Good morning, ladies and gentlemen and welcome to the PolyOne Corporation First Quarter 2019 Conference Call. My name is Brian 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 call is being recorded for replay purposes. At this time, I would like to turn the call over to Joe Di Salvo, Vice President, Treasurer, Investor Relations. Please proceed.

Thank you, Brian. Good morning and welcome to everyone joining us on the call today. Before beginning, we would like to remind you that statements made during this conference call maybe considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements will give 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 the 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 reconciliation from the most comparable GAAP financial measures. Operating results referenced during today’s call will be comparing the first quarter of 2019 to the first quarter of 2018 unless otherwise stated. Joining me today in our 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, Joe and good morning everyone. Today, we reported adjusted earnings per share of $0.64 for the first quarter, which compares to $0.68 for the first quarter of last year. This is only the second time in nearly 10 years since we have had a year-over-year decline in quarterly EPS. Like many companies in our space, our results for the first quarter were negatively impacted by weaker demand in certain end markets and regions and unfavorable foreign exchange. Most notably, a decline in automotive related demand in China, in Europe were the primary drivers in overall sales decline of 6% and 8% respectively in those regions, which impacted our color and engineered materials segments. In addition, construction and appliance related sales in North America fell significantly, primarily impacting our performance, products and solutions segment. Weather likely play a role as customers believe the construction cycle was delayed due to colder than normal temperatures in the U.S. However, underlying our results in the challenging macro conditions are several encouraging proof points that the investments we have been making better position us to navigate these challenges, but more importantly, position us for long-term growth with expanding margins. Since 2014, as you know we have made investments to diversify our product portfolio with innovative and sustainable solutions, but we have also expanded our commercial resources by over 30%. These investments were primarily made as enablers to our growth strategy and in challenging times like we experienced in the first quarter, these same investments also aided in offsetting the weaker demand. A clear case in point is our composites platform. We began our investment in this space back in 2012 with an acquisition of Glasforms. Since then, we have completed additional acquisitions and invested in commercial resources to drive growth and expand the reach…

Well, thank you, Bob and good morning everyone. Now, let me start first with our GAAP earnings. We reported $0.49 per share in the quarter. Special items in the quarter resulted in a net after-tax charge of $11.5 million and were primarily related to cost associated with recent acquisitions and environmental matters as well as recent targeted workforce reductions, which I will cover in a few minutes. Adjusted earnings per share for the quarter, was $0.64, a 6% decline in EPS. Excluding foreign exchange impact, our EPS was down 3%. In terms of our segments, engineered materials delivered a solid performance considering the challenging economic conditions. Soft demand in Europe and Asia transportation end markets were offset by strength in our composite business, as Bob previously discussed. Consumer and wire and cable end markets also expanded resulting in organic top line growth in total of 1% for the SEM segment. Sales and consumer applications within SEM grew 8% in the first quarter driven by new business gains. One excellent example, not mentioned by Bob is with a large multinational athletic apparel company. The application is an engineered material base layer for shoes with demanding performance characteristics. PolyOne’s ability to provide global support, technical development trials here in the U.S. and our ability to manufacture locally in China served as a differentiator to capture this $5 million new business wins. Wire and cable was another bright spot for engineered materials this quarter as our team continues to capture new business in this end market. Overall, wire and cable business was up 33% year-over-year and the majority of that growth is from new business closes here in North America. Likewise, new wins enabled by our sustainable solutions for packaging applications are benefiting our color segment. Last month, for example, we closed a…

Well thanks, Brad. And we’re certainly disappointed to report a decline in EPS for the quarter. But much of that was driven by macro economic factors that were outside of our control as we discussed. And as I look back in the first quarter, it was certainly better than it could have been because of our prior investments and strategic focus on specialty and sustainable solutions. We are not going to sacrifice our long-term growth potential, because of what we believe are these near term challenges. We will continue to invest in innovation, acquisitions and in our people to ensure we deliver long-term for our stakeholders. Leading indicators is our innovation pipeline as it reflects our research and development investment and activity it serves as a roadmap for our future growth. We have talked a lot about sustainable solutions today and you’ll hear more about that in the future. We’ve added more than $250 million of market potential associated with these solutions, some of which may sound familiar, such as the lack of barrier solution, Brad mentioned, and specifically for the dairy market in Asia. If you haven’t been to China or haven’t been there recently, you may not know the yogurt drinks are one of the most popular classes growing there, and our additives are an enabler making those possible. Our commercial team is generating new business with this growing part of our solutions portfolio. These initiatives, along with our focus on sustainability are leading to some other big wins. Just this quarter, our color team in Asia began production of color UV resistive materials for a floating solar panel application in Vietnam. This is really cool, the combination of color, the UV, which we call our smart badge solution very difficult to formulate, especially when serving the rapidly…

[Operator Instructions] Our first question will come from the line of Mike Sison with KeyBanc. Your line is now open.

Hi, guys. Just focusing a little bit on PP&S or performance products and solutions, sales down quite a bit in the first quarter, where do you see that business in 2Q based on your guidance and what do you think profitability should be it had made really good progress and kind of step back a little bit, maybe give us a little bit of a longer term view on that segment as well?

Yes. I mean, I think that’s going to be the primary driver, Mike, of the EPS decline we are projecting for the second quarter, almost entirely driven by construction and appliance. Just to put things in perspective, Brad had made a comment or two about sequentially how that terrifically plays out through the course of the quarter, the March sales on the construction space were down 20% versus last year. So, while I do expect orders will pickup some, in April, I don’t think we are going to get back to where we were last year. So, my expectation right now and again driving that $0.03 down is probably $6 million or so of operating income below prior year for this segment as a whole. So that hopefully answers your question about what we see for PP&S here in the short-term. Longer term, nothing has changed about this business and it has still got one of the best brand names out there, very well respected, very well regarded and one of the best performing in its space and the reality is, right now it’s just suffering from lower construction starts in the U.S.

Right, okay. And then for the second half of the year, you noted there could be some recovery. Any thoughts of what you need to see to see some earnings growth in the second half and then given the tough start for the first half of the year, is it strong enough to have flat to up earnings for ‘19 in total?

Now, first of all, let me just maybe service some remarks about China. And when I was there a couple of weeks ago, obviously everyone was disappointed about the results in the first quarter and what we saw there, but customers in general, I would say the sentiment seems to be pretty positive with respect to potential stimulus actions that will be put in place by China and to see those begin to take effect in the second half of the year. And I think those could be very real. To what extent that filters into and helps export markets I think remains to be seen, but I really think there is some good traction there. They could see some benefit in China in the second half. So, I think that’s a big driver for us, Mike. With respect to what that means for EPS for the year, I do believe we will see EPS growth in the second half of the year and that can offset what we have going backwards in the first half to deliver growth for the full year as a whole. I believe that’s very real.

Okay, great. Thank you.

Thank you. Your second question comes from Frank Mitsch with Fermium Research. Your line is now open.

Hi, good morning gentlemen. Yes, obviously, a lot of discussion on the difficulties in PP&S, you did mention that weather was an impact in Q1 and you gave good guidance on Q2 when you gave good guidance in terms of what March was. What are we seeing so far in April in that business and frankly for the company overall?

Yes. So the order rate right now for April just as it specifically relates to construction is up a bit. And I would say that’s not meaningfully over what we saw for the first quarter as a whole. So look, I have seen this in the past, where at times weather delays can result in a very robust following quarter and that may possibly still be the case in the second quarter, but April order rates haven’t suggested that, which is why we have given the guidance, Frank, that we did for the first quarter. So that’s the best information we have right now. As you guys know what we have got worse that probably give us visibility for 3 to 4 weeks and try to make the best statements about the future we can with what we have.

Understood. And obviously, you have taken some steps, your intervention actions can you provide some granularity in terms of order of magnitude of savings etcetera?

Yes, I mean, look, most of this is just about improving efficiency and when you get into it up, we get into a year like this. I think it just as you reflect on the layers in the organization and where you can take – make moves to improve efficiency as Brad described that. So, it’s about 50 to 60 people I would say, probably still half of those savings in the first quarter with a little bit more to come in the second and third quarter. So by the third quarter, we should be at that full run-rate, which is $1 million or $2 million of positive benefit.

And this was primarily in the PP&S business?

No, I mean it really was across all of our businesses as well as our corporate functions and perhaps the corporate functions being impacted the most.

Alright, thank you so much.

Yes. Thank you.

Thank you. Your next question will come from the line of Mike Harrison with Seaport Global Securities. Your line is now open.

Hey, good morning.

Good morning, Mike.

Bob, I was wondering if you could talk a little bit more about the composites business and in particular, the contributions from Fiber-Line, if I heard you correctly, you said that overall the composites plus Fiber-Line contributed about $3.5 million of operating income. Just wondering if you can maybe help us understand what the trajectory of that operating income number looks like as we go through the rest of the year based on what you are seeing at this point?

Yes, I mean I prefer not to give specific profitability numbers by product line. So that’s why we referenced composites in total for the quarter and we’d like to keep the comments to that level if I may. With respect to how that plays out for the balance of the year, I think it’s going to continue and what we have seen is a growth in operating income and specialty engineered materials, which is – it’s been something we have been focused on intently for the last couple of years where we’ve had some disappointing performance there. It’s very exciting to see composites lead the way and the investments we’ve made pay off and you’re going to continue to see that through the year in its entirety. The wins that we’ve had are exactly the kind of wins that you want with respect to specifications and longer term and so I don’t see any reason why that wouldn’t be the case for the balance of the year and beyond, Mike.

Alright, great. And then I was also wondering if you could talk a little bit about what you’re seeing in Europe obviously came into the quarter, a little bit weaker than what you were hoping? But I think it’s still slowing there. Are you seeing any signs that there is some recovery in Europe and maybe give some color on specific countries or markets in Europe that you’re seeing pockets of weakness or strengths?

Actually, I think when I was commenting on Mike Sison’s question, I just made an observation or two about China and seeing that as a positive in the second half of the year. I really should have commented on Europe at the same time, because we are not seeing improvement in Europe from an order rate perspective and not aware of something that’s going to make that better. So even though we believe we’re going to see growth and improvement earnings in the second half of the year. I don’t believe that’s going to come from Europe, look outside of potentially just lapping what was really weak fourth quarter last year. But right now, conditions are not good. I think as you know, lot of that driven by automotive which we’re participating in and at present, I don’t see that getting better in 2019.

Alright. Thanks very much.

Yes.

Thank you. Your next question will come from the line of Ben Kallo with Baird. Your line is now open.

Good morning, guys. Maybe this is for you Brad on the FX you guys called that out, can you quantify that for because it was kind of a surprise to me?

Yes, yes, Ben, I mean that it’s about – at the OI line, it was about $2.5 million, OI hit, which equates to little over $0.02 a share on an after-tax basis. And I think that’s relatively consistent with what we had kind of signal when we started to talk about 2019 it’s going to be another headwind as we look at second quarter probably of almost similar magnitude and then as we get to the second half of the year, things normalize if the euro and dollar stays at the rates that it is today.

And just on that front, could you just remind us all kind of how we should think about the FX exposure, because I know you’re talking growth in China and slowdown in Europe, and so, what should we be watching for as far as the headwinds?

Yes. I mean, I think it’s really the RMB and the euro exchange rates. And again, like I said, if you get to the second half of the year, the exchange rates on both of those currencies are essentially flat at today’s rates. So again, it’s going to be a headwind here in Q1 and Q2 and then dissipates after that.

Great. And then as far as capital allocation, you talked about tightening the belt in what you’ve done in the Q1 and then certainly Q2, how do we think about, I think you purchased 1 million shares in the first quarter somewhere around there, how do we think about that and then potential tuck-ins in this environment?

We didn’t acquire any shares in the first quarter and that was largely just due to the funding of Fiber-Line. Typically, we try to pace the share repurchases based on what is going on with respect to CapEx, overall level of borrowing and M&A activity. So, we didn’t have any share buybacks in Q1 and not making any projections for the balance of the year. We bought back little over 2 million shares in the fourth quarter, which is obviously helping the year, but nothing in Q1.

As far as the tuck-in acquisitions and your capital allocation here?

Yes, I think that the view is unchanged, but with respect to looking at bolt-on acquisitions and technologies and other, we’re looking at in the composites space albeit small, I still think we have plenty of capacity to do those as we go forward. You are right that as we’ve looked at some of the belt tightening, we did that around CapEx as well and I’d say we’re going to make the investments that we need to this year and some of the things that are nice-to-haves, but not must-haves can be deferred.

Got it. Thanks guys.

Yes.

Thank you. And our next question will come from the line of Colin Rusch with Oppenheimer. Your line is now open.

Good morning. This is Kristen on for Colin. Thank you for taking our questions.

Sure. Good morning.

Good morning. Just as a follow-up on the workforce reductions, as you go through some of this effort and if the softness is more transitory, as you start to grow again, what do you anticipate incremental margins can look like?

I mean, look we – the first question started off around the headcount reductions, but it’s sort of we already gave the order of magnitude on those and how that should play out through the course of the year. So, I think you can factor that in from a margin standpoint. Look the biggest upside opportunity that we have in our margins is improving upon the recently acquired businesses that we had, which as you know they usually come in around 8% to 10% of sales in Color and EM, and we believe we’ve got the opportunity to double those in 5 to 7 years, making very good progress now on the composites side and obviously as you know composites was a business that we were investing so heavily in that even had an operating losses recently as the first and second quarter of last year. So, I think you’re going to see really good improvement in margins, but you’ve got to obviously see an uplift in sales and the general market conditions for that to be the case.

Great. Appreciate all the color that you gave on Europe. Specifically, I wanted to ask about your auto customers there. Are you getting any indications as that weakness is due to some of the testing procedures that they have going on in that transition and is therefore maybe more temporary rather than a structural demand decline?

Well, with a lot of that feedback is anecdotal from customers and we certainly hear that sometimes. My best estimate of what we’re seeing right now is that, we’re not going to see any improvement in 2019, so how you define temporary I guess is open to a discussion, but I don’t think it’s going to be an improvement this year.

Great. And then if I could sneak one more in, just on free cash flow expectations for the year, obviously there’s some seasonality in Q1, but based on your CapEx outlook, which we’d be looking for free cash flow?

Yes, I think we’re on track to deliver about $200 million in free cash flow.

Thank you so much.

And that again just for clarity, Kristen, is after funding again, our CapEx.

Thank you. Your next question will come from the line of Bob Koort with Goldman Sachs. Your line is now open.

Thanks. Good morning.

Hey Bob.

Bob, I was wondering if you could characterize how you feel the health is across your supply chain in light of volatility in pricing or demand trends. Do you feel like there’s been some destocking and customers may be waiting for some price relief, is that not been an issue, what’s your general sense of that issue? And then secondly, should we expect to see any raw material relief at the gross margin line, have you seen that, and then what’s your expectation looking into the balance of the year?

So, look I do think that there has been some destocking. I think that started in the fourth quarter of last year and continued into Q1. I’m making this as a customer observation, where I just think in general, everyone is very cautious given what is playing out from a macro standpoint and not wanting to sort of relive a build in inventory like we saw in ‘06 and ‘07. So, I think that could be easily playing a part in this. I’m cautiously optimistic that we will see some benefit from raw materials going forward in latter part of this year. But as you know for us a lot of times when you look at headline numbers like what’s going on polyethylene or polypropylene for example, those are base resins for us, carrier resins, and while we may see some relief in those, we’re seeing increases in other places like pigments and dyes, which is impacting the Color segment. So, I think there is a little bit of good news coming on the raw material side, but really just starting to see that now and hopefully that gets better in the second half of the year.

And then you noted organic sales erosion, I may have missed it. Did you give the breakout between volume and price there, how much of it is underlying volume erosion?

We didn’t give the specific on that. We usually try to put that into our Q. If you need more follow-up, we can. But in general, the volume was down most notably in PP&S world with the preponderance of the sales decline that we saw a little bit in price as well. But across the board I would tell you, we did have good traction in pricing. As you know last year, I felt like we were behind on that, but with the actions we took in the second half of the year, we’re starting to see some benefit. Distribution is a good example, where volume was down slightly, but pricing was a positive and we got the freight surcharges in place, which were long overdue. So, we’re seeing some benefit there as well.

Great. Thank you.

Yes.

Thank you. Your next question will come from the line of Dmitry Silversteyn with Buckingham Research. Your line is now open.

Good morning, gentlemen. Thanks for taking my call. Couple of things, if I may. Number one, you talked about raw material relief, so, thank you for addressing that – concern or that that question, but you also mentioned that Fiber-Line is getting into some of these kind of the power opportunities, power distribution opportunities in the 4G and 5G expansions. Can you – is it possible for you to sort of ballpark what that market opportunity for you could be over the coming 2 to 3 years, have you thought about it that way?

Maybe the best way to describe that is what we see is the growth opportunity for that business. We had projected – at the time we actually announced the deal, I believe we said we expected sales to be around $100 million in revenue. And I think with the expansion of existing infrastructure and then soon-to-come 5G, you can see double-digit sales growth as a result of that quite easily for the next 6, 7 years, Dmitry. I mean at some point, there’ll be a plateau on the infrastructure expansion, but that’s what we see right now.

Okay. So, that’s a very good – very good framework. Thank you. And then secondly, there is a lot more attention and you mentioned on a couple of times in your prepared remarks on sort of environmental sustainability and use of plastics obviously, we’ve seen – we’ve all seen the straw bans in various parts of the world and in this country. How do you look at that trend and how are you positioned to either benefit from it with your increased sales of additives that help minimize plastic use and then help recycling or conversely, are you looking at this as a potential headwind going forward as these initiatives spread?

I believe as you know, we were – we probably had joined the Alliance to End Plastic Waste as a founding member that was announced at the beginning of this year. The alliance is newly created and led by Dow, LyondellBasell, GM [ph] and many others, who really are very interested in helping us to clean up the planet as a starting point. But I’d also say that next generation of the activities are all about improving recyclability and providing better materials for all of us. And look from my standpoint that could ultimately mean that in some cases for like beverage and food packaging less material is used and that’s okay. For us, our solutions enable that when you look at what we offer for many of the additives that we provide. So, I think this is only going to gain momentum, and I think PolyOne stands to benefit from our sustainable solutions. In some cases, you may see things go away or change and certainly in some cases, you see less material being used, but in the long run, I don’t see anything, but positives from that.

Excellent, Bob. Thank you.

Yes. Thank you.

Thank you. Your next question will come from the line of Laurence Alexander with Jefferies. Your line is now open.

Good morning.

Good morning, Laurence.

Could you peg a little bit sort of any cash outlays you have for restructuring or is it for the cost cuts that you are doing? And then also speak a little bit about how you’re thinking about adding talent in this environment, I mean, where you’re still expanding the technical sales effort?

Yes. I will take the latter part of that and Brad can tell you a little bit more about the numbers, some of that restructuring was in the first quarter. Look, first of all, as you know, we have hired a lot of resources in the last 4 years in sales, marketing and technology being up 30%. I think in light of the current circumstances, it’s important for us to continue to invest in our people, but largely as replacement hires to keep things flat from a turnover perspective. And as we said sort of at the end of last year maybe the middle of last year, really, it is important for us to drive more efficiency from those. So, for example, Laurence, if you went back to ‘14 and kind of followed our trajectory through ‘16 and ‘17 sales dollars per seller was actually down. That was okay, but we need to start to see that go on a positive direction and it is beginning to in 2018. So, I think this year is about being more productive and being more efficient. We will not hire at the pace that we have in previous years. Brad, can you comment on the –

Yes. Laurence, on the restructuring actions that we’ve discussed, in our first quarter, we took a charge for activity of about $4.5 million. There’s probably a little bit more to come in the second quarter as people leave the organization, but that’s you should think about that as cash outlay.

Okay. And then could you give us sort of a benchmark for the current run rate for composite sales and sales in China?

The first part was composite sales. What was the second, Laurence?

Sales in China, what the current run rate is?

Right. So, composites in total is up to about – when you add in Fiber-Line, we should be right about $35 million, $40 million for the first quarter and then China is about 10% of sales in total.

And then just lastly, can you speak a little bit about the M&A environment that you’re seeing in this – your – either multiples starting to come down or do you think some additional assets could shake loose?

No change in multiples, that’s actually been kind of an interesting discussion point really over the last few years. Whenever we see a little bit of contraction and macro activity, you think well maybe that would be the case, but it certainly hasn’t been our experience. And at this point, I’m not seeing any real change in activity in terms of something coming to market that wasn’t previously contemplated. If anything, it may delay some of that with the numbers being down some this year. So, there’s a couple of things that we’re looking at, but that really started last year, so at present no change from our perspective.

Okay. Thank you.

Thank you. Your next question will come from the line of Jason Rodgers at Great Lakes Review. Your line is now open.

Yes. Just a follow-up on Fiber-Line, I think the expectations were previously mid-to-high single-digit growth for 2019 and maybe $0.02 to $0.04 for the year contribution. Any update to those forecasts?

No, I think those are still good numbers.

And can you quantify what the impact was on raw material costs on gross profit for the quarter, I think you did that for the last few quarters?

In total, I have to – off the top of my head, I couldn’t give you the inflation/deflation impact, as you know, overall volume was down, so, total costs were down as well. What I would tell you is that, if I just look at Color and Engineered Materials for example, overall, raw materials were up, even though we started to see things come down a little bit a few pockets, it was some of the other specialty materials as I mentioned like pigments and dyes that led to overall inflation. PP&S was roughly flat. So, that kind of puts things in perspective to where we were first quarter of last year.

Okay, that’s helpful. And then Brad, do you have a forecast for the tax rate for 2019 and CapEx as well? Thanks.

Yes, we did as you saw in our release, our first quarter effective tax rate was about 24%. And I think as I look at the rest of the year, we’re going to be in the 24% to 25% range. So, I think that’s probably a good proxy. And our CapEx, we’re thinking we’re going to be in kind of the $75 million to $85 million range for CapEx.

Okay. Thank you.

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

Thank you. Your last question will come from the line of Jim Sheehan with SunTrust. Your line is now open.

Good morning. This is Pete Osterland on for Jim.

Hi, Pete.

Given some of the demand headwinds, did the pace of freight and logistics cost inflation ease at all during first quarter and do you expect any further inflation as you look forward into the rest of the year?

I think freight really does start to flatten out in the first quarter in the U.S., we saw it tick up some in Europe, but for the most part, no real significant changes from what we saw, I mean, obviously, last year it went up rapidly at the beginning of the year. So, it seems to have stabilized at the beginning of this year.

Okay, thank you. And then you called out a product mix improvement on the distribution segment. Could you just give a little bit of color about what is driving that positive mix impact?

Yes, just a little tilt towards I’d say healthcare as well as the outdoor high-performance industry, which we saw quite a bit into from distribution. And then obviously, as you know we did put the freight surcharges in place, which is we did not have in place in the first half of last year. So, those are the primary benefits of the – or drivers of the benefits this year.

Thank you.

Great. Okay, well thanks everybody for joining us on the call today. We look forward to updating you on our progress on our next call following the conclusion of our second quarter. Bye for now.

Thank you.

Ladies and gentlemen, thank you for your participation on today’s conference. This does conclude the program and we may all disconnect. Everybody have a wonderful day.