Good morning, ladies and gentlemen. And welcome to the PolyOne Corporation First Quarter 2017 Conference Call. My name is Shannon, and I’ll 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. And 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, Shannon. 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 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 from the most comparable GAAP financial measures. Operating results referenced during today’s call will be comparing the first quarter of 2017 to the first quarter of 2016, unless otherwise stated. Joining me today on the call is our Chairman, President and Chief Executive Officer, Bob Patterson; and Executive Vice President and Chief Financial Officer, Brad Richardson. Now, I will turn the call over to Bob.

Thanks, Eric, and good morning. I am pleased to report record first quarter adjusted earnings per share of $0.59. I am very proud of our performance and there are many factors that drove it, which we will cover on the call today. But the main reason was the prior investments that we have made to generate organic sales growth, namely increasing our commercial resources. Many of you know over the last two years we have invested heavily in adding new sales, research and development and marketing professionals and this proved to be the difference maker in the first quarter as we deliver organic revenue growth of 5%. In total, sales increased 6% to almost $900 million, as acquisitions added 2% or partially offset by weaker foreign exchange was negatively impacted the topline by a point. Operating income expanded a new first record highs for each segment except for DSS. Our prior investments in commercial resources delivered near immediate returns in POD and PP&S last year. Their momentum continued in the first quarter as sales increased 6% and 11%, respectively, for these two segments. They continue to shine and are not showing signs of slowing down. In Color and Engineered Materials we have noted how sales cycles are often longer than in POD and PP&S. The time required for the marketing, formulation, testing and qualification expands as the complexity of the required science increases. We understood this when we made these investments in the prior years and we have been patience as our commercial teams have deployed. And I'm very pleased that in the first quarter we started to see those seeds of growth take root, as both EM and Color delivered organic revenue growth. From an EPS perspective these outstanding sales results were partially offset by the expected loss in DSS, as well as near unprecedented spikes in certain raw material costs. And as I mentioned, weaker foreign exchange negatively impacted our earnings primarily in Color and EM. But I am not going to dwell on the negative today. We had a great quarter and our sales growth is a clear indication that we are doing what we said we would and that is working. The investments in commercial resources, the increased focus on innovation, our customer first mindset and leveraging our unique service offerings, it's all working in concert for our customers and our stakeholders. Our comments -- a few more comments in a few minutes, but I first like to turn the call over to Brad who will review our segment highlights, as well as our balance sheet performance.

Well, thank you, Bob, and good morning, everyone. Let me start with our earnings. On a GAAP basis earnings per share in the first quarter was $0.57, an increase from $0.46 in the first quarter of 2016. Special items in the quarter resulted in an after-tax charge of $1.9 million or $0.02 per share. Adjusting for these special items, EPS for the quarter $0.59, a 5% year-over-year increase from $0.56 in the first quarter of 2016. Now I typically close with comments on our balance sheet. But I am going to begin with them this morning. A large part of our success of PolyOne has been our strategic deployment and management of capital, and we've made -- recently made several improvements to our capital structure to further enhance our position. In February, we amended our asset based lending agreement, in addition to upsizing availability from $400 million to $450 million. We also reduced pricing and will benefit from the diversification and extension of our debt maturity profile. Additionally, we were able to take advantage of favorable market conditions to re-price our existing term loan, reducing the interest rate by 50 basis points. Also related to our capital structure, investors have experienced our commitment to returning capital to increase shareholder value. From 2011 to 2016 we deployed nearly $700 million to repurchase shares and in the first quarter of 2017 we continued purchasing 1 million additional shares for $34 million. You know our management team feels very confidence in PolyOne's long-term outlook. We see value in every share repurchased and will continue to pursue our opportunistic buyback strategy. In the future we will also expect to increase our annual dividend, which we have done for the last six years. As our business leverage commercial investments to achieve organic growth, I'm proud…

Thanks Brad. Our first quarter results indeed validate the investments we have been making over the last two years have been the right ones. The more specialty our mix is the greater our ability to perform, despite tough market and macro conditions. We see this in all of our businesses, but I want to highlight PP&S, which is demonstrating how niche and complex solutions that utilize vinyl can shift towards the specialty formulation spectrum. A great example is our recently captured business for the production of a medical barcode scanner. Healthcare settings now demand flawless information and the industry is moving toward barcoding all patient touch points. These devices must deal with the rough environment characterized by frequent handling, portable use and constant disinfection. Our recently launched resilient vinyl technology was selected for the scanner because of its durability and chemical resistance that expands the lifecycle of their product. Our vinyl solutions continued to gain traction and acceptance on a variety of other next-generation products as well. These include our recent collaboration with Halo Labs on its smoke and carbon monoxide smart home devices and we are winning new line of business within the LED lighting market. Although, metal and glass were the preferred materials for LED designers in the past, we've seen increased demand for polymer solutions. They offer higher durability benefits with lower cost to manufacture. These solutions require colorants, stabilizers and other additives, and also demand specifications that will pass strict UL testing approvals. We are able to provide all of this and more to our customers through our trusted and innovative Geon brand. In fact our company-wide focus on service and innovation has never been stronger. Our unique service offerings build trust in collaboration with our customers and ultimately lead to sales pull-through. Services such as…

[Operator Instructions] Our first call comes from Frank Mitsch with Wells Fargo. You may begin.

Good morning, gentlemen.

Hi, Frank.

Good morning, Frank.

Hey. Bob, obviously, a relief in terms of organic topline growth here in Q1, how confident are you that this is the -- that you've turned the corner on organic growth and that this is something that we should be expecting as we progressed through the year.

I am very confident in the momentum that we have Frank, I mean, we really saw that coming out of the last year, of course, it was primarily within POD and PP&S, but now it seemed that extend to EM and Color, and I don't see any reason why that doesn't continue for the balance of the year.

Yeah. Sure, Bob, I mean, we heard you say that a quarter ago, but we believe it, but now that you kind of through the results, it’s looking much better. And if I could just try and get a sense of the range of what the DSS, what the necessary course corrections would, as you reevaluate that business or are forced to reevaluate that business as you progressed through the year? What sort of things are you contemplating in that necessary course correction?

Yeah. Look, I think, as I had probably said number of times last year, we made it a point not to take any further costs out of this business, as we had in years prior, we have gone through significant restructuring efforts in ‘13 and ’14, and probably to some extent in the ’15, and candidly to some extent that resulted in lost business. So we made it very clear that we didn't want to take any further cost actions last year, Frank, is all I really wanted to do was just make the customer happy. And so that’s what we have focused on. But there's no doubt that, I think, we have an underlying infrastructure that's too large for the size of business that we have today. And I would say, first and foremost, we would be looking at potentially additional restructuring efforts for some of our businesses if we don't see things improve here in the near-term.

All right. Great. Thank you.

Thanks, Frank.

Your second call comes from Robert Koort with Goldman Sachs. You may begin.

Good morning. This is Ryan Berney on for Bob.

Hi, Ryan.

Hey, Bob. Just have a question for you, as you look out in the back half of this year and I think a lot of the consultant data for now seems to have some reductions in polymer prices built-in. If that were to happen, do you think that you should be able to capture and keep some of that sustainably on the specialty side of the portfolio?

Yeah. I mean, look, if that happens I largely always characterized that is probably largely timing related and certainly what we experienced in the first quarter of this year went against us. So it is possible that with some declining prices in the future that we see a benefit for that in one quarter or another. I think that’s reasonable way of thinking about things, Ryan. I mean, look we are in the middle right now of discussions with really all of our stakeholders both suppliers and customers with respect to dealing with the most recent inflation that we just experienced and that's first and foremost. But as you just said and as Brad did I think earlier, there is an expectation I think that that does sale down towards the end of the year.

Great. Thanks. And then, again just sticking on the Engineered Materials side, I know that in the past you had a little bit of weakness there and kind of the last couple of quarters especially in the European side of the business, speaking specifically there, has there been an uptick in kind of your business trends specifically there?

We did have a good quarter in Engineered Materials in Europe. One of the things that we really pointed out in the prior year was weakness in oil and gas and specifically how that related to some of our composite materials. I think we have lapped that, so that's good news. And EM in Europe actually had a really very good quarter up -- sales up about 7% or so on organic basis.

Thanks so much.

Yeah.

Your third call comes from Mike Sison with KeyBanc. You may begin.

Hi, guys. Nice start to the year.

Hi, Mike.

I know you gave us data a little bit latter when the Q comes up, but when you think about the volume and price in the organic growth for Q1. Can you kind of split that out for us and how that looked by each of the segments?

Let me -- I will just give you a headline number if I could. First of all, total sales growth was up 6% for the year, acquisitions, so organic was -- it was 5%, acquisitions added 2% and then FX was a bad guy at 1%. So I think if I cover that. Volume, however, was actually up on organic basis by 7%. So what that tells you is that across the company we actually still had some price deflation in the first quarter of a point or two and I think that’s may sound strange to hear that based on everything we said about experiencing inflation on the cost side, but we really didn't get anything on the price side this quarter. So and I think going into the quarter we still had some deflation that had to come through system and that’s what weighed on prices. And that's actually a pretty good way of looking at how things played out for the other the segments, I am excluding DSS from that observation, but from the other segments as well.

All right. Great. And then, global Color, do you expect that organic growth to pick up as the year unfold. You spent a lot of resources there over the last year and it looks like we got a little bit of a glimpse or improvement here in Q1 and so, how can that accelerate as the year unfold?

Yeah. We did. I think, as you know, second half of last year was weak. We reported year-over-year OI down at that time and thought there was possibility we could see that continue into the first quarter. So I was pleased to get to where we did and I think that's a positive sign for the balance of the year. I think we still got some work to do to post double-digit OI growth in that segment. As we stand here today, FX is still a bad guy for us for the balance of the year and so was some of what we saw in raws in the first quarter. But it's absolutely moving in the right direction, Mike, and maybe we are quarter or so ahead where I thought we would be.

Great. Thank you.

Yeah.

Your fourth call comes from Ben Kallo with Robert W. Baird. You may begin.

Hi, gentlemen. Good process on the last quarter. I am looking at the operating margins over the last three years and I was just trying, it’s -- it looks like great progress, I was very clear when I look at the PP&S and then you just kind of jumps around depending on how our slice and dice, with that backdrop can you just talk about your Platinum 2020 targets and how we should think about the operating margin progress towards those on each of the segments and we can leave out DSS?

Yeah. Let me look at Color and EM first and if you go back to 2014 and 2015, there's no doubt that we saw really significant expansion in margins going from ‘14 to ’15. To some extent, I think, that was mix related but it was also partially due to what we saw going on with raw material dynamics at the time. As we were going into 2016 I really didn't have an expectation that we would see additional margin expansion of that magnitude, in fact I really doubt that would be the case, though we might get some, but as it turned out we didn’t and that was largely mixed driven with some of our more profitable business being down year-over-year. So as we head into 2017, Ben, I think, that the mix should start to improve. We did have some negative impacts from inflation in both EM and Color in the first quarter which hurt us, but I don't think anything structurally has changed about our business model, what our view is on the 2020 Platinum Vision. So I still feel comfortable about getting those businesses passed 20% OI by 2020. And if you go back in time in those periods of time with PP&S and POD, POD has been pretty, I would say, stable with respect to being around 63%, 64%, 65%, I think, that’s world-class margin performance for a distribution business. We've never had a goal of having it get too much higher than that. I think that it can over time through growth but not much really on just pure margin expansion. I think there's a lot of promise with respect to PP&S and how far those margins can go, as you know from the time that we first set our 2020 vision, we actually increased the margin expectation for that segment and that might be something we revisit again, largely driven by what we are seeing in mix improvement and I highlighted one of the examples today around healthcare application. So if we can continue to get more and more in the healthcare, I see that moving towards a more specialized looking margin profile. So there's been some underlying raw material dynamics that was positive in the first quarter of last year, negative this year, but over time I see those things evening out.

Okay. Thanks, guys.

Yeah.

Your fifth call comes from Mike Harrison with Seaport Global. You may begin.

Hi. Good morning. Congratulations on the nice quarter.

Thanks, Mike.

Good morning, Mike.

I wanted to start with a couple questions on DSS. You noted some of the business is coming back. What kind of visibility do you have on sales for Q2 relative to the $102 million you just posted?

Yeah. As you know we have really a very short lead time and that's true for really all of our businesses. So it’s always difficult to answer that visibility question. I think that with respect to your first of your question, with the gains that we've seen, like I said, they're very small, I feel like customers are testing us was sort of how I described that earlier this morning. So I don't see that adding meaningfully to the revenue number today as we stand here, but I do think that we got a chance to getting close to that $100 million figure for the second quarter. Possibly, a little bit better than that but a little bit more here as things play out in April. So we did $102 million in the first quarter. We ought to see a little bit better second quarter just based on seasonality, but we’ll see how that plays out in the next month.

And in terms of not really seeing that sales pick up contributing to operating leverage or to an improvement in the bottomline, is it fair to say that as you are being tested by those customers, you're may be incurring some additional cost to make sure that they're getting service in the way they need?

Well, that’s for sure. I would say, we are doing a lot of additional work to ensure that we are improving quality and on-time delivery. The last thing we want is to be given a second chance and not deliver on that. So I do absolutely believe there are some additional costs going making that happen. However, I would say, with respect to your first part of that comment. I think that as we get above $100 million in revenue, we do start to see operating income growth from that number. So, I think, it's -- that $100 million number as we lost money in the first quarter of that, so we clearly going to get up to probably $105 million, $110 million or something like that to start seeing some operating income.

All right. And in terms of your confidence on the volume momentum, are you confident enough to provide us with some guidance on your expected 2017 EPS growth versus 2016? Thank you.

Yeah. One thing I guess I would point out is that, I think, right now the consensus out there is for EPS growth around 8% or so, which is the number that resonated with us and we may have even commented on that in the first the call that we had this year back in January. I still think that's a good number. I know we had upbeat in the first quarter. As I just kind of look at how the quarter's play out, the one thing that I just asked everyone to just take a look at as we do have seasonality in this business and right now the third quarter number that's out there seems like it's high relative to Q2. But that's really the only comment that I have Mike at this time. I think we will see how the second quarter goes and maybe we are going to do a little bit better than that. But for now we are kind of sticking with that very high single-digit growth rate.

Thanks, Bob.

Yeah.

Your sixth call comes from Laurence Alexander with Jefferies. You may begin.

Good morning.

Good morning.

Good morning.

I guess, couple of different questions. First on the new products in PP&S, as you -- as the efforts to upgrade the portfolio matures, is it getting more difficult, do you need to put more resources into each new product launch? Or are you actually getting efficiencies because as you get more products and you know how to position products for customers better. That’s the first question. The second one is just on DSS. You made a comment about the infrastructure side supporting the business. Is there sort of any peers that could be folded into that infrastructure, you said the first piece, but then separately what are the synergies that DSS gives the rest of PolyOne. I mean what's the benefit of having it in the portfolio at this point? And then, lastly, just on general pricing trends, are you seeing pockets of end markets strength where it’s possible to get pricing through or can you characterize the lap degree of domain strength in terms of is it broad or is it mixed?

Yeah. Certainly. So there is about four questions in there. I am going to try get through them the best that I can. One is, your first question was about PP&S, and I think, sort of a question around the investment, resources and what's needed as that mix improves. There is no doubt that we have had -- that we have had to add resources to that segment. That's true for all of our segments. In fact, as you know, we probably added to our salesforce about 15% from where we were in 2014, but our average sales territory size is actually down and so what that means is that the capacity per seller is actually declined and I think that’s a direct result of getting more specialized and as true for our segments. So I think that's the case within PP&S. So, I wouldn't say that what we have experienced so far is greater seller efficiency in the sense that one seller is now selling more, but I think that where they're spending their time is more productive and I think that that's can help lead the new business gains, which is what we are seeing. So I hope that answers the first question on PP&S and my expectation is, is that as we continue to grow in those specialty segments we are going to have to continue to add resources to support that. Next, I think, you shifted to DSS and there was a question about, infrastructure and the underlying business, I am not sure, I am going to remember everything you asked in that regard, so help me out. But, first of all, we know we have underutilized capacity. And as I said, last year we just flat-out made the decision that we are going to run with a higher cost structure than what is ideal with the intention of just making sure that we get quality fixed and on-time delivery. So I view that as an opportunity going forward. I think your second question is part of that might be with somebody else view that as a synergy and best possible, I mean, very well could be the case that somebody else is in the space can look at that capacity and review that as an upside to them that might be different to us. So hopefully I am answering that as well as I could.

Actually, what I just trying to -- if I may, that what I was trying get out there is, is there any way in which having DSS in the portfolio makes core PolyOne stronger and having it out of the portfolio now would be a net disadvantage. I am more just trying to look at it from the rest of the business. I think just how it fits in the ecosystem?

Yeah. It’s a fair question and I think it's part of the analysis that we need to complete this year in understanding that. We have always believed that, there is tremendous power in combining our additive technology with the sheet and packaging materials. I still believe that’s the case. That is a long-term synergy and something that takes a lot of time to ultimately deliver an innovative solution. That's probably one of the most compelling reasons. Number two would be around the combination of Color with those same products, which I view as a -- which I view as an upside. So look on balance I still think there's a tremendous amount of synergy between us. But clearly with the challenges that we have had with that business, we just haven't been able to capitalize on that. So, really the evaluation of the business in the longer term portfolio, thinking comes down to really just those types of questions, which is how long will it take us to bring that to fruition and how much are we willing to invest to get there and that's what we need to ascertain this year.

Okay. Thanks.

Yeah.

[Operator Instructions] Your next call comes from Dmitry Silversteyn with Longbow Research. You may begin.

Good morning. Thanks for taking my questions. Can you just talk a little bit, excuse me, about the sort of the progress on DSS and following on Laurence question, maybe I will ask you a little bit differently. You talked about possibly reevaluating some of the business as we get to the year. What would be the milestones or what would be the characteristics that you need to see in the business that to believe that you're moving in the right direction and what would be some of the things that you would see that will signal that additional work needs to be done or a different strategic direction need to have?

Yeah. I mean, the first thing I want to highlight, Dmitry, and I think, Brad, included this in his remarks, certainly is that, DSS has gone six months without an injury and as you know PolyOne prides itself on improving our safety record and being far better than the industry norm. I have to recognize the team and their efforts specifically for improving safety, because they have come light years from where they were when I first joined the company. Why am I sharing that with you, because I really believe that that safety performance is a leading indicator of us getting our house in order and so I feel very good about how well we are doing from a manufacturing standpoint based on how well we are taking care of our associates and they are taking care of each other. So I have to tell you that was one of the things that we really wanted to check off our list and continue to get better on this year. We are making great progress. So that’s the first. But secondly, we have got to see improvement in quality and I would say that we made some progress last year, we went backwards a little bit in the fourth quarter and we saw returns tick up again in Q1. So there's something that's not going as well as we'd like it to. And then, finally, it's really about how much are we build in the sales funnel and we see momentum going into 2018 and I guess I shouldn't say finally that's probably three before being as I was commenting to Laurence, how soon do we think we can get some of these new technologies out there, because that's a very important underlying investment thesis we have in DSS and our portfolio. So those are things you can expect us to continue to comment on and will be as transparent as we possibly can as we go through the course of the year.

Fair enough, Bob. In fact thanks Bob. And then, just -- so it was my follow-up question. You’ve made a couple of small deals recently, but sort of how do you look at the M&A pipeline and your appetite for deals of some size, given the fact that you're still working through the DSS issues and then obviously like now we are in the midst of raw material inflation spike that keeps your guys busy out there trying to raise prices. Where does M&A play role this year?

Yeah. That’s for sure. Look we remain, I think, very actively seeking out new acquisition opportunities. I think that to the extent that something comes to fruition this year and all likelihood there will be smaller bolt-ons, candidly the things that are out there that are larger in nature that we've always had an interest in. I just flat-out now on for sale, so I don't see anything like that coming together and maybe that’s good timing for us as we get to the DSS stuff that you just mentioned, but really I think continue to focus on these small bolt-ons. We did five in about 14 months, 15 months time period there and I don't think we'll have that same pace in ’17, but I think we'll be able to pick up a couple smaller deals.

Okay. And are those deals likely to be in the sort of the composites or Engineered Materials or are you looking at actually the vinyl, given how strong your business is doing there?

Yeah. We had, I mean, right now I know the stuffs that’s primarily in the pipeline is in Color and EM. But look -- we have looked at things in the vinyl space in the past. Most recently, I think, we have one or two last year that we just didn't proceed with and I generally think we got outbid in that case and maybe that's a good thing. But so anyway that's possibility. I don't rule that out certainly as we look at trying to take vinyl in the more specialized applications that’s there is opportunity there.

Okay. Thank you, Bob.

Yeah. Great. Thanks, Dmitry. We have time for one more question.

Your last question is from Jason Rodgers with Great Lakes Review. You may begin.

Yes. I just wanted to make sure I understand the comment that was made about the third quarter estimate number, the consensus forecast, if you're saying its $0.63 right now, I believe you're saying, you think that's too high or I miss understood the comment?

Yeah. Rodgers, I will just point out that, if you look at last year, for example, Jason, we had $0.63 in Q2 and that went to $0.56 in Q3. That's a pretty normal working seasonal pattern. I know if you go back further in time sometimes you can see Q3 being closer to Q2. But I think when we saw last year was probably a little closer to what is normal and I think where consensus is right now, it’s got Q3 pretty close to Q2 and so I think the Q3 is probably something that's want some adjustment. That was the balance in my observations on that.

Okay. Thanks for that. And also just looking at the DSS loss in the quarter the $3.3 million, would you say that will be the low point for the year or can you not make that statement yet?

Well, I think, that the second quarter it should seasonally be a stronger quarter than Q1. So in the short-term, I think, we could see some better numbers. We may still have a loss here in the second quarter. In fact that's decent chance of that. So I think things start to get better as we exit the year. The wildcard I might say is the fourth quarter just betting where our seasonality is. But the goal here is to try to get this business back to breakeven by the end of the year. So I look at this first quarter is kind of having real potential to be the bottom for this business, but the only thing I'm kind of holding out there is just to see how things play out towards the end of the year.

All right. And just finally some number questions, you have with the Polystrand loss in the quarter was, as well as your estimate for the tax rate and interest expense for 2016 -- 2017, sorry? Thanks.

Yeah. So, Polystrand, I think is down about a $1 million. That’s about the run rate per quarter, Brad, can comment on where interest rates are, I know they are down just a touch from where we started the year with this most recent readjustments we have made.

Yeah. So, Jason, the kind of the tax rate question, we came in at 29.3%, I think that’s a good proxy of high 20%’s, low 30%’s, so roughly kind of 30% rate here for the year is a good proxy. As it relate to the interest rates and interest costs for the company, I am really pleased as I put the comment in terms of what we've been able to do, in terms of adjusting our interest rates down. But we are -- we do have variable rate debt and so as you look at what's going on with LIBOR right now. My thinking is that interest cost will be relatively flat year-over-year.

All right. Thank you.

All right. So, thanks, Jason. Thanks everyone to join us on the call today. I appreciate your continued interest and support for PolyOne and look forward to catching up with you after the conclusion of our second quarter. Take care.

This concludes today’s conference. Thanks for joining the call and have a nice day.