial is actually slowing in North America or in the U.S.?

Yes. Look, I mean, when we make good comments about our own segments, I can appreciate that at times there may be disconnects between our performance in an underlying macro story out on an end market. But I think it's a good example of weighting new business. And for us, a couple of points of extra new business really offsets what could be a macro headline around industrial being down. From my own experience as I visited with customers in the first quarter, like I said, in North America, I think they are largely positive. I think they really believe that we've got good prospects for this year.

And one last, if I may. Could you talk about the trends for raw materials versus pricing?

Yes. I think that obviously last year was a very volatile year with prices coming down and oil moving as much as it did. I think that we probably will see some level of inflation this year, I hesitate to predict what that is. But coming out of the first quarter, I think that's going to be the case. Look, we've always said that a little bit of that is actually a good thing. Lower raws on balance are good for us, but a little inflation over time is also helpful. So my sense is that's what we're looking at right now, but I really hate to prognosticate on that at length. Thanks to everybody else who was able to join us on the call today. It was a pleasure to share our first quarter results with you. I Look forward to doing so after our second quarter. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone, have a great day.