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

Thank you, Shannon. Good morning and welcome to everyone joining us on the call today. Before beginning, I’d 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 result in 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 for the most comparable GAAP financial measures. Unless otherwise stated, operating results referenced during today’s call will be comparing the fourth quarter of 2019 to the fourth quarter of 2018 or the full fiscal year 2019 to the full fiscal year of 2018. Joining 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 would turn the call over to Bob.

Well, thanks, Joe, and good morning, everyone. I’m pleased to report that for the fourth quarter we delivered adjusted EPS of $0.34. That’s a 42% increase over the prior year fourth quarter and $0.04 better than we expected when we provided our updated outlook in December. Much of the upside was driven by our composites platform. However, Europe Color and Asia Engineered Materials also did better than expected. Our investments in composites and other sustainable solutions have been a highlight for us this year. When combined, with cost reduction initiatives we took early on, we have been able to offset a weak demand environment in a number of end-markets or regions. Specialty Engineered Materials finished the year strong, growing organic operating income 30% in the fourth quarter. This was driven by top-line expansion from new business gains in composites, wire and cable and health care applications. In fact, on a full-year basis, our composite technologies grew organic revenue 11% as sales in health care and wire and cable applications also grew 14% and 16% respectively over this same time. It's pretty impressive when you consider that SEM Europe’s automotive-related sales were down 12% for the year. These same end-market dynamics negatively impacted our Color segment, as sales and operating income from Color Europe were down 7% and 13% respectively for the year. Despite these results, there were some real bright spots in Color demand for sustainable solutions gains momentum. Our barrier technologies for food and beverage packaging now when preserved content but they are also improving recyclability. They reduce material requirements and energy consumption in the manufacturing process as well. These positive attributes deliver on our customers’ sustainability goals. And in doing so, this helps to preserve our planet's natural resources. It's a win for customers, our planet, and for…

Well, thank you, Bob, and good morning everyone. Let me first start with our GAAP results. In the fourth quarter, we reported GAAP earnings per share from continuing operations of $0.08. Special items in the quarter resulted in a net after-tax charge of $19.9 million compared to $20.6 million in the prior-year. 2019 special items are primarily related to additional provisions for earn-out payments associated with the Fiber-Line and PlastiComp acquisitions, as the businesses performance has been exceptional exceeding our original expectations. As Bob mentioned, adjusted EPS for the quarter was $0.34, 42% higher than the prior-year fourth quarter. This growth in adjusted EPS was driven by 13% improvement in operating income, lower interest expense, and a lower share count. Contributions from Fiber-Line, our growing composites portfolio, and barrier additives continue to perform and differentiate us. And as Bob said, we're also benefiting from our earlier effort to reduce cost and improve pricing and mix. From a regional standpoint, organic sales in Europe were down 8% primarily due to weak demand in automotive applications and unfavorable foreign currencies. Foreign currencies negatively impacted the region's overall sales by 3%. Asian sales were down 2% with weaker foreign currencies impacting sales by a percent. Still, despite this slight top-line decline, improved mix from wins in sustainable solutions led to a 30% growth in operating income for the fourth quarter and a record operating income for the full-year. In reviewing our segments for the fourth quarter, SEM expanded revenue and operating income 18% and 60% respectively. Organically, operating income increased 32% on flat sales driven by improved mix from wins in health care applications and composite solutions. Strong performance from composite and North America wire and cable sales along with mix improvement offset unfavorable FX and demand weakness in Europe and Asia. And…

Well, thanks, Brad. I'm certainly proud of our team's accomplishments this year growing adjusted EPS 12%. But I'm most excited about our portfolio transformation and what lies ahead. With the divestiture of PP&S and pro forma for the announced Clariant transaction, over 85% of our EBITDA will be generated from specialty applications and that's up from just 7% when we began our specialty transformation journey little over 10 years ago. The new PolyOne portfolio will have significantly reduced exposure to cyclical end-markets like North America housing and transportations. More than half of our sales will now come from packaging, consumer, and health care. Geographically, we will be much more global as Clariant expands our geographic presence in higher growth regions such as India, Southeast Asia, and Brazil, as well as in established markets such as Europe. And the latter should not be overlooked. Entrepreneurs are often behind breakthroughs in technology, we all know this. But established markets and OEMs will also be driving forces behind sustainable solution innovation. Such solutions will of course be deployed around the world. And I believe that this is one of the largest opportunities in front of us. Our focus on sustainability has never been higher. If you haven't yet read our sustainability report, I encourage you to do so. Therein we define our four pillars of People, Products, Planet, and Performance. This comprehensive report not only details how we are investing in each, but highlights how important culture has been for us in transforming the company. As many of you know, in 2018, we earned our first great place to work certification. And our recent employee engagement survey results demonstrate further improvement in how our associates feel about working for PolyOne. It's a huge source of pride for us and it is a competitive…

[Operator Instructions]. Our first question comes from Frank Mitsch with Fermium Research. Your line is open.

Thank you and nice end to the year Bob and happy belated birthday.

Thank you very much.

While there is a lot of celebrating to do not just for yourself but also with PolyOne. Hey, listen you outlined a couple of the areas as to why you were able to post $0.04 better from your December 2019 guidance and I was curious if you had any thoughts, was any or concerns with any data pull-forward into 2019? And how is -- how are you seeing the first quarter start out since it appears that you ended the fourth quarter pretty strong?

Yes. I don't perceive or believe that any of it was a pull-forward is. In our space sometimes December can be little bit of a wild card with respect to customer buying patterns and oftentimes that's directly offset by what takes place in January. So for us going into December, we had a pretty conservative view on how it would play out and fortunately it came in a little bit better. But don't believe that we were pulling anything in from -- or the customers did anyway from January into December. With respect to how things have started out to the year, I'd say it's probably a pretty decent continuation of what we saw in the fourth quarter. The reality is there isn't a whole lot of macroeconomic tailwind here. So as we look at the first quarter, we do see the opportunity to expand EPS by double-digits but acknowledge a lot of that's going to come from price and mix and a little bit lower interest expense.

Thank you. And we're now a bit more than a month after the announcement on Clariant. Is there any update that you can give us in terms of your discussions with the regulatory agencies, or if there's anything else from a change perspective in terms of your outlook on synergies et cetera with this transaction?

No changes with respect to our outlook on synergies or timing related to the capture of those synergies. Our expectation is that regulatory approval will take somewhere between four and six months. So we expect to close the transaction sometime in the middle of this year. The filings have all been made with the exception of one which will be done tomorrow. And as I said before, we don't expect any issues with that. So no other comments really to be made at this time with respect to related financing. I think that will be known as we move forward and get closer the deal being done.

Our next question comes from Mike Sison with Wells Fargo. Your line is open.

Hey guys, congrats on a nice end to the year.

Thanks Mike. Good morning, Mike.

Good morning. I just want to make sure I understood your outlook for 2020. I think you said that you can do double-digit growth on your own meaning without Clariant or the financing. And if that's so can you maybe talk about how that flushes out with the segments into 2020?

Yes, so first of all, thanks for asking that question because we wanted to be clear that the guidance expectation really is an organic one with respect to what we believe we’ll be able to do in 2020. Of course, we do have the intention of raising equity and ultimately issuing debt to accomplish the Clariant transaction and my comments about double-digit EPS growth don't contemplate any of those changes. So just looking at what we have today and what we see for next year, we expect to deliver the double-digits. So my expectation is, is that should play out with respect to probably getting or get there in the first quarter with respect to 10% or 11% of EPS growth. I don't really expect, Mike, much in the way of substantial sales expansion this year. I really think it could be somewhere between 1% and 3% as we still see some downward effects from Europe and Asia, although they were not as down as much as we thought in the fourth quarter, but are still down. So large that we're going to get there through a continuation of improved mix and margin improvement. So that's kind of how I see things playing out for the year as a whole and how we expect to start the first quarter. My sense is that again composites and SEM will have the highest level of growth for the year and in the first quarter. I think Color will continue to see some challenges coming out of Europe in Q1 which we hope to start to improve in the second quarter.

Right. Okay, great. And then I think you outlined that you still see $0.85 in terms of accretion including or excluding the step-up amortization for the Clariant deal. Can you maybe talk about a little bit what drives that in year-one in terms of how much will come from integration and maybe sales growth, if any and how you think the Clariant business needs to perform to get there?

Yes, so with respect to, first of all, the $0.85 is a pro forma figure as if the acquisition had been done on the first day of the year and with all the synergies fully captured. Our expectation is that of the $60 million of synergies we've identified that we will achieve a run rate of 20 by the end of the first full-year of acquisitions. So that means if the deal were to get done in June of this year, we would be there by June of next year. And that is contributing to the EPS expansion to the tune of probably $0.15, $0.16 or so. We do see incremental EPS expansion from simply the acquisition of Clariant without synergies and that's probably $0.04 to $0.08 on a per annum basis, Mike, if you want to think of it that way. And again, we haven't given any guidance with respect to how that plays out this year because we just don't know the timing of the deal.

Thank you. Our next question comes from Mike Harrison with Seaport Global Securities. Your line is open.

Wondering if you can maybe talk a little bit about the strength in composites and wire and cable in EM, I think one of the questions I have is if that stuff is so strong, clearly there are some offsets, what's going worse in engineered materials than you would have thought? And then maybe the second piece is specifically on Fiber-Line, how sustainable can that improvement be is that 5G infrastructure build-out pretty steady or is it something that's going to have some fits and starts?

Yes. So well first of all, we have benefited this year from the acquisition of Fiber-Line. But we have also grown some of our legacy product lines in the wire and cable space so both of those are actually doing very well this year, a lot of that in connection with fiber optic build-out. Now in our markets like the U.S. and Europe, where we have the largest presence, a lot of that build-out is actually of legacy technology and infrastructure, 3G and 4G, 5G is really just beginning. Obviously China is way ahead of anyone else in that regard, but it's really just getting started. So when I look at the growth of Fiber-Line and other wire and cable applications in this last year, just a little bit of that's driven by 5G, the rest of it by the legacy infrastructure build-out. So I do view that as very sustainable and I view that as something that's going to continue to grow over time really over the next decade as this rolls-out, it takes that long for the infrastructure to get -- to reach really critical mass. Now you did ask -- the second part of that question is well what's not going well and a lot of that has been offset by automotive demand in Europe for Engineered Materials which is down considerably over the year. So if you're to look at SEM segment results as a whole, there's certainly a plus for the added Fiber-Line organically the growth of composites and wire and cable partially offset by automotive demand in Europe.

All right. And then in the Color business, wanted to specifically take a look at the packaging piece within that business. Has that generally been solid or is it more mixed maybe just comment on areas within packaging where you're seeing some strength and some weakness right now?

Yes, I mean packaging is actually, if you just want to think across the board for our major markets, I'd say packaging has actually been fairly stable. We have grown in that end-market primarily as a result of the sustainable solutions we've introduced primarily in light blocking beverage, preservative type additives. So for us as a whole packaging is up. That's a question that's getting asked more and more frequently of course which is what challenges do sustainability present as people if they do try to use less plastic and how does that play itself out? Interestingly, if you look at 2019, rigid plastic consumption is actually up almost 2% for the year, population growth is maybe up 1.1%. So there is a continued consumption. Although I think people are doing so in smarter ways and the sustainability trend is here to stay. So we view it as primarily an upside opportunity for us.

Our next question comes from Jim Sheehan with SunTrust Robinson Humphrey. Your line is open.

Good morning. Could you talk about interest expense in the fourth quarter, was that to come in little lower than you expected and what should we be thinking about for interest expense in 2020?

Yes, Jim, I mean it came in pretty much in line with what we expected. And I would say as you kind of look at the full-year, we had $11.9 million. And as Bob mentioned this is excluding obviously the impact of the Clariant, the run rate that we were on in the fourth quarter is probably a good run rate for the year.

Terrific. And for your double-digit 2020 EPS growth outlook, what should we be using as the adjusted EPS base in first quarter 2019?

Yes that should be $0.43.

Okay. And quickly on --

From continuing operations growth.

Correct. And quickly on your Color margins, when do you expect to start to see margin expansion year-over-year?

Yes. Look as I saw, I think the first quarter is potentially in our challenging quarter for the Color segment and so should see improvement starting in the second quarter. Really what we have seen there is just some level of volume decline associated with really transportation and fiber-related demand in Europe and Asia this year. Sustainable solutions are still a good guide from a margin standpoint, but that's really what's driven the year-over-year decline.

Our next question comes from Colin Rusch with Oppenheimer. Your line is open.

Thanks so much guys. And given the success that you're having with your sustainability solutions, can you talk a little bit about your pricing power and how you expect to see that on a go-forward basis?

Look, I think that from a margin standpoint, these are some of our best performing offerings. So I do think that there is really good pricing power with respect to those solutions. I can't really put it into a relative basis for you vis-à-vis, the other things that we have in the portfolio other than the point to, let's say, additives, for example are always a higher margin profile than what we have in some of our traditional or legacy Masterbatch offerings again, if I'm just sort of focusing on the Color side. So it could be that it's 4% or 5% higher between the two. But what I do expect that there's competition out there for these products as well, we're not the only one with this as an initiative. Everybody has it as a headline. But we really do think we got a great suite of products to help our customers.

Okay, great. And then I'm going to combine two that you may not have the answers for but one you just the FTC Antitrust Clearances came through curious about how that may impact if that came in a little bit faster than you expected and accelerate some of the closing activities that you've got for the Clariant business acquisition? And then also, just if you have any early indications on whether the coronavirus is impacting any of the supply chain in Asia you guys at this point?

Yes. So I'll take the last one first if I can. With respect to the coronavirus, obviously we have -- are obviously concerned about the safety and welfare of our associates in China and around the world. At this point, we're not aware of any of our associates being impacted. It is Chinese New Year; our plants are actually shut down presently. There is discussion about potentially or the government potentially extending that shut down for a longer period of time, that remains to be seen and how that plays out for us. We don't have any facilities in Wuhan directly. But we do have some associates there. So we've taken measures to restrict travel for all of our associates into and out of China. And at this point really just waiting to see how things develop over the course of the next couple of days and see if there's any other governance mandate, if you will, with respect to when plants can be operational. To the extent that there is an impact from that, we'll just have to update our investors when we know more at this point, we haven't assumed there is because we're on Chinese New Year as we expect it. So I can't -- I don’t have any more to say about that, Colin. I think the first part of your question was about U.S. regulatory approval, which we just got early clearance for that just came out. So that's a good sign. It's one that we did request early termination for, we’re happy to get that. I think just this morning or last night whenever that got published. So it's right-off the presses. I think it's a good sign that we're going to get regulatory approval in the other 12 locations where we have filed. One of the reasons why we've said four to six months really is simply just a matter of the time it can take in certain jurisdictions to go through the process. So we’re not expecting any challenges, but do expect that it just could take more time. So hopeful I’m answering the question as well.

Yes, that’s fine. I just want to check if there is anything there. Thanks so much guys.

Yes.

Our next question comes from Ben Kallo with Baird. Your line is open.

Hey, so just a little [indiscernible] maybe but the other income during the quarter what it was that, it was $10.7 million?

Other income for the quarter --

I’m sorry, yes, for the quarter.

Yes, it should have been closer to about $1 million on an adjusted basis which is a combination of pension expenses below the line as well as some FX related items.

Okay.

Yes, there’s $10 million, Ben, we have a defined benefit plan. And we mark that to market in the fourth quarter of every year and we had about a $10 million mark-to-market gain. That's really what's in the other income and of course in our adjusted results that we speak to the $0.34 we pulled that out because that's kind of a one-timer.

Yes, got it. And then just another question on the sustainability aspect. Is there a way for you to kind of break-out your revenue or have you thought about that for sustainable products, just a rough estimate because sometimes we get asked by investors focused on that. Thanks.

Yes. I'm going to defer that until we've put together our next IR deck. We're doing some work on that presently to update the numbers for 2019. I'd say a reasonable estimate is probably around $380 million to $400 million in revenue. But it meant that we've got to go back through and look at FTC coding guidelines and do the same thing. So we've done some measurements in the past, that's probably a good place to start with. It could end-up being a little bit higher, but we would just need to work on finalizing those numbers for 2019 which we’ll get in our next investor deck.

Our next question comes from Bob Koort with Goldman Sachs. Your line is open.

Good morning, this is Don Campbell on for Bob. A question on raw materials. Polyethylene and polypropylene prices have come in during recent months and with oil down recently. And imagine that’s spitting into a couple of your other raw material baskets. How's the competitive landscape currently? And I guess kind of what’s the likelihood that you're going to be able to preserve this margin on the raw material costs? And I guess what do you had in terms of raw material trends in your 2020 guidance?

Yes, so I do think we had seen some benefit from those trends in the second half of 2019. Hopefully, that continues into the first part of 2020. So to this point, I'd say we have hung on to some but I'm sure not all that, the competitive dynamic is candidly getting more challenging with respect to demand conditions particularly in automotive markets like Europe and Asia. So I think when auto starts to pull back that just puts a lot of competitive pressure in Engineered Materials for things that are, let's say, nylon base for example. So but hopefully in Color we’re actually able to preserve that on the underlying base resins for polypropylene and polyethylene. And I think we have seen some of that. With respect to margins being down in Color, mostly again, that is just volume driven with what comments I made about Europe a few moments ago.

Got it. That's helpful. And then I guess in terms of margins, you had pretty strong margin improvement in SEM business. On a year-over-year basis, I think it's competing against the fourth quarter 2018 where I’d imagine it’s fairly low utilization rates. Can you give us a sense of kind of utilization rates in that business as we head into kind of 2020 or in other words I guess kind of what margin improvement could we see in that business I guess in more typically stronger seasonal quarters outside of the fourth quarter?

Right, well first of all to one of your points acknowledging that the fourth quarter of 2018 was weak is spot on. So clearly that was a very difficult quarter for us, one of the most challenging we've had in a long-time so potentially got just an easier comp in that regard. I'm sure that utilization explains some of the margin expansion as a result of that. But we're not recording a specific capacity or utilization rate. Certainly, they're up but it's not anything we've ever really been obsessed about as you know, not thinking about volume but thinking more about sales and value. I do expect margins in SEM to improve in 2020 which is going to be through a combination of increased sales in composites but as well as margin expansion partially again driven by I think little bit of a benefit from lower raw material costs. So if I have more to say about that when we get to end of the first quarter.

Thank you. Our next question comes from Laurence Alexander with Jefferies. Your line is open.

Hi guys. This is Dan Rizzo on for Laurence. How are you?

Hey, Dan.

Hey, Dan.

Hey just a quick question, how does Clariant has been into your kind of sustainable solutions portfolio? I mean, is there work to be done there or do we kind of meld-in seamlessly? I was wondering how you think about that?

Well, I think Clariant fits in very well. They have a larger presence in packaging than we do but look at us as being look very similar with respect to how we view at that end-market and how we're both going to participate and the megatrends that that drive it. So I think it's a very good fit. Culturally, I'll just reiterate what I've probably said in the past in the sense that we're both ACC responsible care certified we both take great care of our employees and customers and the planet as well. So I think it's going to be a really good fit. Now because we're competitors, right, I don't have perfect line of sight in visibility into product line profitability or detail. So more to come on that once they are part of our organization, but certainly believe their sustainability portfolio should mirror our own.

And then you mentioned obviously the weakness in European Auto. I might have missed it, but you haven't really talked about North American auto. Is that not as important and what is it doing I guess what we’re seeing?

Well, it was -- it didn't impact us as much as Europe and Asia did this year. For our sales into it, it was down a couple of points in 2019 versus 2018 and it probably just hasn't garnered any attention, Dan, simply because the other two are so much bigger. So again someone earlier asked a question about composites are growing so much, it might have been Mike Harrison. If composites are growing so much, what’s going on with the rest of EM and the preponderance of that answer really has been Europe Auto. So there is some going on there from an North American auto perspective, it’s down slightly, but it just hasn't hit the radar probably for that reason.

All right. Thank you very much.

All right, good. Maybe we got time for one more question or is one more caller on the line.

Our last question comes from Rosemarie Morbelli with G. Research. Your line is open.

If I could follow-up on a couple of items in terms of China and the coronavirus, can you give us a feel for your exposure into that market, whether it is directly or via customers who are operating in the region?

Well, we do have eight facilities in China. So we’re located there. We have our own employees there nearly a 1,000. So we do have a significant presence in China. We do not have any facilities located in Wuhan, the employees that are there are sales associates for the most part, and so our exposure is very similar to what you've read about anybody else who is in Shanghai, Shenzhen, Suzhou, for example are the biggest places where we have operation. That's really what I could say about our size and scale. When we do business in China typically it’s for customers who are located there, although they may be exporting their products ultimately outside of the U.S.

Can you share with us the revenues that you are generating in the region?

Yes, I mean China for PolyOne legacy is about 10% of sales.

Okay, thanks. And just quickly any expectations of potentially having to divest small pieces of Masterbatches in one region or another with regarding Clariant?

No, we don't have any expectations -- we -- there have been some questions about mix and the percentage of their sales that are from blacks and whites; we’ve acknowledged that that's higher than our own. But I also think historically, Clariant has done a better job with those product lines and in those end-markets that they serve. So my starting premise is that it's a positive. But obviously once the deal is complete, and we looked at our overall profitability and where we do business, things could change. But I'm not looking at it right now, as if there is something that needs to be divested.

Okay. Thank you very much.

Okay. Thank you.

Thanks again for everybody who is joining us on the call. We look forward to giving everyone an update following our first quarter results.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.