Good morning, ladies and gentlemen, and welcome to the PolyOne Corporation Fourth Quarter 2016 Conference Call. My name is Kevin, and I’ll be your operator for today. At this time, all participants are in a listen-only mode. We will have a question-and-answer session at the end of the conference. As a reminder, this conference is being recorded for replay purposes. At this time, I’d like to turn the call over to Eric Swanson, Director of Investor Relations. Please proceed.

Thank you, Kevin. 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 fourth quarter of 2016 to the fourth quarter of 2015, 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 to everyone joining us on the call today. For the full-year, I am pleased that we delivered record adjusted earnings per share of $2.13. This is an increase of 9% over the prior year and represents our seventh straight year of adjusted EPS growth. This is truly an impressive accomplishment and one that we are all proud of, particularly because 2016 was a tough year in many respects. We faced a number of macroeconomic challenges, including lower selling prices in Distribution and PP&S due to hydrocarbon-based raw material deflation, unfavorable foreign exchange and a significant drop off in demand in certain industries. And DSS continued to struggle with winning new business as a result of prior year integration and operational issues, which was most pronounced in the fourth quarter. And as we discussed on our last earnings call, we anticipated a small decline in adjusted fourth quarter EPS to end the year, primarily attributable to the DSS results, but also unfavorable mix and potentially some year-end destocking. Certainly, we are disappointed to see our quarterly earnings streak come to an end. But on the bright side, I think we are finally lapping the lackluster demand effects we have seen in certain industries such as oil and gas, and perhaps we will even see some upside from this market in 2017. Or regardless, we are not waiting for a recovery in any market. We are leveraging the investments we have made in the last two years, investing for our future, and focusing on serving our customers with new and innovative solutions, and this is a theme that you will hear more than once before this call is over. Recall that in 2015 we increased our sales-force by 10%. In 2016, we further added to our commercial…

Well, thank you, Bob, and good morning, everyone. And I’m very pleased to provide additional comments and perspective on our fourth quarter and full-year results. On a GAAP basis earnings per share in the fourth quarter was $0.40, an increase from $0.04 in the fourth quarter of 2015. Special items in the quarter resulted in a net after-tax gain of $2.2 million, or $0.02 per share and included the following. A mark-to-market pension and other post-retirement gain of $8 million, driven by higher return on assets. Restructuring charges and other legal cost of $5 million and acquisition related cost of $1 million. Adjusting for these special items, EPS for the quarter was $0.38, down from $0.39 in the fourth quarter of 2015. For the full year, we reported record adjusted EPS of $2.13 a share, a 9% increase from 2015. Reviewing our segments, PP&S ended the fourth quarter strong continuing its momentum to finish out what was a record-breaking year. Our PP&S team has made significant improvements to sales mix, which led to a quarterly increase in operating income of 14% to $15.4 million with a return on sales of 9.7%. Underlying growth was up 8% over the prior year, due to new business gains in the consumer and industrial end-markets. For the full year, PP&S delivered record operating income of $74.4 million, representing a 30% growth NOI and, operating margins of 11.1%. We delivered some outstanding results in PP&S and POD. And our Color and SEM businesses have had an outstanding 10-year run. For those of you who are familiar with PolyOne, you know we have a long history of improving mix by shedding high volume, low margin commodity businesses for often smaller yet more profitable specialty application. This defined our transformation and we have no intentions of going…

Thanks, Brad. And it is our significant cash flow generation that has made possible our investments in innovation, commercial resources, and M&A as Brad pointed out, while also returning cash to our shareholders. In fact, I think our cash flow generation is often underappreciated. As I look back on the last two years, I know that we have fallen just short of our annual goal of delivering double-digit EPS growth in 2015 and 2016; much of this is due to a number of macroeconomic challenges already discussed and the turnaround of DSS. But through it all we have still generated a tremendous amount of cash. And we have used that cash to invest in our future and reward shareholders along the way. Consider this, since 2011 we have returned $155 million to shareholders through dividends and repurchased $700 million in outstanding shares. And we have done this while increasing our resources in sales, marketing and technology. We have invested more in research and development. And last quarter is a great example we hosted a global innovation summit, while we brought together nearly 130 of our research and development experts from all regions. At the summit, we shared best practices to accelerate collaboration and innovation, for highlighting our top R&D projects. Our teams discussed how we can leverage and grow technologies like composite solutions for alternative energy. The popularity of wind turbines for example as an alternative source is growing rapidly, providing an exciting opportunity for us in our Advanced Composites team. We discussed new colorant solutions such as OnColor super-concentrate, which allows our customers to use less products, achieving the same end result of potentially reducing their overall costs. And we discussed new additives for packaging solutions such as a new exciting development from our Color team with a light…

[Operator Instructions] Our first question comes from Mike Sison with KeyBanc.

Hi, Bob. Happy New Year.

Hi, Mike. Thanks.

Good morning, Mike.

When you think about 2017, you look at GSEM and Global Color, 2016 was as you noted the first year, it didn’t really hit your growth goals that it normally has hit. Can you maybe walk us through what type of growth you think you can get in 2017 with those two businesses, given the commercial resources? Can we get back to double-digits? And what could be the key drivers in getting you back on that path?

Yeah. Certainly 2016 was disappointing for a few reasons. One of which I just want to expand on is, the underlying influence of mix, which really came through in engineered materials, in the composites space, and then on the color side with respect to some of the colors that we sell into high-end wire and cable applications for that same end-industry. Both of which were significant impacts on the year and the quarter. As I look forward to 2017, I believe that underlying growth can get back to 10%, which includes a couple of other small acquisitions that we’ve done along the way. But I also need to acknowledge that we’ve got a little bit of headwind with respect to currency coming our way if the euro continues to remain weaker against the U.S. dollar. And then also, as we’ve pointed out in the past, a weaker pound for us is bad. So maybe they’re are closer to high-single-digit growth rate with those things in mind, but the underlying growth rate I think does get back closer to that 10% level.

And that’s for both?

Yes.

Okay. And then just, when you think about PP&S, the margin improvements, the growth, very impressive there. Do you consider this business now in your specialty platform and where do you think you can take it from here?

I mean, look, it’s been an exciting year for the business. And I look back to the changes that really began in 2015 under Michael Garratt’s leadership and really setting this business up I think for really good long-term success, and we really saw that in 2016. Ultimately, specialty is defined by really the overall engineered complexity of the products we sell, the ability to put a service alongside of that and earn in my opinion a sustainable double-digit return, and this business is on its way to I think getting that recognition. As I look to 2017, I think we’re going to have growth in operating income and margins in that segment. The one thing that I just think about here in the near-term is we had a very, very strong first quarter in PP&S last year. And I know that when we were discussing the results at the time, it was really difficult to determine if that was just a pent-up demand from fourth quarter of 2015 or a weak first quarter in 2015. So kind of remains to be seen how the first quarter plays up, but for the year I’ve got a lot of confidence in PP&S.

Okay. And then just one final, if Global Color and GSEM can get to high-single-digits, and it sounds like PP&S could continue to grow, your balance sheet still in pretty good shape, how close can you get back to the double-digit EPS growth in 2017?

Yes. I think it will be close. And on the surface of it if I were to put a 8% type growth number out there, I would say what is very different about that in 2017 is that it’s really going to be driven by the underlying performance of our business. And on my own sort of prepared remarks for today, I acknowledged that 2016 did benefit from lower interest taxes and shares. And when I look to where the growth is going to come from in 2017, it’s going to come from sales and operating income growth. So I think that’s a real massive shift in improvement for us that I just want to recognize.

Great. Thank you.

Yes.

Our next question comes from Robert Koort with Goldman Sachs.

Good morning. This is Ryan Berney on for Bob.

Hey, Ryan.

Good morning, Ryan.

Hey, just wanted to go in a little bit to maybe the underlying volume and acquisition related assumptions in the Color with the acquisitions business in 2017.

Yes. Look, I think that the acquisitions add real modest amount of operating income in 2017, probably around, let’s say, $2 million to $2.5 million. The deals that we did were pretty small. I think we’ll get a little bit more benefit too from the Magenta deal that we did back in the end of 2015. So when I look at the underlying growth from there and maybe just shift that to - that was an operating income observation there, Ryan. I think we’re going to have low-single-digit revenue growth, but candidly, with the observations that I made about the euro and the pound specifically that impacts our Color business more than any other. So that’s one thing I’d have out there as a caveat for that growth rate assumption.

Understood. That’s helpful. And then I know you are pretty excited about the Gordon acquisition when you first announced it back in the third quarter. And at the time, it didn’t seem like you’re expecting a huge contribution in the near-term. But I was wondering if as you’ve kind of integrated it in the business, if your views have changed at all on kind of the medium or longer-term growth potential for that business, and if you can maybe put some numbers around that.

Well, first of all, thanks for reminding me of that, because I had meant to mention that in response to a question that Mike just had on EM, which was that - look, it’s true and we had talked in the past about that acquisition coming in July of last year, really with around breakeven to a slight loss, primarily because of the nature of thermoplastic composites and where it is in its development. That ended up being true for the year. And so part of the reason why EMs margins are down, when you look at the second half of the year is because of that acquisition. It doesn’t take anything away from it. For the long term we absolutely love this space. I think we’ll see a little bit of an uptick in 2017, but in terms of overall operating income dollars that might be in the neighborhood of one to put it in perspective. So pretty small, but I think it starts to move that margin needle in the right direction.

Thanks so much.

Our next question comes from Frank Mitsch with Wells Fargo.

Yes. Hi, I was sitting here puzzling, trying to figure out why Mike Sison, who I love is talking about happy New Year. And I’m realizing wait a minute, tomorrow is Chinese New Year. So I’m very pleased that I was able to figure that out. Just following up on his question, Bob, obviously you acknowledge just falling short of the 10% EPS growth last couple of years, and suggesting this 2017 is going to be a challenge as well. Any thought about backing off of your vision 2020 double-digit EPS growth metric?

Not at this time. And I appreciate that’s something we do need a revisit every year. Most importantly, I think that we are looking at sales growth combined with margin expansion to help us get to those profitability targets. But with respect to 2020 and looking out to four years, our goal is still to deliver double-digit EPS growth. So that’s not changed at this time.

Okay. That’s fair. Hey, look, obviously DSS, you mentioned the positive momentum in terms of on-time delivery and so forth of it, but on an EBIT basis took a material step backwards in Q4. How do we think about that that business in 2017?

Yeah. And let me just expand on that if I can, because I’m really - me too, I think with respect to the fourth quarter results specifically, which did come in certainly significantly below where they were in the prior year. And, look, a lot of that really comes down to where the overall sales level is related to our underlying infrastructure. And I made it really clear hopefully through the last year that I wasn’t going after additional cost reductions in this business, I just wanted to focus on improving quality, on-time delivery and getting the customer satisfaction rating up. And as a result of that when we were so close to breakeven, a little bit of decline in sales candidly really hurts the bottom line. That’s what we saw in the fourth quarter. So as we look to 2017 I still think we have a lot of work to do to win back these customers and business. And I think that’s going to get us closer to breakeven in 2017, looking at - making that happen. I think the first quarter will be down year-over-year, not to the magnitude that it was in Q4. But I think we’ll start to see progress here in the middle of the year, but it really comes down, candidly, Frank, to those sales numbers.

And so your expectation is you’re targeting breakeven for 2017 in DSS?

Correct.

Thank you, sir.

Yes.

Our next question comes from Mike Harrison with Seaport Global Securities.

Good morning. This is Jacob on for Mike.

Hi, Jacob.

Hi, just wondering how do you feel about trends in the specialty business in Europe heading into 2017?

Yeah, I think that if I look back at 2016, I feel like we actually started to see a little bit of positive trend with respect to underlying markets there. It’s a very broad statement. For us, we were then have been particularly, I’d say, are disproportionately impacted by some of our additive sales in the packaging, and a little bit of what we saw with respect to wire and cable going into the Middle East. So those kind of things hopefully end up getting a little bit better in 2017, as I said in my prepared remarks. But, look, I still think Europe is the slow grower. And for us a lot of that growth is really going to come from the additional resources that I mentioned.

Okay. And then in the DS&S business, how did customer retention rates look in the fourth quarter…

The customer retention rates - yeah, I mean look that’s - yeah, it’s a great question, I mean, you go back to the beginning of really end of 2015. And I really felt like getting into the beginning of 2016. We finally got into a point where we weren’t losing additional business, certainly some of the business that we lost in 2015 had to lap itself through the end of the fourth quarter this last year. And I think that’s really improving. I mean, I think the customer relationships with those that we have, have gotten better. And really it’s a matter of winning the trust and confidence of those that have left, and that’s where an opportunity is now plus new applications.

All right. Thank you.

Yes, absolutely.

Our next question comes from Jason Freuchtel with SunTrust Robinson Humphrey

Hey, good morning.

Hey, Jason.

Good morning, Jason.

Just following up on DSS have you been able to recapturing the business that transitioned away from PolyOne yet. And with that how long does it typically take from when a customer begins exploring moving business to a different compounder to when volumes actually show up.

Well, there is a couple of questions there. The first is - well, let me take a second first if I could. Look, with respect to DSS, the acquisition with Spartech and the frustrations that customers felt through the integration process, I mean, we learnt that it actually takes in some cases a fairly long time for customers to go on qualify an alternate supplier and move business away. As a result of that, I think we can assume that bringing business back can also take a long time, not because they couldn’t just shift it back to us, but because of the time and effort that they spent finding somebody else. So look how it is, it takes a long time to earn and build trust. And you can lose it quickly, which we did. So I’d still say that it’s going to take time. We are winning back little pieces of business. So the way that that works is, customers will give us another shot. But oftentimes, it might be on a smaller application or one piece of business but nothing close to the order of magnitude of what we used to have with them. So I’m encouraged by the, I’d say, the little opportunities that we’re getting with those customers. And I think ultimately, if we do well and perform on those we’re going to get another shot at the remainder of the business.

Okay, great. And I think we’ve heard about some other compounders adding sales people recently and attempt to drive top line growth similar to PolyOne strategy. Do you anticipate that could increase competition for sales and potentially delay the timing of when you see the benefit of your commercialization efforts?

No, I don’t think anything that’s going out there with anybody else in the industry is, I mean, look, it’s a competitive universe. So that’s the nature of what we do and that’s what our sellers and marketing technology resources are prepared for. So I genuinely see momentum from those resources coming in 2017. And it doesn’t mean that I’m not concerned or thinking about what the competition is doing. But I don’t see it impacting the momentum that I previously described.

Great. Thank you.

Our next question comes from Kevin Hocevar with Northcoast Research

Hey, good morning, guys.

Good morning, Kevin.

Hi, Kevin.

I’m wondering if you could comment on, the first quarter is kind of funky, because I think trying to determine if it’s a tough comp or if it’s - or not, because I think earnings were up 22% in the first quarter last year, but that came on a very easy comp. So how do you view that and you had mentioned destocking in early so it was a concern in the fourth quarter. Did that destocking occur and is there any chance of restocking here in the first quarter? I know polypropylene has moved up. And so curious if - just kind of curious with all that mind how you think of the first quarter here. Can earnings grow or is it a really tough comp that’s going to be tough to top?

Well, there is no doubt that we had a very strong first quarter last year. And I think you’ve sort of accurately portrayed the questions around that first quarter performance against 2015 and then also looking forward to this year. So it’s a little early to call, I guess, the way I’d say that right now, Kevin. But at this point, I’d say it’s a stretch. You know what I mean to get past that number because of how strong I think just some of the anomalous maybe restocking effects were in the first quarter of last year. But I might feel differently about that at the end of February. I really just think that we need a little bit more time to see.

Sure. And then in terms of corporate expense, how should we think of that, because it’s been down I think here the last two years. And I think incentive comp was running lower. So how should we think of corporate expense in 2017?

Yes, I mean, you’re right. If you go back in time and look at where we were in 2013 and 2014, certainly running at a higher level than where we were in 2015-2016. Incentives is the largest explanation for that. And as you know, we haven’t hit our double-digit goal, so that’s a big factor. In addition, I just think we’ve also done a really good job of managing our overhead expenses. And that has been largely driven by our desire to move that money towards funding our commercial additions. So as I look forward to 2017, we want to deliver on our results. And to the extent that we do, you can see higher costs related to incentives, but it’s a self-funding prophecy, right. So we got to deliver on the top and bottom line in order to make that happen.

Okay, great. And then a last question on DS&S, I think back to Frank’s question, you mentioned that maybe flattish earnings this year is the way to think of it. But what’s the multi-year outlook here? What type of progression do we need to see over the next couple of years to see that the investments that you are making are working as you expect? And what do we need to see to - to see that you’re on track to hit the Platinum Vision? I think it was 8% to 10% margin. I think it was your target there. So, I guess, what do we need to see out of that business over the long-term to see that the investments you’re making are working?

One thing - I guess, I’d make a couple of comments in that regard. First of all, look, I’d say that the industry itself is a healthy industry that supports a higher margin profile than where DSS is by far. And what we set as a goal for 2020, I think takes that into consideration. So as we’ve probably said all along it’s not a broken industry, but we’ve got a lot of work to do with our specific business in it. One of the things that we will be paying close attention here to really is how well are we doing at improving our sales funnel, right; how well are we doing it growing the best few opportunities and ultimately bringing those to close is a key metric of our success. With respect to the underlying investments that we’ve made, it really comes down to, Kevin, doing a double-digit return on invested capital. So that’s kind of how I think about our objectives there. Obviously, with my comment to Frank about what I think OI lands in 2017, that’s not going to happen this year, but I think it will between now and 2020.

Okay, great. Thank you.

Our next question comes from Tyler Frank with Baird.

Hi, guys, thanks for taking the question. When do you think that we’ll start seeing the real upside from the recent hiring in sales? Just looking at that sort of the prepared remarks and the press release, which indicate 2018, but given the fact that you’ve been hiring through 2015, and then through 2016 as well, sort of thought we would see more benefit sooner. So with the longer lead-time or sales processes segments, when do you expect to see that start to flow through?

Yeah, look, we had - as you know and we really covered the Distribution and PP&S impacts in 2016 quite a bit. The one thing that I tried to expand with respect to my earlier remarks was, we’re already seeing that in Asia. And when I look across all the businesses that we have and all the regions we are in, I look at the fastest closed cycle business being Distribution, and then moving towards our PP&S, and then Specialty in Asia, which is a little faster than North America and Europe. So I say that I guess as a recap that it’s really about when are we going to see those benefits in those two regions. And I think that’s going to be in 2017. So if the release moved you to thinking that that was an 2018 impact, we’ll take another look at that. But it’s really around, I see it in 2017 so.

Okay. And then, when do you expect, I guess, the turnout for DSS? I mean, if it’s going to be breakeven in 2017, moving beyond that into 2018 should we expect growth there or how long would this process continue on?

Look, we have to see growth. And it’s not about what we expect. I mean, that’s what has to happen in DSS. And getting to breakeven is one step in that process and we have to see growth or determine what other course corrections are necessary to improve the business. So it’s not lost on us where we are, and us right in the spot on. It has to happen in 2018.

Okay. Thanks, guys.

Yes.

Our next question comes from Laurence Alexander with Jefferies.

Yes. Hi, this is Nick Saro [ph] on for Laurence. I was wondering if you could elaborate on some of the end-market trend you’re seeing, especially in transportation, packaging, construction, as we move through 2017?

Yes, absolutely. So, look, I look at maybe three or four of our largest markets, healthcare, packaging, transportation, consumer, for example. And for us the transportation industry is the largest space that we play in. If I were to exclude the impact of some lost business that we had in DSS, I would say, we were really right in line with probably what you recognize as sort of U.S., Western Europe production in 2017, because candidly we don’t have a whole lot in Asia with respect to that. So looking forward to 2017 there are some question marks around what’s going on with the passenger cars. And got too much inventory, is a correction necessary there, and I think it probably is. But I don’t see that there is anything for us that’s any different than probably what you expect for the market overall. And, again, I sort of characterized my comments around transportation around North American auto, because that really is the largest driver there. Around consumer, consumer is actually one that has got some really good momentum for us. I talked about the outdoor performance industry, and lot of the work that we’re doing in other areas of consumer goods including some of the inks that go into sportswear, et cetera. And I see that as being as a positive going into 2017, meaning potentially better than 2016. And then, lastly, I’d probably just comment on healthcare, if I can. This continues to be a focus market for us. And with some of the business that we picked up as part of the acquisitions this last year, I think that helps us in 2017. The global medical device market continues to grow at about 6%. And that’s a place where I think we really need to be and we’ll see some benefit from in 2017.

Good. Thank you very much.

Yes.

Our next question comes from Dmitry Silversteyn with Longbow Research

Good morning, guys. This is Matthew Skowronski on for Dmitry. My first question is how should we be thinking about the cadence to the share buyback throughout 2017? And then secondly, in Asia, I believe you guys mentioned your 6% to 7%, excluding FX, last year or last quarter year over year. Did you see an acceleration of this growth in the fourth quarter? And then thirdly, within the Asia what is your visibility into January?

So first of all, with respect to your question about shares, we’ve always stated that, look, our goal is to offset dilution from equity awards. So I’d assume that’s still going to be the case this year and will remain opportunistic with respect to buying them back. So at this time of the year we’ve really never given a whole lot of guidance on that, and that being, because we don’t have a regimented buyback program where we buy X amount of shares every quarter, every year. With respect to Asia, I think really Asia had a very good year all year. Fourth quarter actually might have been just a touch better than the balance of the year, but nothing that I’d call out specifically. And I think that rate of about 7% or 7.5% was all in including FX if I remember right.

Perfect. That’s all the questions I have. Thank you.

All right.

Our next question comes from David Stratton with Great Lakes Review.

Good morning. Thanks for taking the questions. Most of them have been answered already. So I apologize if I double up on anything. But looking at 2017, where are your CapEx plan sitting out? And then, also you mentioned you’re going to have the headwind of a low tax rate in 2016. And what are you targeting for 2017 tax rate?

Yes, David. I think as you look at the capital that we put into the business in 2016, was about $84 million. We have a lot of opportunities for reinvestment back in the business. And so we’re targeting between $90 million and $95 million in 2017. Your comment on the tax rate, I’m very, very pleased with the work that we’ve been doing from a tax standpoint. Our full-year rate came in right around 30%. That obviously had a positive impact on the income, but that’s also been a big driver of our cash generation. And as we look at 2017, I expect that will be in line with the rate that we had in 2016.

All right. And then, you mentioned wind turbines, and I am just wondering if you could give some color around how you see that playing out as part of a growth strategy with maybe hesitance in the national commentary on differences in energy viabilities.

I mean, obviously, the discussion around what happens relative to administrative or policy changes is obviously beyond the scope of what I can cover here in the next 30 seconds. Look, for us, I think that the wind blades are really exciting and interesting opportunity for composites. And I think this acquisition that we did in July, provides us with a new and different way of actually getting composite material out into the field to facilitate construction there for turbine blades that candidly are getting bigger and bigger and bigger with logistical issues around moving them. So, look, for 2017 I don’t think that’s anything that’s going to move the needle for us in a big way, but something that I think over time it could.

Thank you very much.

Yeah. All right, well, thanks, I know that brings to conclusion the callers and the questions that we had on the phone today. I just want to say thanks for everybody joining us. And we look forward to updating you on our first quarter performance, when we release our results towards the end of April. Thank you.

Ladies and gentlemen, this does conclude today’s presentation. You may now disconnect and have a wonderful day. We thank you for your continued interest in PolyOne.