Good morning, ladies and gentlemen, and welcome to the PolyOne Corporation Fourth Quarter 2013 Conference Call. My name is Alice, and I will be your operator for today. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes. At this time, I'd like to turn the call over to Isaac DeLuca, Vice President, Investor Relations. Please proceed, sir.

Thank you, Alice, and 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 the 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 on the company's filings with the Securities and Exchange Commission, as well as in yesterday's press release. During the discussion today, the company will use both GAAP and non-GAAP financial measures. Please refer to the earnings release posted on the PolyOne website, where the company describes the non-GAAP measures and provides a reconciliation of them to the most comparable GAAP financial measures. Operating results referenced during today's call will be comparing the fourth quarter of 2013 to the fourth quarter of 2012, unless otherwise stated. Joining me today on the call today is our Chairman, President and Chief Executive Officer; Steve Newlin; Executive Vice President and Chief Operating Officer, Bob Patterson; and Executive Vice President and Chief Financial Officer, Brad Richardson. I'll now turn the call over to Steve Newlin.

Well, thanks, Isaac, and good morning, everyone. I'm pleased to share our fourth quarter results with you, as we close out another record-breaking and transformational year for PolyOne. We delivered fourth quarter adjusted earnings per share of $0.26, a 44% expansion over last year. And this marks our 17th consecutive quarter of strong double-digit year-over-year adjusted earnings per share expansion. Our strong performance in 2013 built momentum throughout the year and exceeded our 25% compounded annual adjusted EPS growth rate of the past four years. Our consistency in delivering outstanding results like this positions us in a unique group of companies who regularly exceed expectations, differentiate themselves from their peers and help their customers win and succeed. And Bob and Brad will talk more about our quarterly performance shortly, but I want to briefly reflect on 2013, as well as look forward to 2014. We're extremely proud of our 2013 results and it's an inflection point for PolyOne. For the full year, our revenue set a record of $3.8 billion. And we delivered adjusted EPS of $1.31, a 31% increase over 2012. What's really impressive about our earnings growth for the year is that we exceed the S&P 500 earnings growth rate nearly six-fold based on full year estimates. Our 2013 performance accelerated during the second half of the year with solid organic growth and the 35% increase in adjusted earnings per share. And this powerful momentum, which sets us up well for 2014, allowed us to strengthen our solid foundation for the future based on four fundamental drivers. First of all, our Specialty Platform has been at the heart of our achievements. Underlying this performance has been our relentless focus on mix improvement complemented by our shift to high-growth less-cyclical end-markets. As the evidence of our mix improvement success,…

Thank you, Steve, and good morning. I am truly excited to be a part of a high performance organization with a proven track record of PolyOne. During my diligence process on PolyOne, one of the things that impressed me was the laser focus this company has on performance, execution, rigor and its unwavering commitment to the portfolio strategy. I believe my experience in both operational and finance roles brings me new perspective both in working closely with each of our business unit presidents as well as continuing to improve our capital structure to support our continued growth and returns to shareholders. With that, it is my pleasure to provide more detail on our fourth quarter performance, which continued the great results we saw in the first three quarter of 2013. We reported fourth quarter revenue of $923.6 million, up from $651 million last year. Adjusted net income from continuing operations were $25.6 million versus adjusted net income of $15.9 million for the fourth quarter of 2012. Adjusted EPS expanded 44% to $0.26 per share versus $0.18 last year. Sales increased 42% overall, principally driven by the acquisitions of Spartech and Glasforms, while gains in healthcare, electrical and transportation end-markets grew over 4% increase in organic revenue. We attribute this success to our investments in commercial resources, improving mix, product growth and new technology launches and early success with the integration of Spartech, which continues to accelerate. With the addition of Spartech in 2013, our income mix is heavily skewed towards North America. As a result, our pre-special tax rate in the fourth quarter was 39.2%, up from 37.3% in the fourth quarter 2012. Special items in the quarter resulted in a net after-tax charge of $4.9 million or $0.05 per share and included the following: restructuring charges, principally related to…

Thanks, Brad. It's pleasure to have you here with us today for your first investor call. And what a great way to start, with an outstanding fourth quarter, bringing to close a record year to PolyOne. Once again, our Specialty Platform led the way. In the fourth quarter, specialty revenues increased 72% over the prior year to $514 million. While much of this revenue growth comes from the recent acquisitions of Spartech and Glasforms, I want to highlight that our Specialty Platform delivered our strongest quarterly organic sales growth of the year in the fourth quarter of 5%. Asia gained 14.2%. North America paced up nearly 5%. And Europe was up 4%. While we did see some help from FX in the fourth quarter, I'd point out this is the first quarterly revenue growth we've seen in Europe in two years. And with this organic growth, we saw a substantial improvement in mix and margins. Coupled with our efforts to expand profitability in DSS, specialty operating income doubled over the prior year and reached a new fourth quarter record of $44 million. The Global Color, Additives and Ink segment capped off a tremendous year with a strong finish in the fourth quarter. Sales increased 15% to $198.6 million and double-digit organic growth from ColorMatrix and Asia Color, as well as the addition of Spartech. Operating income grew to $20 million, a 57% increase over the prior year and a record for the segment. Notable gains were achieved in every region for our color business, but I want to highlight our teams in Asia who expanded sales by 16% and delivered a 25% improvement in operating income. ColorMatrix also finished strong with a 12% increase in sales and operating income more than doubling in the fourth quarter. For the full year,…

Well, thank you, Bob. It's great to hear about what we accomplished last year, but the time for celebrating 2013's success is over. We have a new year to focus on, with higher expectations from our customers and our shareholders. To deliver on those expectations, we have a lot of work to do. Growing revenue, improving profitability and introducing new and innovative products will not simply happen based on past success. We have to make it happen and we will. We will not rest on our laurels nor will we ever become complacent. Great companies never do. We have a tremendous amount of excitement and organizational energy building at PolyOne. And I just returned from attending a grand opening of our new facility in Turkey last week. And for all the negative news of late about Turkey and other emerging markets, you sure wouldn't know it from our associates and our customers there. It was energizing to hear our customers talk about how our portfolio is helping improve their businesses, as well as the opportunities our facility and its capabilities can offer. Our business in Turkey doubled operating income over the prior year in 2013. And recently, Turkey gained the number two position in Europe for plastics consumption with a growth rate of over 10%. Our state-of-the-art facility is a specialty plant that is designed to meet that growing demand. It shows PolyOne in a different light and our customers are eager to develop long-term collaborative working relationships with us. And Turkey is just one example where our energy is steaming. There are many others and the energy and momentum will carry us well into the future. We expect to continue to deliver strong double-digit adjusted earnings per share growth in 2014, growing our specialty portfolio and importantly introducing unique innovations that our customers value, providing strong returns to PolyOne. We look forward to sharing our first quarter 2014 results in early May and seeing many of you at our Special Innovation Day on May 16. With that, we now have time for questions.

(Operator Instructions) Your first question comes from the line of Robert Koort at Goldman Sachs. Please proceed, sir.

Just wondering if you could give us some sense within Spartech, I think, Bob, you mentioned there's still some training going on. How far are you in to sort of changing the sales culture of the EVE tools, the whole process of reinvigorating that marketing and customer interface efforts?

Well, I think that we're still in the early innings and we'll really make great progress this year with training and introducing the tools like you mentioned, the EVE tool, as well as in general just customer-centric selling skills. So we've got a long way to go. I'm encouraged by the associates at Spartech. I think they're really to emblaze specialization and largely have been very energetic about being part of PolyOne and receiving that training.

On the cost side of the asset optimization, can you talk a little bit about where you expect to get the savings there? I mean obviously there's facility closure and some reduction headcount. Are there other logistical benefits or how do you get some value out of that process?

Well, in terms of the $65 million of operating income improvement that we defined early on, that did include benefits from sourcing savings, supply chain improvements, et cetera. And some of that is due to North American manufacturing alignment. So it's included within the $25 million. I don't have an exact write-down for you, but it is included in the $25 million, much of which comes in to play in 2015 with those closures being largely scheduled for completion by the fourth quarter of this year.

You track on that thought, Bob. We have a lot of work that's going on around improving the product quality and reducing scrap rates and there's a pretty nice price to be had when we get all of those issues resolved. And we're making excellent progress on that front. And then I think Bob mentioned supply chain, but certainly there is a lot of additional volume that suppliers are interested in, in competing for. And we think we'll gain some advantage on that front as well.

Your next question comes from the line of Frank Mitsch of Wells Fargo Securities. Please proceed, sir.

On the organic growth in the Specialty Platform, Bob, I think you said it was 5% organic growth, but then also you mentioned that ColorMatrix had double-digits organic growth. Does that imply that the GSEM was well below the specialty average?

Well, Specialty Engineered Materials was about 6% organic growth year-over-year. And then I mentioned double-digit for ColorMatrix and then it was the legacy match for batch business that was a little bit below that average at about 3%.

Do you think that your 43% vitality index in terms of that area of growth, that part of the color, are doing particularly well, and the other parts not so well, and then GSEM is kind of in that average? How do we think about how that 43% breaks up by the three major parts?

Well, each of the three businesses have better than 35% vitality index. So I wouldn't point to either one as being a lag or a particular positive. I think they're all doing very well. And we have had influence from bringing on new product lines such as liquid color and additives from ColorMatrix. So I'd say our balance right now at Color is a bit higher than EM. But certainly both of those businesses are fairly world-class.

Lastly on the distribution side, you talked about some of the weakness that you saw in Q4. How should we be thinking about that business in 2014?

It's been in our line of safety gauge, our margin targets in 2015. So we need to get past 6% return on sales and get closer to 7%. We had an unfortunate beginning to the year, if you will, with respect to raw material prices and unfortunately just couldn't overcome that throughout the course of 2013. But we've got good line of sight to doing so this year.

Are you expecting a significant progress in distribution as we go through Q1 and beyond?

Yeah, I think we're going to see good topline growth as well as margin improvement.

Your next question comes from Laurence Alexander of Jefferies. Please proceed sir.

It's [ph] George D'Angelo for Laurence today. Just in the current market environment, is the ongoing mix shift enough to support a mid-teens growth cadence in each quarter or the progress will become more lumpy going forward?

So I would say that mid-teens would be below our expectations and below our four-year performance. If you look at our CAG over the last four years, it's been 25% and it accelerated in the second half of the year. So I would personally be disappointed with that level of performance. I think the lumpiness for us is kind of working its way out of this system as we move to markets that are less cyclical. I think that wonderful advantage that we have at PolyOne is this great opportunity of business potential that is really up to us to execute. Of course, everybody is linked to the macroeconomic issues and if there is a big downturn, obviously same-store sales would erode. But for us, it's more about cash free new business gains that are profitable, that enable us to have incremental growth. And for that reason, we don't ever talk about metrics like what's the GDP growth rate and do we have a number above that at which we expect to grow. Our expectations are more around our ability to innovate, gain new business and execute. So I think the lumpiness for us has a little bit of seasonality to it, if you will, to use your term of lumpiness. And that really works like our second quarter almost always our strongest, our third quarter is the second strongest followed by the first quarter and then the fourth quarter. So that's the only element of, I guess, lumpiness that I would see as more seasonal factor.

Just one quick follow-up. Can you give any guidance on CapEx for 2014?

Yeah, let me just take that. If you look historically at certainly what we did in 2013, we spent about $76 million, which is roughly about 70% of our depreciation rate. As we look to 2014, we're looking at a number more like $100 million, just slightly below our depreciation rate. And that's really a function of the fact that we are investing in the manufacturing realignment for the North American business. So that's roughly in the $100 million range.

Your next question comes from Mike Sison of KeyBanc. Please proceed, sir.

A couple of things in Designed Structures and Solutions, very impressed that that operating margin is 7%. I recall even the fourth quarter tends to be the weakest quarter seasonally for that business. When you think about 2014 and all the cost savings you have, I mean how much progress do you think you can get, is it a couple of hundred basis points based off of where we're at now?

Well, we haven't set any specific targets for 2014. We certainly have a trajectory that was leading to believe we could get there. I think that last year and that fourth quarter, they were right around 2%. And also we have achieved pretty significant year-over-year growth. We may see some of that being backend-loaded with respect to manufacturing realignment, timing and getting a remainder of that in 2015, but certainly have great progress so far that I don't expect to stop in '14.

Let me view on sales for '14 for BF in the sense that I think you got some product rationalization effort that you tend to do in terms of improving businesses there? Is there a way to describe what's at Spartech are keepers now versus what maybe have been keepers earlier in the year?

Yeah, I mean it's reasonable to expect that we'll have ongoing prudent activities through the course of 2014 as we look to highlight more profitable product lines. We're not intentionally trying to lock away from many customers or business, but we do want to focus on those areas while I think we have the most differentiation. I would tell you that we're emphasizing the packaging sector. It's a place where we want to be longer term and certainly that would be an area where we would emphasize growth.

When you think about GSEM, you sort of had some projects as a team, but also seen a delay from 2015 goals in terms of operating margin. Any thoughts there, why isn't there an improvement, what needs to happen to sort of get it on that trajectory?

Yeah, so that's a fair observation. And here is how we view this. I mean we are varied and optimistic about GSEM and they have made tremendous progress. The reason that they're lagging is that this is a very long sales cycle business. You're dealing with the OEMs. You're getting specked in. You're passing a lot of tests to qualify and getting a lot of approvals. And we have consistently said this is typically more like a three-year sales cycle. So this past year, we reaped the benefit of some of the word done three years ago. Next year, same thing. So the process is continuing. And we've added resources in the organization to penetrate further, but it is just a very long sales cycle process. And while it's a little frustrating on the front-end to see the results as early as you'd like, it's a really terrific when it comes to building barriers once you do get entrenched and established. I mean you think about the markets that we're selling into in that business, healthcare, aerospace, auto, these are businesses that you need to work hard to get specified and they're going to require some convincing, some conviction and some proof before you begin to collect orders. So I think that's the reason for the lag. And I think we're doing a very good job of improving and executing in that space. So I would stay tuned in. And we certainly expect that business to grow and make the range that we've laid out for 2015 and I would also say, my personal thinking is long term, that will become the most profitable part of PolyOne.

Your next question comes from Kevin Hocevar of Northcoast. Please proceed, sir.

In Spartech, I believe on last quarter's call, you mentioned you expected it to be accretive $0.08 to $0.09 for the year and it ultimately turned out to be $0.12. So just wondering what was right over the past couple of months that really accelerated that business?

I think it's a couple of things and they really relate to our interactions with our customers where we've been able to quickly implement the use of the EVE tool and demonstrate our value. And while we expect some prudent activities, it hasn't been to the extent that we had planned. So I'd say that that number wasn't as high as we thought it would be and ultimately margins will better as a result. And we're also just ahead on timing with respect to cost out. So while we haven't changed the total goal of $65 million, I think we've gotten there faster this year from a cost reduction standpoint.

I'll give our team some credit here for this. I mean we put some high-powered talent down in that business. We had bench strength backfill for them (inaudible) has done a great job of leading that organization, Tom Kedrowski in the manufacturing organization are doing fantastic work. So I think we're just executing beyond our expectations.

It sounds like you have an expectation of mid-single-digit type organic sales growth in 2014. What type of incremental margins can we expect, particularly in the Specialty Platform where the organic growth has been hindered either from Europe or product tuning or what have you in the past couple of years? Just wondering now that this is going to be a tailwind next year, what type of incremental margins we can expect.

Well, on the operating side and we've always planned on trying to do 100 basis points to 150 basis points of improvement and I think that gets us inside our range, where we want to be in 2015. A lot of that comes from ongoing benefits from Lean Six Sigma, but also improving emerging markets. I'd point out that Europe is 35% of our EM and color businesses and remains behind from a profitability standpoint. As they hopefully come out of this recession, we saw a great progress in that regard in the fourth quarter. And I think that will be a tailwind for us next year. But lastly, it's really innovation. And our ability to introduce new and unique solutions for our customers drives margin performance beyond the other two. And that's why we're going to host the Innovation Day on May 16 is to highlight what's next and what you can expect.

Does this harsh weather that we've had, particularly in December and January, have any impact on your business at all?

A little bit. We've had some challenges with delivery in December as well as in January. And we've been fortunate to be able to keep our customers' supply, but it wasn't easy. So we have a little bit of work to do around making sure we navigate all the problems that are out there. And then most recently of course with gas pricing changing, obviously that's going to impact our business both in terms of cost to produce as well as ultimately raw materials. But we mange that we manage it well. So you can expect us to recover that and build margin through pricing related to the energy cost as a result of the weather.

Your next question comes from Mike Harrison with First Analysis. Please proceed.

I had a question on the color business, maybe if you could just talk in a little bit more detail about the uptick that you're seeing on the liquid side and is that cannibalizing some of the more traditional masterbatch business? And then specific to masterbatch, are you seeing any competitive pricing pressure? You mentioned that the organic growth rates were a little bit low average in that business.

We are not seeing any cannibalization from the liquid color business. And in fact, this is something that really crystallized for us when we were conducting due diligence on ColorMatrix as just how different the marketplaces are that the two businesses are in and what we're trying to grow. So for us, it's really viewed as a strength and we can also build a masterbatch and a liquid color solution and haven't seen any comps like there. A lot of the growth that's been coming out of ColorMatrix I think has been from our own best practices with respect to communicating value to the use of the EVE tool, et cetera, and get some margin expansion as a result. And then from a masterbatch side, I mean it's always a competitive market out there. And to some extent, you have to add some (inaudible) but most notably in blacks and whites as we continue to emphasize specialty color where we think we can be differentiated.

On the Spartech side, you mentioned that leveraging that business internationally is something that you would look to do over time. Is that something that you guys can do organically now that you have the combined resources? I think as we think about the Spartech business, we always thought that that might be a roll of opportunities you look for and try to expand it. Can you do it organically or do you need acquisitions?

Well, we can do this organically if we choose to. It will be sort of buy/build, do it on the income statement or the balance sheet decision. We're just not ready right now to do this. We're getting closer, but we certainly want to have the house in order before we start extending it and leveraging it globally. We have capacity opportunities and space in some of our existing plants, for example, to do this and all the infrastructure is there. So certainly theoretically we could do this on a home-grown basis. But again, every one of those decisions will be based on opportunities that are out there to get there faster and then it becomes just a financial decision more than anything else.

Did I hear correctly that you saw 24% organic growth in Europe in Engineered Materials? And if so, how did you do that?

You did hear that correctly. And really through new business gains. We started to see some weakness in that business going back to 2010 and 2011 with the recession there. And I'd like to say things are not getting any worse in the fourth quarter, but for the most part, our performance has been driven by our ability to go out and win new business at better margins. It hasn't been about our economic recovery.

Your next question comes from Dmitry Silversteyn of Longbow Research. Please proceed.

First of all, on the PP&S side of the business, as you look both at '14 and towards your 2015 goal, how is it tracking with respect to housing starts versus your expectations, which I think were somewhere in the million housing starts by 2015? And assuming that the construction market in the North America recovers a little bit slower than that, are there levers that you can pull inside the business and things that you can do sort of internal execution to get to your margin goal?

We haven't looked at this , Dmitry. I believe I said 85% of the 50-year norm and that came out to be around 1.2 million, 1.25 million housing starts in '15. Here are some data points that might be helpful. In '11, there were 610,000; '12, 780,000; '13, 920,000 starts estimated and the mean expectation for '14 is 1.12 million. So we're tracking really nicely. Our expectation for another 200,000 incremental starts in '14. And if you take that trajectory, we'll certainly get to the 1.25 million that we had stayed at when we put those goals out and maybe it's possible to have a little bit more than that. I don't have any '15 estimates yet. But just based on kind of the way the ramp-up is going, it should be pretty much in the ballpark.

As you look at your both current performance, as you finished 2013, and your delta into '2015 target, is there a much difference in your specialty businesses regionally between North America, Europe and Asia, Latin America, and where do you have to sort of do the most work to make sure you hit the margin targets, where you are on target or a little bit ahead of your expectations?

I guess, just to answer the question about where do we see the most work, I would say that is in our emerging markets and outside the U.S. We still have some work to do, I think, to overcome a recession in Europe. That could turn to be a good guy in the event that the market recovers, it turns around. But we also have some regions such as Brazil that just aren't where we want them to be from a margin standpoint. And so got a lot of work to do there, but this is not the preponderance of our business, as you know. So we've got great success and momentum in North America and Asia with some pockets of work to do in some of these smaller markets.

We're blessed with abundant opportunities in all of the regions. And so it's up to us to execute on all those fronts. And for us, it's hard to just sort of single one out. I mean obviously Asia is really important to us long term and we're doing extremely well there. The European recovery would help it. I would just not overlook North America. I mean the successes that we're having with specialty in North America are rather extraordinary. They have a lot more to do with the applications and creating value for the customer than they have to do with sort of the economic growth rates. So we've got to execute on all fronts.

If there is a significant difference in growth rates between 2014 versus 2013, for example, if Europe goes from being negative to being a contributor, is there differentiation in margins strong enough that we'll have to be at least cognizant of some margin headwinds or conversely tailwinds as some of the regions grow faster than the others?

I think the balance and the way it is such that the biggest business we have is of course the highest margin and the most attractive businesses. But as we begin to expand our growth in these other economies and we're doing so with new technology, it's priced right, our new technology is priced right, so we should have accretion. I think your underlying question is, is PS&S has a lagging margin profile. And so to the extent, they have more weight, more sales, they would be dilutive to the core of our gross margins. But it's more of a platform basis than it is a regional basis. And yes, I would also say Europe lags a little bit on the SEM side, but the opportunities that they're taking advantage of now are much more profitable than in the past, because they're getting out of sort of the base nylon business into more attractive specialties. Hope that helps answer your question, Dmitry.

Your next question comes from Robert Koort of Goldman Sachs. Please proceed.

Do you have a sense or a plan in terms of taking the Spartech products to Europe or more globally, how fast you might be able to do that or what certain metrics we should look at from the outside?

It's still early for us. We want to be careful with this. We see opportunities and we move at a pretty brisk space around here. But I think we're really wanting to make certain what we have and selectively lift the platforms that are the most attractive, not just from the end market standpoint, but from a technology and application standpoint. And I'll tell you that we haven't sorted through all that yet, Bob, and we're gaining a lot of knowledge, but it's really too soon for us to make a call on we're going to take this and we're going to go to Europe first or so and so forth. There'll probably be some regions we just made leapfrog, it may not be quite as natural of a progression in terms of typically North America, then Europe, then Asia. We will sort through all of that based on understanding of end-markets and growth opportunities as well as our capabilities in what's migratable and what's transferable and leverageable. So I can't give you much more on it than that right now.

Do you have a sense on how many of your customers in North America exist in other regions? I mean is it a 5%, is it a 25% level?

We're surprisingly global in our customer mix. We focus on the global multinationals. It's been a part of our strategy. And so we're overwhelmingly weighted toward companies that operate around the globe as opposed to two little locals. Now, it's not necessarily true with all the movers, because movers oftentimes tend to be smaller and more entrepreneurial, but when you're getting specked in and you're working with the OEMs, these are the big brands around the world that are all household names to be aware of.

I think you mentioned the pension cost to hit $0.06 or $0.07 from a lower returns expectation, but I'm not sure you sized the benefit of having a fully funded status. So does that offset that? I think people might believe that maybe you'd be able to reduce the overall numbers in the pension? And then secondly, in light of your targets for '15, it looks to be pretty spectacular growth, I would assume your stock price might take a similar path. So have you considered an accelerated share repurchase to cover 5 million of this Spartech dilution?

You're right in that we have an early buy off program. That really reduces your ongoing costs that are funded by the plan. And the assumption is $0.07 is on a net basis. So we've factored in the lower rate of return. That does also affect the current funded status. So that $0.07 is all-in type number. As it relates to the question on the accelerated share repurchase question, again we're 50% of the way returns of the commitment that we made to repurchase the 10 million shares issued in conjunction with the Spartech. We're still on track to complete that within the 18 to 24 months period from the date of acquisition. I would just say this that as we look at purchasing the remaining 5 million shares, we're going to be very opportunistic as we enter the market and execute on that program.