Eric Swanson - Director-Investor Relations Robert M. Patterson - President, Chief Executive Officer & Director Bradley C. Richardson - Chief Financial Officer & Executive Vice President.

Frank J. Mitsch - Wells Fargo Securities LLC Michael J. Sison - KeyBanc Capital Markets, Inc. Robert Andrew Koort - Goldman Sachs & Co. Kevin William Hocevar - Northcoast Research Partners LLC Dmitry Silversteyn - Longbow Research LLC Jason A. Freuchtel - SunTrust Robinson Humphrey, Inc.

Michael Joseph Harrison - Seaport Global Securities LLC Tyler Charles Frank - Robert W. Baird & Co., Inc. (Private Wealth Management) Laurence Alexander - Jefferies LLC Jason A. Rodgers - Great Lakes Review.

Welcome to the PolyOne Corporation Third Quarter 2015 Conference Call. My name is Kailey, 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 this conference. As a reminder, this conference is being recorded for replay purposes.

At this time, I would like to turn the call over to Eric Swanson, Director of Investor Relations. Please proceed..

Thank you, Kailey. 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 expectations and involve a number of business risks and uncertainties any of which could cause actual results to differ materially from those expressed in or implied by the forward-looking statement.

Some of 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 of them to the most comparable GAAP financial measures. Operating results referenced during today's call will be comparing the third quarter of 2015 to the third quarter of 2014, unless otherwise stated.

Joining me today on the call is our 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 everyone, joining us on the call today. I'm pleased to report record third quarter adjusted earnings per share of $0.54, a 10% increase over the prior year. I am proud that our team delivered continued growth in a challenging environment.

The weaker euro alone reduced earnings per share by $0.02 when compared to last year. While we don't report our results on a constant currency basis, if we did, adjusted EPS would have grown by 14%. Year-over-year our adjusted EPS has now increased 24 consecutive quarters, 23 of which were 10% or more.

That's six years running, an impressive streak few companies can claim. We understand and work hard to find ways to grow and to deliver in the face of a challenging environment. For the quarter, our adjusted operating margin reached an all-time third quarter high of 10.4%.

Expanding profitability likely comes as no surprise to those that have watched us execute a specialty strategy that is built to succeed in both thriving and challenging economies. That's not to say that we don't feel the effects of macroeconomic factors; we do, and most notably outside of our Specialty Platform.

Sales in Distribution and PP&S declined 8% versus the prior year, primarily due to lower hydrocarbon based raw material deflation. This negatively impacted selling prices in Distribution and PP&S and both segments delivered lower operating income as a result.

But such headwinds do not change our strategy or our invest to grow model; in fact, they only increase the need for us to drive further investment in commercial resources.

As we noted in our press release this morning, we have increased our sales force by 6% since the beginning of the year and we are also adding important technology and marketing associates as well. We are funding these additions with the reduced back office expenses and administrative costs.

Much of these investments are going into Color and Engineered Materials, both of which set third quarter records for operating income in dollar terms and as a percentage of sales. This is particularly impressive when you consider that one third of their sales are euro-based.

Color and EM grew operating income 15% and 9% respectively, and return on sales advanced to 17.3% for Color and 14.7% for Engineered Materials. Regionally both of these segments experienced strong operating income growth in North America, more than offsetting the weaker euro.

Increased sales of our advanced wire and cable solutions and applications for building and construction, including solar industry, drove mix improvement for EM. And this more than offset the decline in demand for oil and gas and energy applications.

And Color saw an uptick in sales of more unique specialty colors and additives, most notably in consumer and packaging applications. I'd now like to take some time to discuss the progress we are making in Designed Structures and Solutions.

Since we acquired Spartech in 2013, we have been implementing our four-pillar strategy and overhauling the culture, much the same we did at PolyOne. This business has tremendous specialty and value creation potential, which is why we bought it.

And while any transformation takes time, I attest that we are making progress and our leading indicators are pointing in the right direction. A foundation is being built that gives us confidence in the long-term improvement and sustainability of profitable results. We are focused on improving on-time delivery as an important and required first step.

We are seeing substantial improvement from where we started at 55%. While we have not yet reached our goal of 95% on-time to customer request date, we have made substantial progress and this will eventually be a differentiator for us in the industry.

In addition to on-time delivery, we are making steady progress in numerous other operational efficiency metrics. Quality claims and returns as a percentage of revenue are down over 20% from 2014, and we have reduced the overall level of scrap by 10%.

These metrics will continue to improve with our planned new investments in machinery and equipment, which will also help us support and drive growth. In further support of our operations, we recently announced the closure of the Granby, Quebec, facility.

While these decisions are never easy, they are the right ones to make for our customers and the long-term health of our business. Production is being transitioned to other facilities now and we expect the closure to be complete by the end of the year. In addition to investing in our manufacturing assets, we're also upgrading our underlying systems.

This year we launched the implementation of SAP, which we expect to be completed by the end of 2016. With SAP and related interfaces, we will be able to better connect and integrate DSS with our customers and accelerate collaboration with other PolyOne businesses.

We had to improve our operations before we could make meaningful headway on the commercial front, and in that regard, I want to highlight that DSS achieved its first sequential increase in sales since 2012. While only a small increase from the second quarter, this is an important inflection point for us. The losses are done and the wins are in.

While we had unfavorable mix in Q3 versus Q2, we're making progress with winning new business. Some were lost accounts and others all together new applications. We do not underestimate the importance of having the right team in place, which we now do. Rich Altice and John Midea have quickly established themselves as results-focused leaders.

We have also added leadership in marketing, technology, sales and operations. In fact, in the last 12 months, six additional leadership positions have been filled in DSS. Under their direction, we're fixing on-time delivery, improving quality and driving innovation projects.

And perhaps what I am most excited about for the long-term is that many of these innovations leverage other PolyOne technologies such as ColorMatrix barrier protection or Glasforms reinforced composites. We are on the path to growing this business again and it's exciting. Our DSS associates are reinvigorated and working harder and smarter than ever.

Although progress may not always be linear, as evidenced by both the turnaround of PolyOne in its early days and our current work with the former Spartech businesses, specialization continues to prove it is the right path for our company, our customers and our shareholders, and with the strength of our established specialty businesses, that drove another quarter of impressive earnings growth at PolyOne.

At this time, I now would like to turn the call over to Brad to provide additional details related to our financial performance..

Well, thank you, Bob, and good morning. I'm very pleased to provide additional comments and color on our third quarter results. Every day I continue to be impressed with our team's ability to drive earnings growth during the difficult economic environment.

Doing so requires a common purpose, common values, and an expectation of excellence from all associates across all regions. And that's what I experienced this past quarter as I traveled in Asia. Our work there is a great example of how our four-pillar strategy is performing, even in challenging times.

The team is energized and enthusiastic and they are not letting the slowing macroeconomic deter us. Case in point, our Asia business posted record results in the third quarter. Operating income increased 13% and return on sales reached 14%, a new record.

Longer term, as the Chinese economy matures and transitions away from reliance on heavy industries to a consumer-driven economy, PolyOne is well positioned with our innovative portfolio of specialty solutions that favor global megatrends.

Our four key end markets of consumers, packaging, transportation, and healthcare play well into the trends impacting this region. Now to a deeper look at our companywide results. Driven by record performances from our Color and Engineered Material businesses, we delivered a record third quarter adjusted EPS of $0.54.

On a GAAP basis, EPS increased from $0.35 to $0.50. Special items in the quarter resulted in a net after-tax charge of $3 million or $0.04 per share and included the following. First, a pre-tax realignment charge of $13.5 million, primarily related to the closure of the DSS Granby, Quebec, Canada facility.

And secondly a tax benefit of $9.6 million, primarily related to uncertain tax positions for which the statute of limitation has expired. And as a result, the related reserve is no longer needed. Now to our segment results.

Color, Additives and Inks continues to post strong results, with operating income increasing to $34.5 million, despite a weaker Euro, which negatively impacted year-over-year OI by over $2 million for the segment. This represented a return on sales of 17.3%, the highest in the company and an improvement of 310 basis points over the prior year.

Our North American Color team expanded return on sales 550 basis points. Meanwhile, our Asia Color business, as I alluded to earlier, also showed strong growth by expanding operating income as a percent of sales by 410 basis points.

From an end market standpoint, our Color business saw growth and margin improvement in consumer, in electronics, but lower sales in wire and cable and appliance applications. Engineered Materials also posted an impressive performance with operating income of $20 million.

Led by strong growth in North America, the segment delivered a record third quarter as return on sales increased 210 basis points to 14.7% up from 12.6% last year. As Bob already discussed, we are improving the operating income that give us confidence in the future of Designed Structures and Solutions.

While operating margins declined slightly from Q2 due to mix, for the first time we achieved a sequential increase in sales. No doubt there's still a lot of work to do in this segment, but we have tremendous confidence in the rigor and discipline of our team and look forward to improving profitability as the year closes.

Performance Products and Solutions saw sales decline 18% and operating income decrease 10%. Operating margins grew by 80% to – 80 basis points to 9.2%. PP&S has placed a priority on portfolio mix optimization and operational efficiency. Our Geon business increased operating margins 310 basis points in the quarter.

Our innovations in the healthcare and electronic industries have our customers' attention about the newfound possibilities and performance benefits of vinyl.

But these gains were not enough to offset the decline in revenue due to lost contract manufacturing businesses inherited from Spartech and the impact of lower hydrocarbon based raw material costs, which reduced average selling prices. Our Distribution segment had mixed results for the quarter.

While margins expanded to a new record for the third quarter and volume increased over the prior year, sales and operating income were negatively impacted by the decline in hydrocarbon-based raw materials. In addition, we made necessary investments in additional sales resources.

While this impacted results in Q3, these new sellers have hit the ground running and will soon be driving revenue and profitability growth for POD. In terms of our balance sheet and free cash flow, both remain strong. Working capital management improved year-over-year to 9.8% of sales on a trailing 12-month basis from 10.3% last year.

And this contributed to our strong liquidity. Free cash flow for the quarter was $46 million and we ended September with a cash balance of $236 million, giving us total liquidity of approximately $420 million. During the quarter, we leveraged our strong free cash flow to increase share buybacks and our quarterly dividend.

Earlier this month, we increased our annual dividend 20% to $0.48 per share. I'm very proud to say that this now marks five consecutive years of increases. This increase reflects our overall expansion of earnings, but more importantly our confidence in being able to continue to grow at a double-digit pace.

During the third quarter, and with our share price down from Q2, we ramped up our buybacks, repurchasing nearly 2.4 million shares. We still have another 5.2 million shares remaining on our board-approved repurchase program, and we'll continue to remain opportunistic in our share buyback efforts.

To further strengthen our liquidity, we are excited to announce our intention to launch a refinancing of our 2020 notes tomorrow, with an offering of a $550 million term loan.

With the proceeds of the refinancing, we will be retiring $317 million of our outstanding 2020 notes, setting aside money for paying off our debt due in December of 2015 as well as, paying down the current balance on our revolver. This offering will retire our higher cost debt, while freeing up capacity on our revolver.

Furthermore, it will expand our debt maturity profile and enhance our liquidity with a flexible prepayment instrument. Final terms and conditions will be communicated once we complete the offering, which should be in the second week of November.

This past quarter represents yet another example of what we are and will continue to achieve as a specialty company. There's work to do and that will always be the case at PolyOne. Yet I am pleased with where we are, both in terms of our focus and execution in the areas most important to our customers and shareholders.

That concludes my prepared remarks. I will now hand the call back to Bob..

Thanks Brad. Our four-pillar strategy continues to underpin our actions. And we remain relentlessly focused on providing our customers with unmatched service and unique value-added offerings. We go beyond simply providing customers with a product. We offer our unique expertise and innovative capabilities and commitment to excellence.

We deliver beginning to end solutions that best suit their needs. This effort strengthens our collaborative partnerships and builds lasting connections with our customers.

In the past, you have heard us talk about sharing operational expertise with our customers by providing Lean Six Sigma training classes, as well as sending our own Black Belts to support and analyze customer processes. This mindset is not limited to just operations.

One particular customer was so impressed with our sales associates, that they wanted help developing their own sales force talent. In response, we organized training sessions for their sales team to focus on customer-centric selling skills, their customer-centric selling skills, to better articulate value to their end consumers.

We are firm believers that openness and willingness to share with customers yields long-lasting relationships and mutual value creation. This is the essence of collaboration. And with PolyOne it extends beyond material science and polymer formulation.

We are also leveraging our unique specialty design service offerings to further differentiate us as a preferred innovation partner. Let me tell you about our IQ Design Lab. It is our in-house industrial design group at PolyOne and customers love it.

This team focuses on material selection and processing expertise, blended with a holistic approach to problem solving that helps our clients develop higher performance products for their market. IQ Design Labs is a capability we inherited through our acquisition of Spartech.

We recognized it as an impactful and needed service for our customers, so we're leveraging it further to grow all of our businesses. So let me give you an example. A leading supplier in a transportation industry recently contacted PolyOne for help with lightweighting, certain interior components.

Our IQ Design team was able to create a product design path that is helping this company significantly reduce the weight throughout the interior of the vehicle, while improving the aesthetic design and reducing the overall number of components and improving the assembly process.

In fact, the design we created is enabling a 50% reduction of the number of components and welding required. And it's not just happening in the transportation industry. Recently our IQ Design team worked with a medical device manufacturer to help them design an on-the-go medical device for in-field emergency applications.

Although the company was far along in its development cycle, with our help, they redesigned the product by combining components into one molded part and added color. Providing this level of world-class service and innovation with such a broad portfolio of solutions to customers takes initiative and resources from all corners of the organization.

It takes feet on the street and it takes the best sales force around. We have it and we're strengthening it even further. Earlier I mentioned that so far this year we have increased our number of sellers by 6% and we will continue to invest in our commercial team to drive growth.

You may be thinking that at a time of economic uncertainty, we should be scaling back. But we are doing the opposite; we are attacking. And for those of you who have followed us, you know this is not the first time we have gone on the offensive to increase resources to drive growth. And we are collaborating and innovating like never before.

Just earlier this month, we highlighted new developments in natural fiber reinforced materials, conductive thermoplastics and specialty engineered materials for metal replacement applications at the 2015 Fakuma International Trade Fair in Germany.

In September, we showcased innovative packaging technologies at the PACK EXPO, North America's largest annual packaging exposition.

Examples included high barrier sheet and rollstock solutions for food protection and medical-grade packaging, light and gas barrier additives for food, beverage and personal care products, soft touch solutions and Percept for product authentication.

While we use these forums to help us market and prospect for the future, we're also closing new business every day. For example, this past quarter in the health care industry, we had an exciting new win for a pre-ops skin prep applicator.

And we also closed multiple new applications with global automotive OEMs for parts ranging from under-the-hood to interior trim components. While many of these wins, as you know, are singles and doubles, they add up. And new products continue to make up more than 40% of our Specialty sales.

Innovation and mix improvement remain at the heart of our specialty transformation and the driving force behind six years of impressive earnings growth. Our turnaround has not been a cost-cutting story; in fact, the opposite is true.

Since our remarkable transformation began in 2006, we have nearly doubled our investment in R&D, sales and commercial resources. And these investments have made it possible for us to move away from commodity applications and into a highly specialized portfolio. Yes, volume is down.

Some of this is by design, but gross profit has more than doubled by moving into new and innovative solutions and that's the bottom line. We are pleased to have now reached the six-year milestone of consecutive quarters of adjusted EPS growth.

But we see an even brighter future at PolyOne, as our established specialty businesses, Color and EM, continue to lead our transformation; DSS laps much of the heavy lifting on integration, delivers on new business gains and is now sustainably on the path to prosperity and growth; and finally, PP&S and POD return to growth after a challenging year during which hydrocarbon raw material volatility negatively impacted our results.

Overall, our culture of innovation, collaboration and excellence is rooted in all that we do, our portfolio of materials, solutions and services is unmatched, and we have a leadership team in place to deliver on our commitments. With that we have time for questions..

Thank you. Our first question comes from the line of Frank Mitsch with Wells Fargo. Your line is open..

Hey, good morning, Bob, and very pleased to hear about all the attacking and so forth, perhaps Harbaugh could have done it against Michigan State the other day..

Very funny..

I try. I try. Some of my material works. Some of it doesn't. But you guys are all – you guys are used to, you take chances and so forth. Hey, the 6% increase in salespeople, how does that break down between the various businesses? Because I know you spoke about it specifically on POD.

But my assumption is that that's probably some of that is in the Specialty side. And can you remind us as to when you think those hires will turn positive in terms of contributing as opposed to right now being a drag..

Yeah, I mean it's pretty evenly spread across actually all of our businesses, with the exception of DSS, which is down just a little bit from the beginning of the year. We still had some turnover there that we need to backfill.

With respect to really the time to, let's say, productivity for an average seller, it depends on the business that they're in. I would expect that in Distribution, you could see contribution inside of the first year they're joining the company, but in EM and Color it can be 12 months to 18 months..

All right. So the investments today – and can you remind us of the investments in 2014 in the sales force area..

It was flat..

Okay, all right. Terrific. And can you talk about the interplay or what you're seeing impact raw materials versus your selling prices.

Where do we stand on that for the company overall?.

Yeah. So for Color and Engineered Materials, I'd say on balance we did benefit to the tune of probably about $3 million. As it happens, that was really a push against the FX headwinds we saw in that business. So raw materials really offset unfavorable foreign exchange and then a slight bad guy on both PP&S and POD..

When would you anticipate that that flips around, given the fact that, obviously oil has come off and you're seeing some of that play out in the resins businesses and so forth..

Yeah. I mean, I think for the most part what we see is that it's timing related in the sense that for Distribution, for example, as they work through high cost inventory and prices come down, we just need to get through roughly one turn or two turns of that inventory, which takes about two months.

So typically when we get past the first quarter of a price decline, you start to see it either flatten out or start to benefit..

And are you optimistic that that's a Q4 event or it's a Q1 2016 event?.

I think it can start to turn in Q4 but we should see some improvement in Q1..

Terrific. Thank you so much. Look forward to seeing you later..

Thanks, Frank..

Our next question comes from the line of Mike Sison with KeyBanc. Your line is open..

Hey, guys..

Hi, Mike..

In terms of your corporate expenses in the quarter seemed very low.

Does that stay at that level in the fourth quarter and how does that reset at the end of 2016?.

We do have lower corporate costs this year from a few reasons, Mike. One is lower, I could say, lower overall the spending on administrative aspects. We do have lower compensation costs, some of which are just purely incentive related.

And so this year's performance, as we look at our operating income growth, vis-à-vis, where it's been in the past say five years as you know, it's lower than it has been. And as a result, our incentive payouts will be lower. So that's coming through and resulting in lower corporate costs this year.

To the extent that it resets in 2016 is entirely predicated on our performance in that year. So assuming we deliver and do so at a double-digit pace, then incentives would reset next year..

Okay. Great. And then when you look at 2016, you did comment in the release that, you hope to see revenue expand with new sellers and sort of commented on double-digit EPS growth in your Platinum Vision.

So if you think about 2016 just globally, how do you get back to double-digit EPS growth next year, maybe give us some of the components of volume, if any, mix and DSS improvements..

Yeah, well, first and foremost, if you look over the last five years, clearly mix improvement and margin expansion have been the drivers of earnings per share. And that's been fine. I mean, when you look at the last five years, we know we've had flat organic revenue growth as we have emphasized both of those.

But as we stand here today and we look at our portfolio of offerings, we really do have the business that we want and I think that pruning is behind us. And, accordingly, in 2016, we expect to deliver revenue growth, and I think that is going to be the key driver of earnings per share. So that's not to take anything away from mix improvement.

I think that will continue to be a part of our growth, but revenue being a key driver next year. So modeling even just a modest or small level of revenue growth next year can get us to 10% earnings per share growth. Clearly as Brad said, we also did buy back shares in this last quarter at a much higher pace than we had in the previous two quarters.

We bought back almost 2.5 million shares. So lower share count helps in the equation as well..

Okay.

And one quick one on DSS, where do you think the profitability can get to over time? And what's the key metric? Do you need to get sales to a certain level, on-time delivery to a certain level? Just maybe rephrase the longer term potential of that segment?.

Sure. Well, look, the one thing we're focused on right now, more than any other is the operational improvements. And on focusing on those things first that obviously gives our commercial team the confidence to go back out and win business with our customers.

If you look back in time on Spartech overall, when we acquired that business, it was about $1.150 billion in revenue. And at the time I always said to everyone, don't be surprised if this ends up being around $900 million in total, as we right size the business.

As you know, it's probably closer to say $750 million right now, but we've got line of sight to winning business back to get it to $900 million. Again, I'm talking about all of Spartech, not just DSS. And really the capacity actions that we have taken in the past were really aligned with that $900 million number.

So at this point outside of what we've done with the Quebec facility, we don't plan to take out additional costs because we got to focus on putting the customers first, improving quality, scrap, on-time delivery. And when we do that, we are going to see margin expansion that is dramatically faster than it would be from ordinary sales growth.

Our expectations are that this can be double-digit return on sales business. Clearly, that's what we set out in our Platinum Vision. And I think it takes us that kind of timeframe to get up, well north of 10%, to the 12% to 14% level. But we can get there pretty fast in a couple of years with sales growth.

So as I look at operating income for DSS and just making some modest improvements, I don't see any reason why operating income wouldn't be able to grow at 25% or so next year, if not better..

Okay. Great. Thank you..

Yep..

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

Thanks. Good morning..

Hi, Bob. Good morning..

Quick questions. On DSS, I don't know if I heard your new wins metric in the quarter.

Did you give that?.

Year-to-date the number of wins – we've had some additional wins, but I'd say we've also had some just push in terms of business that we're still working on closing. So year-to-date, probably at about $45 million, maybe closer to $50 million.

So a little bit in the third quarter, but I'll tell you the team has got a lot in front of us right now at the bottom of our sales funnel that we're pushing to close here by year-end..

Bob, you obviously strike folks as a pretty competitive person, like a challenge.

Why in the world would you do an SAP implementation while you are still on the course to driving revenue growth in this company and add another layer of challenge?.

Well, I'll tell you, a lot of times when I talk about implementing SAP, people cringe because their experience with it is so bad from their own implementation challenges. But we've got an outstanding team here at PolyOne. That is very experienced in implementing SAP. And it has been a margin improvement enabler for all of the businesses that have it.

We have not rushed the implementation historically. And what's been most important is that we fix the underlying processes first to allow us to put the system in second. And we've made enough progress or we're starting to now within DSS that we can begin to knock out SAP with a goal of getting it done by the end of next year.

So I don't view this as rushed. I think it's on time. I mean, recall that by the end of next year, we'll be into this deal by three and a half years. So I think that's the right time..

And Brad, if I could ask you on the refinance effort.

How big a difference do you think you'll get in rates between the notes you're retiring and term loan you are issuing?.

Yeah, Bob and just one comment on the SAP, just to that question. We've had four go lives this year with no disruption on the business. So again just to repeat what Bob said, we've had a very, very good track record.

In answer to your question on the interest, we're retiring the 2020 notes, which carry a 7.375% coupon rate, as well as our December 2015 notes, which carry a 7.5%. So at this point, I think we're going to see a substantial reduction in our rates.

But we're not at this point ready to kind of outline exactly what the terms will be, because we don't want to do anything to kind of jeopardize the marketing process. But as I said in my remarks, we will be coming forward with the final terms and conditions, the second week of November..

Great. Thank you..

Our next question comes from the line of Kevin Hocevar with Northcoast Research. Your line is open..

Hey, good morning, guys..

Hi, Kevin..

Can you comment on the new business wins in Spartech? Could you comment on how you expect those to flow through the rest of this year and into next? And also, Bob, you mentioned you track back towards $900 million in sales in that business.

Do you think you can get some more wins in 2016 as well? And also is there business losses too? So just trying to get a sense for would this all be incremental in 2016, or do you think there might still be some losses as well?.

Well, first of all, just for pointing out the $900 million number, again that's for Spartech as a whole. Recall that when we acquired Spartech, we created a new segment DSS. But then pieces of Spartech went into Color, EM and PP&S. So that was a holistic comment on that revenue number.

With respect to the course of this year and the use of the words gains and losses, look, every year, every quarter we have some business that flows out. And that may not be lost business in the traditional sense of a customer who no longer buys from us, but a product that has reached end-of-life or end-of-life cycle.

And so those things continue to happen and you have turnover. And that continues to exist in DSS, as well as our other businesses. We've been highlighting some of these new business gains along the way this year, because up until this point, we really hadn't had any.

And so, that's why we wanted to point out the $40 million to $45 million, which really should start to flow through in 2016. There should be some benefit in Q4, although I don't believe we get to a sales number that's higher than we had last year for DSS, until next year. But you should see a lot of that flowing through in 2016.

But I can't give you a specific percentage conversion..

Okay. And in terms of your margins in the Specialty business, what happens if raw materials start to reverse course over the next year and start rising? I mean, you've done a great job of holding on to pricing as those have come down.

So do you think you can easily pass those along, maybe with a lag, if those ultimately reverse course and maintain the margins, or just trying to get a sense for how to think of whenever that day may come?.

Well, look in the Specialty businesses, our goal is to continue to drive sales growth and margin expansion in any environment. And I would tell you that within Color and EM, we've become increasingly disconnected from specific raw material movements.

And candidly, as the products become more specialized, they are less influenced by underlying base resin cost. So my expectation is that in an inflationary environment, we should continue to improve margins. Our ability to do that obviously, reduces as you get closer to some of our other businesses, such as in PP&S and POD which aren't as specialized.

But I would remind you that in the short term, a price up correction can be a good guy in the distribution model if we sell lower cost inventory in to that environment. So that's how I see things playing out in an inflationary environment. And hopefully answers your question..

Yeah. And then just final question. There's a lot of noise in the top line number between FX and passing through lower price feedstock and so on and so forth in POD, and PP&S.

And so just wondering how you think the organic sales line has gone maybe year-to-date and also third quarter specifically?.

Yeah, so I mean look if you look at the sales decline overall of 12%, FX is 2.5%, what we would have called the acquired Spartech business is 5.5% and then effectively what we're assigning to the lower hydrocarbon cost is 4%.

Accella adds about 0.5%, which basically tells you that the organic number is roughly flat, when you look at things across the third quarter. So I think that's a positive sign in the sense that historically we've actually had quarters when that organic number has been down, because we have made such significant changes in mix.

And as I said earlier, I really believe that with the portfolio we have now that that becomes less of a factor going forward and that's what will drive organic revenue growth..

Okay. Great. Thanks..

Thanks, Kevin..

Our next question comes from the line of Dmitry Silversteyn with Longbow Research. Your line is open..

Good morning, guys. A couple of questions, if I may. First of all, we've seen margins down quarter on quarter in DSS in the third quarter. I thought after the second quarter, the guidance was for margins to be up sequentially in the third quarter and fourth quarter as you move towards your sort of mid to high single digit goal of margin for 2016.

So is my recollection correct, and if so, what was it in the third quarter that caused the margin to be down sequentially?.

Yeah. I mean, look, obviously I think that's a fair observation about guidance for the balance of the year and for the full second half of this year I do believe margins will be up from where they were in the first half.

In the third quarter, it really is a sales-driven phenomena, in that some of the transportation applications we have in the second quarter are higher margin than the mix of business we have in the third quarter. That's really what's driving that. We did have some operational improvements.

In my prepared remarks I mentioned some of them, which helped to offset that, but not all of it. So part of, Dmitry, is that when you're looking at an operating metric that's down below 5%, it doesn't take much to move that unfortunately, and so that little bit of mix change had a negative impact in the third quarter..

Then just to follow up on the comment you made in discussing your EM and Color business, you talked about appliance demand being down and that was one of the bad guys to offset the growth you've seen in consumer and packaging.

Can you talk about that? Is that regional? Is that broader? Because my understanding is appliance sales have been, at least in North America, pretty robust..

I don't think we said appliance. I specifically mentioned gas and energy being down. And that being probably a bigger effect on EM. There might have just been a little bit of one-time noise around appliance in Color. But I don't think there is anything I would point to there from a macro or industry standpoint..

Okay. Yeah, you did reference that in respect to the call, you talked about consumer electronics being up and wire and cable and appliance being down..

Yep..

Okay.

So that was just a vagary of the quarter and no macro read through we should be making from that?.

Correct..

Okay. And then one final question just to clarify. You talked about the foreign exchange impact overall, but the two businesses obviously with the biggest foreign exchange exposure is Color and Additives and Inks and Engineered Materials.

Can you give us what the FX impact for the quarter was on the revenue line for those two businesses or combined?.

At the top of my head, I know bottom line impact for Color was a little over $2 million and about $1 million for EM. We can get you some revenue numbers here a little bit later. But that's the OI impact of FX..

Got it. Okay. Thank you..

All right. Thanks, Dmitry..

Our next question comes from the line of Jason Freuchtel with SunTrust. Your line is open..

Hey, good morning, guys..

Hey, Jason..

Good morning, Jason..

Did you add the bulk of the 6% higher sales force during 3Q? And is the 6% increase in sales force a good run rate estimate to assume for next year?.

So it started to come in the -- we actually made hires in all three quarters. But I'd say probably a larger percentage of them started to come in the second quarter and third quarter. We've got a goal of actually continue to increase that by the end of the year, where we could be up as high as 8%. So that's a number you should probably use for 2016..

And can you remind us roughly how much of your employee base was represented by your sales force last year?.

About 600 employees in sales, direct sales roles..

Okay.

And then lastly, with new equipment in the DSS business and investment for SAP planned for next year, should we expect higher CapEx in 2016?.

No, Jason. I mean, I think this year we're going to be somewhere between $85 million and $90 million, and I think that's a good proxy for next year. You always have new things coming in, but you also have some projects that are maturing out..

Okay, great. Thanks..

Thank you..

Our next question comes from the line of Mike Harrison with Seaport Global. Your line is open..

Hi, good morning..

Hi, Mike..

Hey, Mike..

Bob, can you give us a little bit of detail on the demand trends that you've seen kind as we go from August into September, and now that we're in October here and talk about what you're seeing in North America, Europe and Asia?.

Sure. And I'll start with the Asia. It's obviously gotten a lot of attention in the press and concerns around a slowdown there. And I think that is the case. I believe that we're still going to see growth from a macro economic standpoint. But the concern is that it's slower than it has been in the past.

One thing that I would point out for us, relative to our exposure in Asia, is that number one, it's relatively small at only 7% of our overall sales, and, two, a lot of what we make in Asia is actually ultimately destined to return to the U.S. or Europe. So our Asia business may not be impacted as much by a slowdown there as others.

From a European standpoint, I think that it continues to be very slow going. In one month you can feel like you're seeing a little bit of an uptick, only to get into the next month and see it flat or slightly down again there. So it's hard to draw a conclusion on when or how that starts to get better.

But at this point it certainly doesn't seem to be getting any worse, and the fourth quarter is always a challenging time to call exactly what will happen, simply based on customer buying patterns in December. And then in North America, I thought we had a very strong September, better than we had in August.

And from my perspective, we have not seen any slowdown from a regional perspective in North America. In fact, as you look at our performance this quarter, we highlighted it really as one of the driver forces of our OI growth for the quarter and that's really been true for the year..

All right. And then in the PP&S segment, you noticed that price -- you noted that pricing versus raw materials were a little bit of a bad guy in the quarter. But gross margin number was pretty good and obviously you're aware you delivered record operating margin there.

So is this step change sustainable? I know you mentioned it's mix driven but can you just kind of walk through some of the other details and components of the improvement you've seen in gross margin there?.

Yeah, well, one of the things -- first of all, with respect to the year-over-year decline in sales, if I didn't say it today I should have, because we've referenced in previous quarters, we did lose particularly a large account that we inherited from Spartech.

And that's probably one of the most significant drivers of that year-over-year sales decline and OI decline. So that actually helped a little bit from a margin standpoint.

And then in addition, I would say that we've really got kind of a mix factor and that our Geon brand vinyl business I think continues to expand and see margin improvement, while the contract manufacturing business, which included that former Spartech account has really been down.

So I think you're seeing a little bit of a mix good guy there that's helping out, plus just the ongoing benefits of our operational excellence initiatives..

All right. Thanks very much..

Thanks, Mike..

Our next question comes from the line of Tyler Frank with Robert W. Baird. Your line is open..

Hi, guys. Thanks for taking the questions. Should we expect to see any additional charges related to the plant closure in Canada going forward? And then can you also discuss anything that you're seeing or different opportunities that could be out there in the M&A market.

Are you still looking to potentially acquire another business and integrate that in the coming quarters?.

I'll take the M&A question and Brad can give you some more details on forecast restructuring costs. So from an M&A standpoint, it's really been kind of a challenging time here to be willing and able buyer for specialty properties, in terms of what we've seen available.

And the kind of businesses that have been selling are those that I would say we did not want to pay such a high multiple for. So I hope that patience and prudence proves out to be the best course of action here. We continue to look at a lot of deals and they range in size, but most recently I'd say they've been smaller bolt-ons and not larger ones.

And in the absence of acquisitions, we are going to continue to buy back shares, and you saw us do that in the second quarter. And our leverage remains very modest still and will be even after the refinancing. And so I think that's what investors should look forward to and expect if we don't find deals to do at a reasonable price.

Brad, on the restructuring..

Yeah, Tyler, specifically to your request on the Granby, Quebec, Canada, I estimate that there probably will be another $3 million worth of charges in the fourth quarter to wrap up the restructuring and closure of that facility..

Perfect. Great. Thanks, guys..

Yup..

Our next question comes from the line of Laurence Alexander with Jefferies. Your line is open..

Good morning. Two questions..

Hi, Laurence..

One, can you give a little bit of color on what you're seeing specifically in the wire and cable and color markets. And if you think growth rates will improve over the next two quarters to three quarters.

And also as we are thinking about the free cash flow bridge for next year, apart from the CapEx and the incentive comp, is there anything else that will swing through the cash flow statement that affects the bridge?.

From overall wire and cable standpoint, I think there's bit of a mixed end market story there, in that, for some applications, particularly in oil and gas industry related business, that that's – there has been downward pressure on that. But that's been offset to some extent by building and construction.

For us in our own growth in wire and cable, it's largely been with new business gains. So I would point to the growth in wire and cable for us as being more related to that than underlying macro driver.

With respect to the markets that really are – the Color team is participating in, as you know, packaging and consumer are two of the largest and I would say that there's still healthy growth behind both of those. We have a very significant presence in packaging in Europe and that has been down for the last couple of years.

And my hope here is that we've reached the bottom and start to see that turnaround positively. But that maybe a comment as much about Europe as it is about packaging in particular, so we'll see how long that takes..

And Laurence, specifically to the free cash flow, I mean, I think you've captured most of the elements. I would expect in support of the growth of the business, that there would be a modest build in working capital. But otherwise I think you've captured the key components..

And then just lastly, are there any end markets or niches where we're seeing an actual or significant acceleration in growth that would support momentum into next year?.

I wouldn't say anything from an end-market product-related comment. However, I will say that we have seen very good growth in Mexico and that has been a driver for us and part of the North American story that I've referenced a couple of times today, Laurence.

And I think that's going to continue to be a growth region for us and probably other companies as suppliers look to resource back to North America. So that's been a good area of growth for us and probably the one that stands out more than any other..

Thank you..

Thanks. I think we got time for one more question..

Our next question comes from the line of Jason Rodgers with Great Lakes Review. Your line is open..

Yes. Thanks for squeezing me in.

Looking at the organic growth forecast, is the expectation for that to turn positive in Q1 of next year?.

The expectation is for that to turn positive certainly in 2016. And I think we can get there in the first quarter. It's always a challenge to predict one specific quarter depending on how things shake out at the end of the year.

And I always tell people you can't really draw any conclusions from December or January results, but when you put them together, you can get a good sense for how things are going to go. So I think it will be close for Q1, but certainly got growth in 2016..

And the on-time delivery rates at Spartech, did those improve sequentially from Q2?.

Yeah, they did..

And finally, would you be able to quantify the savings from the Canada plant closure?.

I think it's $2 million..

Thank you..

All right, thank you very much. I appreciate everyone's time and attention and participation in the call today and your ongoing support. We look forward to seeing you in the future, if not before then, then on our next call at the conclusion of our year. Thanks again..

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a wonderful day..