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

Michael J. Sison - KeyBanc Capital Markets, Inc. Frank J. Mitsch - Wells Fargo Securities LLC Robert Andrew Koort - Goldman Sachs & Co. Tyler Charles Frank - Robert W. Baird & Co., Inc. (Private Wealth Management) Dmitry Silversteyn - Longbow Research LLC Daniel Rizzo - Jefferies LLC Jason A. Freuchtel - SunTrust Robinson Humphrey, Inc.

Michael Joseph Harrison - Seaport Global Securities LLC David M. Stratton - Great Lakes Review.

Good morning, ladies and gentlemen and welcome to the PolyOne Corporation Second Quarter 2016 Conference Call. My name is Kaily, 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 would like to turn the call over to Eric Swanson, Director of Investor Relations. Please proceed..

Thank you, Kaily. Good morning. And welcome to everyone joining us on the call today. Before beginning, we would like to remind you that statements made during this conference call maybe considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Forward-looking statements will give 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 of them to the most comparable GAAP financial measures.

Operating results referenced during today's call will be comparing the second quarter of 2016 to the second 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..

Well, thanks, Eric, and good morning. I'm excited to kick off today's call by announcing the acquisitions of Gordon Composites and Polystrand. These businesses will join our existing portfolio of complementary solutions to create a new Advanced Composites platform within our Specialty Engineered Materials segment.

This strategic move broadens our current thermoset composite portfolio and importantly provides PolyOne entrance into thermoplastic composites. This is a space we view as the next frontier for customers who want the strength of a composite but with increased design flexibility afforded by thermoplastics.

Quite simply this capability allows for composites to be used in more applications, where high strength and lightweight polymers can replace alternate materials. I'll have much more to say on the call later. But first, I'd like to discuss our performance in the quarter.

For the second quarter, we delivered an all-time record adjusted earnings per share of $0.63. That's an 11% increase over the prior year and marks our 27th consecutive quarter of year-over-year adjusted EPS growth.

Consolidated return on sales reached a new high of 10.7%, driven by expansion in Performance Products and Solutions and Specialty Engineered Materials and ongoing world-class margins in color. The momentum in PP&S continued through the second quarter as operating margins improved both sequentially and year-over-year to a record 12.3%.

This resulted in operating income of $21.3 million, representing a 31% increase over last year. Reflecting our confidence in the longer-term outlook of this business, we have increased our 2020 Platinum Vision operating margin target for PP&S to 12% to 14% from the previous target range of 10% to 12%.

PP&S rigorously executes the principles of PolyOne's commercial and operational excellence pillars, while finding new innovative ways to apply their portfolio solutions and better serve our customers.

For example, we continue to innovate with major lighting manufacturers, and in June, an outdoor light that contained our material won an award for best new product introduction for outdoor landscape lighting. Our customer came to us looking for a material that would last longer and have the same aesthetic characteristics of traditional die-cast.

Our PP&S team developed a new vinyl formulation that matched the customer's needs, while offering end-user-specific color choices. In Engineered Materials, sales increased 3% versus the prior year, and operating income increased 6% to a new record second quarter of $21 million. This led to a year-over-year improvement in operating margins to 15%.

From a revenue perspective, sales from the addition of Kraton's TPE business plus organic gains in wire and cable and appliance were partially offset by weakness in consumer. In distribution, our investments in commercial resources continue to positively impact the business, as volume was up 9% in the quarter. And these are truly outstanding results.

Unfortunately from a sales dollar perspective, this volume growth was nearly offset by lower prices due to declines in hydrocarbon raw material costs, and total distribution sales grew 2% over the prior year. The lower pricing environment also negatively impacted PODs operating income as margins compressed.

But I want to emphasize the significance of this underlying growth. When prices recover, I believe we will see a substantial uptick in operating income as well. Moving on to DSS, I was very encouraged by the sequential increase in operating income and profitability in the second quarter.

We're making progress, executing our plan to transform the former Spartech segment into a specialty business. Like PolyOne's early days, this transformation will take time, but I can say the business has now stabilized as we continue to execute in the key areas that will generate growth for the future.

I'll have some additional comments in a moment and certainly speak more about Gordon Composites and Polystrand. But next I'd like to hand the call over to Brad, to provide some more detail on this quarter's performance..

Well, thank you, Bob, and good morning, everyone. I'm very pleased to provide additional comments and perspective on what was another quarter of strong performance at PolyOne. On a GAAP basis, EPS in the second quarter was $0.59 versus $0.74 in the second quarter of 2015.

Special items in the quarter resulted in a net after-tax charge of $3.2 million, or $0.04 per share and included the following. Realignment charges of $5.7 million, primarily related to the closure of two manufacturing facilities within DSS and acquisition-related costs and adjustments of $2.6 million.

On a consolidated basis, adjusted EPS increased 11%, made possible by our prior investments in our commercial organization, the portfolio contributions from our recent acquisitions, the benefits of our refinancing activity and share repurchases. I'm very proud of our team's efforts, which extended our adjusted EPS growth streak to 27 quarters.

Reviewing our segments, Color, Additives and Inks reported operating income of $38.2 million with operating margins of 18%, truly world class profitability. Operating income was down slightly versus the prior year due to weakness in certain consumer and packaging segments, and slightly unfavorable FX.

In addition, we continue to make investments in commercial resources, and our color sales force is up 4% since the end of 2015, and 8% over last year. These increases in sales force take time to develop customer relationships and drive specification and ultimately deliver a return through sales and margin expansion.

Our recently acquired magenta fiber colorant business is integrating nicely into our color family and having spent time in business and technology reviews with our Magenta team in Italy this quarter, I'm even more impressed by their technology and talent.

These traits were a key factor in what compelled us to purchase this business, and I am optimistic as we continue to apply our invest-to-grow strategy, it will become a growing contributor in our comprehensive color offerings. Specialty Engineered Materials grew operating income 6% to $21.4 million with return on sales of 15%.

From a top-line perspective, sales were up slightly as a result of the Kraton TPE acquisition, which was partially offset by weakness in certain consumer segments, namely personal electronics and entertainment where increased product life expectancy has led to more infrequent purchases of devices and their related accessories.

For example, in Apple's results released yesterday, sales of the iPhone were down 15% year-over-year and 21% sequentially. We have, however, won new business in wire and cable applications and we are excited to have completed the installation of a new line at our Avon Lake manufacturing facility to support these customers.

This line will increase our capacity and improve our service, quality and delivery levels. The new Specialty line is another great example of our invest-to-grow approach, which we not only apply to acquisitions, but also to our proven legacy businesses when we identify opportunities and have an ROI business case to support it.

At Designed Structures and Solutions, we continue to be impacted by the lag effect of the prior year customer losses. However, the business has absolutely stabilized. We're focused on the future and we were encouraged that operating income grew sequentially in Q2.

We are pleased with the underlying operating improvements that we have made in the business which are driving quality, service, efficiency and innovation. On-time delivery in DSS in June was 93% and our scrap rates are now down 15% from its highs in 2015.

Our key operational improvements are well underway and we are retooling our operations to be highly efficient at producing specialty products for our customers. We are rigorously implementing sales and operation planning, Lean Six Sigma, and investing in strategic capital expenditures to enable the growth in this business.

As we improved our operations, we have won new niche innovative specialty business. For example, we recently won new business with a major food and beverage company to supply packaging solutions for their new product launch. This customer required a material that had oxygen barrier properties, printability, and a three-color design.

With revenue of around $1.5 million, it was yet another win in the singles and doubles category that you know we focus on at PolyOne, because singles and doubles add up, and together they have a meaningful impact on the performance of DSS and for PolyOne overall.

In early June, I was with our President of DSS, Rich Altice, and his team at our Greenville, Ohio facility, which as you know is where we are making significant investments and improvements. I can attest that the enthusiasm and dedication of the DSS team is as strong as I've seen it.

They understand that we are investing heavily in that location, with new lines for two of our fastest growing products, PETG and Royalite. PP&S had another exceptional quarter, building on strong momentum from the beginning of the year.

For the quarter, operating income increased over 30% as margins expanded 370 basis points to 12.3%, truly outstanding. The PP&S team is applying the specialty playbook and has dramatically improved the mix in their business. Distribution grew volume by an impressive 9% over the prior year.

With our rigorous commercial discipline and a relentless focus on using service as a differentiator, we have been able to outpace the market. The increased volume was partially offset by lower selling prices due to lower hydrocarbon based resin prices. This resulted in $18 million of operating income, with operating margins of 6.5%.

Before moving on to our balance sheet, I'd like to take some time to discuss the recent referendum by British voters to exit the European Union. I know this is still in the front of many investors' mind. Although Brexit's impact on the European economy remains uncertain, we don't believe it will cause a significant disruption to us.

Currently, only our Color and Additives segment has sales in Great Britain and we do expect approximately $0.01 to $0.02 of headwinds as a result of the weaker pound in the second half of this year. Regarding our balance sheet, in June, we successfully re-priced our debt from last November's refinancing, reducing our rate by 25 basis points.

This lowers our expected interest expense by over $1 million per year. I was very pleased with the outcome of this re-pricing as it is reflective of the financial health and creditor confidence in our company.

We generated free cash flow for the quarter of $69 million and ended June with a cash balance of $161 million and total available liquidity of over $540 million. Yesterday, we drew on our revolver to fund the acquisition of Gordon Composites and Polystrand for $85.5 million.

We intend to enter into a $100 million add-on to our existing senior secured loan to repay these borrowings. We expect this acquisition will add $40 million in annual revenue and will be accretive to earnings in 2017. Again, now halfway through the year, we are off to a good start.

We have a strong balance sheet, and the investments we're making in the commercial and operational areas of the company are paying off. And I believe, we are well-positioned to continue our momentum through the balance of 2016. This concludes my prepared remarks. I'll now hand the call back to Bob..

Next time you open the hood of your car, you'll see a small compartment packed full of various parts supported by even larger, often heavier ones, stamped metal components and complex shaped modules. Often these are structural steel components that likely require traditional high cost manufacturing processes and tool and die rooms to produce.

Thermoplastic composites offer the material for the future for applications such as these. They're lightweight, high strength, can be shaped, joined and formed in the unique shapes as the applications requires. It is the future, and that's why we acquired Polystrand.

We will apply our proven invest-to-grow strategy and leverage our sales, R&D and marketing expertise to further grow this business. I believe these deals mark a compelling milestone for PolyOne and our customers. Like our previous acquisitions of GLS and ColorMatrix, which have been extremely successful.

We'll now go to market with a new platform called Advanced Composites, which will operate within our Specialty Engineered Materials segment. This new platform includes Polystrand, Gordon Composites and Glasforms. We expect these acquisitions that we announced last night to add $40 million in revenue and be accretive to earnings in 2017.

In total, our new composites platform will have revenues of approximately $80 million. I'd like to take a moment to welcome the Polystrand and Gordon Composites' employees to our team. And to our newest customers, we look forward to serving you and accelerating the innovation and growth you've come to expect in this dynamic industry.

Now powered by PolyOne, it will be business as usual, only better. In closing, I'd like to remind our investors that innovation has always been our lifeblood at PolyOne. And it will continue as we invent internally, collaborate with our customers on unique formulations and acquire complementary capabilities.

We continue to live by our four-pillar strategy and invest in commercial resources as we remain focused on executing that strategy with excellence. With that, we have time now for questions..

Thank you. The call lines are now open. Our first question comes from the line of Mike Sison with KeyBanc. Your line is open..

Hey, guys. Nice quarter, again..

Thanks, Mike..

Bob, I wanted to kind of, sink in a little bit on Performance Products and Solutions. You've had two quarters in a row of really good profitability there.

How much of that portfolio is now, let's say, at that 12% and higher and how much is lower? And trying to better understand – is this more of a new product growth phenomenon where margins are going up, or are you kind of, walking away from lower stuff to get the margin improvement?.

Well, I guess there's probably two dynamics that I would describe.

The first being that I believe that our legacy Geon business, which is principally vinyl-based is, I think really, sort of, following a specialty transition with respect to focusing on higher margin niche applications and improving their overall mix and that's certainly part of the margin improvement.

But I also want to call to attention – sometimes I just have to remind everyone that a big chunk of Spartech's business went into PP&S, and that business was really hurt last year by lower polypropylene prices and just some of the, I'd say, pressure on margins that took place as a result.

So this year, I'd say we're seeing really good improvement in Geon, overall. So finally starting to see some improvement in the business we acquired from Spartech. Now on that Spartech business that improvement is small, but it's taking place and it's having a noticeable impact on margins.

So those are the two factors that I would say really describe, you know, that margin expansion. And to your really last question about where are we sort of in the innings game here, there's a long way to go to improve the Spartech margin. So I'd say we're far from finished..

Okay, great. And then the acquisition that you just did looks like a great fit. Is this a business where profitability is already pretty high? Is it at the – some (27:37) average? And when you think about the growth potential of the next three years, I remember when you bought Glasforms, you tripled EBITDA in a couple of years.

Is that kind of the growth potential for this business?.

Well, it's really a combination of things going on, Mike, and you know, we – really, this was one transaction, but there are two businesses that we referenced because they resonate with our customers and those names. But the legacy Gordon Composites business, I think that's a fair statement with respect to profitability in comparison to EM.

But on the Polystrand side, we're really buying technology. There is a revenue base there, but it's still really up and coming and growing. And so on a consolidated basis, the margin isn't quite where EM is at this point. But it's obviously got great growth potential and we see potential just like we did with Glasforms..

Okay. Great. And one quick follow-up on Global Color. It's probably the first quarter we've seen earnings decline in a while.

Do you expect that to turn around in the second half?.

Well, you're correct, it's been a very long time since we've seen that. And what I would point to is, number one, that we have seen some continued sort of fallout legacy business from Spartech, and some of the customers that we lost a year or so ago in the DSS segment impacted what we had in Color. So that's a part of it.

But a bigger part of it really is the demand decline that we've seen for traditional packaging, and also in oil and gas. And I know that may sound strange but on the oil and gas side, we just do some very high-performance fluoropolymers colorants for wire and cable applications.

That was down in the first quarter and I wasn't sure if that was – how long that was going to continue, but we saw that again in the second quarter. Those, sort of, end market dynamics, Mike, coupled with the additional resources on the commercial side is really what's driving that year-over-year decline.

And my expectation is we're going to see that probably for the second half of 2016 as well..

Great. Thanks..

All right. Thanks, Mike..

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

Hey, good morning, gentlemen..

Hi, Frank..

Good morning..

Hey, obviously, very good results out of POD and volumes up 9% there.

I know you don't like to talk about volumes for the balance of the company, but I was wondering if you could try and give us some comfort with respect to the top-line and what your expectations are and when we can start to see some top-line growth, because it's been over a couple of years since you guys had some top-line growth? When – what is your expectations there?.

Yeah, and you know, on a consolidated basis, we did have volume increase in the second quarter. Obviously, POD was a significant driver behind that. See that continuing in the second half of this year.

But look from a headline revenues standpoint, I don't think that we're going to overcome the raw material price related declines that we see in PP&S and POD this year. I think you're going to see top line revenue expansion in 2017.

What I'm mostly encouraged by is I know that we do have underlying growth in these businesses, and when we see some price stability or recovery that will improve. We did – I just spent a little bit of time, Frank, answering Mike's question on Color and I see that improving in 2017 as well..

All right. Okay, great. And I was happy to hear that DSS has 'absolutely stabilized'.

I think there was an expectation that the second half would see a material pickup in profitability, is that still the case? How are you thinking about the back half of the year on DSS?.

Yeah, I think that for the full year we were really targeting around $5 million or so of operating income. Maybe it could get to $6 million. And I still think, we could get there but it's obviously going to continue to creep up from where it was in Q2. So I think Q3 will be a little better, with Q4 to follow after that.

So I think our story remains the same on DSS with respect to full year performance..

Thank you so much..

Thanks, Frank..

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

Thanks very much. A couple of questions, one, I was wondering, you mentioned adding the sales and R&D resources. Yet your SG&A and Color seem to be well in check.

Can you talk about what offsets are there to keep that aggregate number relatively stable?.

Yeah. First of all, we – and this is really true across all of our businesses, Bob, that in the second half of last year and going into this year, we did reduce administrative costs knowing full well that we wanted to redirect that money into the commercial side.

So there is a pretty almost direct offset on the administrative side to those additional investments. But I'd also point out too that we still had a little bit of, I think, some currency effect that helped to offset that too. So when you look at year-over-year performance, currency is offsetting some of that..

And, Bob, I noticed – you spoke well about the Composites business and the scale of the deals is not so big that it's going to move a lot of the needle, I guess, but maybe, the technology enhancement gives you a chance to accelerate growth. But what is Gordon itself – you mentioned $40 million in sales.

What has the growth rate of that business been over the last five years?.

Yeah. And it's – so the growth rate is – in the last couple of years it's been flat. And that really, I think, is to my earlier point that I made about Mike really wanting to find and partner with somebody else to help push that growth with additional commercial presence.

So Mike and his team have done an outstanding job of really cannily creating this technology, which although small, I think needs our commercial presence to push it forward. But I'd say, look, overall the market is growing at 10% or better, which is faster than the overall plastics universe.

And that applies to really their historical growth rates as well over the last year – few years being an exception..

And my last question When you go into an account now, you mentioned that you got Glasforms – obviously you've got the composites here. You can do thermosets, thermoplastics.

How do you mobilize the sales and development force that's got such a broad materials portfolio? Do you have specialists in each one? Do you have somebody that sort of has a broader purview that can sell across the product platforms? Or what's the go-to-market approach, given you have these different technologies?.

Well, one of the reasons why we're putting this Advanced Composites platform together is that it will have one leader and that's the General Manager from PolyOne, Matt Borowiec, and Matt's really going to help to oversee how we bring together and harmonize the resources inside of our composites offering.

So I'm not sure if your question relates to composites or overall PolyOne. So I'll answer it both ways. Within the composite space, we absolutely have technical resources that focus on that type of material and the applications that they can serve as well as innovation and development.

But we also have resources like our key accounts resources at PolyOne that are responsible for selling across all of our product lines and product families. And every seller really is expected to be a good spotter for other businesses.

So they may not be technical experts but hopefully see those opportunities and bring in additional PolyOne resources where they can. So I think over time, we're going to see even more harmonization of the sales and commercial resources within composites across the three that we just acquired. But that's really to come probably in 2017..

Got it. Thank you very much..

Thanks, Bob..

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

Hi, guys.

What are your expectations for oil and base resin prices, and what are the puts and takes there, given the volatility, and how they could either increase or decrease? Do you see that being a headwind or a tailwind throughout the year?.

Well, I hesitate to prognosticate on that subject, because if you had asked me what was going to happen going into this year, I would never have guessed certain prices would have declined by as much as they have. Oil is up, but polypropylene was down.

Different dynamics going on there, and polypropylene is the one in distribution that pinched our margins the most. So I'd really hesitate, Tyler, to tell you what I think is going to happen. Our responsibility here is to grow and expand margins regardless of what's going on there.

And you know with our distribution business, it's the most challenging place to do that, because we don't really set prices. So that may not be answering the question as well as you'd like, but it's probably about as good as I can do..

Okay. Thank you..

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

Good morning, everybody. A couple of questions, if I may.

First of all, I just want to make sure the Gordon and the Polystrand acquisitions, they have closed already?.

Yes, yesterday..

Okay. Secondly, your 9% volume growth in distribution, obviously, very, very good.

Can you talk a little bit about sort of the drivers and sustainability of that? Was there any one-time or specific large orders or something like that, that flowed through? I mean, typically as you know this business doesn't grow that fast but you guys have been managed to grow it significantly faster than the market.

9% is really out there, so I'm just wanting to make sure that we don't need to model high-single digit growth for this business going forward, or maybe we do?.

Yeah, and – it's a great question. When we started the year, I always caution everyone that it's hard to draw a conclusion from what takes place in January or December for that matter because strange things happen at the end and the beginning of the year with respect to what goes on with customer's buying patterns.

But we actually had better volume growth in the first quarter, and that may have been a little bit of a push going into maybe some of the industrial or construction cycles. So I looked at 9% as being solid and sustainable. There is no doubt that we are winning some share, Dmitry. This isn't just a specific end market that's driving that.

I think our teams are doing a great job of spending more time, making more calls and cannily putting our commercial excellence principles to use. We also created an inside sales team, and I think we're doing a much better job of winning business there. And that's really just focused on, again, thousands and thousands of small accounts.

But to directly answer your question, there was nothing anomalous about this quarter, and I just think the team's doing a great job of winning new business..

Excellent, thank you, Bob. And then as my follow-up question; you've talked a little bit about consumer electronics and packaging and some of these end markets and what's going on there.

Can you provide us sort of a little kind of a broader outlook for the second half of 2016, whether by geographies and what's going on in Asia-Pacific and Latin America and Europe, or by – and/or by significant end markets like automotive construction, packaging, consumer, sort of what do you see and how do you expect your business to perform in this environment?.

Yeah. So maybe just from the highest level and looking at the second half of the year, I used the word 'sluggish' in our release. I'll say that again today, and it's a word that other companies have used.

There just isn't a whole lot of macroeconomic tailwind out there, right now, and you got certain markets like oil and gas – and for us, consumer electronics is a big deal. Thus far, it's been down this year. Maybe with some of the product launches taking place in the latter half of the year that will reverse itself, but that remains to be seen.

And I think, look, for – we still see the full year EPS being double-digit this year for all of 2016, but I think that slows a bit in the second half because of the headwinds that Brad mentioned from the weaker pound, which is $0.01 to $0.02, and the demand dynamics that we're seeing in Color, right now. And compressed margins in POD.

Now, Dmitry, there was a previous question about what's going to happen with raw material prices. And so you could see a good guy coming in (41:48) POD as well, if we saw prices stabilize or improve.

So I guess that's a part as well as I could call it right now, I don't necessarily have any other observations on geographies that I think would be new or insightful for you. The one thing that I mentioned also in Color is just that demand is down for this traditional packaging that we served for so long in that market.

So that, kind of, shapes how I view the second half of the year. I'll hope that's helpful..

Thank you..

All right. Thanks, Dmitry..

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

Hi. This is Dan Rizzo on for Laurence.

With the new segment you were, kind of, referring to, will there be new additional M&A going through the segment or there will be like internal assets that you're transferring over?.

Are you talking about Advanced Composites?.

Yeah..

Yeah. So it won't be a reportable segment in the same way that Color or Engineered Materials is. It's really a business unit inside of Specialty Engineered Materials. But to answer the second part of your question, absolutely, we're going to continue to invest in that business.

And that's really our underlying thesis for the acquisition, is that we can bring additional technology, commercial resources to help accelerate growth. And to the extent that we find more acquisitions in that space, that's a place where we'd like to do more of those deals..

And for the segment or for this business and for others, is there any appetite or opportunity for like a Spartech-like fixer upper, or is it just going to be more like these type of deals?.

Well, I think I've commented on this in the past, and you know when you look at our track record with respect to M&A, there's no doubt that the acquisitions where they really already had a starting or specialty profile where we could invest to grow those businesses with additional resources, it's really been our sweet spot.

And that's where we've done the best and I have referenced deals like GLS, Glasforms, ColorMatrix, NEU, for example. And recently we did the Kraton TPE business and now Composites. So my sense is you're going to see more deals like the ones we've just done recently, and I think that's really what falls into our sweet spot from a specialty standpoint..

All right. Thank you..

Yeah. Absolutely..

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

Hey, good morning..

Hi, Jason..

Good morning, Jason..

Following up on your discussion of innovation, last year at your Investor Day you indicated the number of projects and addressable markets in the latter phases of your innovation pipeline were significantly higher compared to 2014.

Can you give us an update of where you stand today in your innovation pipeline? Have many of those opportunities come to fruition and do the latter phases still look fairly robust?.

Yeah, we had – a lot of the work, as you know, that goes into our Vitality Index relates directly to customer and custom formulations, so I don't want to overlook that as a driving force behind innovation. But with respect to the pipeline itself and new products that are in that, it's really about the same size as we reviewed with you last year.

Our Vitality Index is still at 42%, and in the first and second quarter this year we didn't have any significant launches but the latter years of what we presented in our pipeline are still robust to use your word or question..

Okay. Thank you.

And have you seen any dislocation in the composites market over the past year due to company-specific issues at one of your competitors?.

I haven't seen any – what you said customer dislocation, I'm not totally sure what that means. But....

No, just dislocation in the market. I'm sorry..

In the composite space, I haven't seen any dislocations. I'm not sure I know exactly what that word is. But, again – so no, nothing on the composite side..

Okay. Great. Thanks..

Yes..

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

Hi. Good morning..

Good morning, Mike..

Hi, Mike..

I was wondering, Bob or Brad, if you can give just a little more color on the SG&A costs, and I guess I was just surprised to see a sequential decline in SG&A costs.

Are you still maintaining the same number of sales and marketing people that you brought on, or are you shedding some of those, either because they're underperforming or because of the economic conditions you're seeing, are we seeing any change in incentive accruals? Just what accounts for that sequential decline in the SG&A number?.

Yeah. So the – I'd say there's really two – one point I want to make, first, is that no, you're not seeing a shedding of any of those commercial resources. And I tried to point that out in our previous remarks, Mike, about being actually up about 4% on those resources. Administrative costs continue to come down. So that's a factor.

But we also had some swing, I'd say, with respect to the incentive accrual timing as well as some insurance costs. So I'd say in the first quarter, insurance was a little bit higher. And in the second quarter a little bit lower than probably what a normal run rate is. And so it makes the swing look a little bit bigger. But then incentives as well.

One place where you see that, Mike, is in distribution where you'll see that sequential decline in SG&A. And some of that is a result of the margin compression that we saw in the second quarter. So while we had this very strong start to the year, from all respects in POD in the first quarter, some of that came back in the second quarter.

Those are the three biggest things that are going on. I hope that explains it. And as you look to the balance of the year, I think it's uptick a little bit from the second quarter from a run rate standpoint..

No, that's helpful. And then the other question I had is on the PP&S business, you mentioned a couple of sources of the margin improvement, but I was wondering if you could talk about the Producer Services business.

How much of the improvement is related to declines in that Producer Services business, and is that a permanent reduction in Producer Services, or is it just weak right now?.

On Producer Services, I mean, year-over-year the operating income is improving in this – in 2016. And as a result of margin expansion, we're seeing a little bit of recovery in some of the end markets that we talked about, or at least dynamics on pricing. Mike asked a question about something declining. And maybe you're talking about mix. I'm not sure.

But there hasn't been a whole lot of mix change with respect to Producer Services from last year to this year. Outside of sometimes, we'll have some customers that are in the contract manufacturing side that ship from a traditional sale basis to a tolling basis but nothing of significance to point out for Q2..

All right. Understood. Thanks very much..

All right, thanks. I think we've got time for one more question..

Our last question comes from the line of David Stratton with Great Lakes. Your line is open..

Hi. Thanks for taking the question..

Sure.

I was wondering, if you could just give a little color around the polypropylene prices. It looks like, given the future charts that they have been trending up.

And how is that reconciled with your description of them hurting the margins recently, especially on the DDS (sic) [DSS] (50:12) segment?.

Yeah. It's possible that what you're seeing is, you know, a current improvement there relative to where things are in July going forward. What I was really referencing was that in January, we saw prices around $0.75 declining steadily down to $0.66 or so in end of June, beginning of July. So if what you see is a trend upward, that's great.

I hope that's true..

All right. Thank you..

Yeah, absolutely..

Thank you. And now, I would now like to turn the call back to Mr. Patterson for closing remarks..

Great. Thanks very much. I appreciate everyone taking the time to listen in today. We'll certainly have more and exciting news as we get to the end of our third quarter and can give some updates on our exciting new platform, Advanced Composites, which includes the acquisitions we announced last night. Thanks, again, for joining us today. Take care..

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect..