Eric Swanson - PolyOne Corp. Robert M. Patterson - PolyOne Corp. Bradley C. Richardson - PolyOne Corp..

Benjamin Joseph Kallo - Robert W. Baird & Co., Inc. (Broker) Frank J. Mitsch - Wells Fargo Securities LLC Robert Andrew Koort - Goldman Sachs & Co. Michael J. Sison - KeyBanc Capital Markets, Inc. Michael Joseph Harrison - Seaport Global Securities LLC Kevin Hocevar - Northcoast Research Partners LLC Jason A. Freuchtel - SunTrust Robinson Humphrey, Inc.

Laurence Alexander - Jefferies LLC Dmitry Silversteyn - Longbow Research LLC Jason A. Rodgers - Great Lakes Review.

Good morning, ladies and gentlemen, and welcome to the PolyOne Corporation Third Quarter 2016 Conference Call. My name is Iala 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 Eric Swanson, Director of Investor Relations. Please proceed..

Thank you, Iala. 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 third quarter of 2016 to the third quarter of 2015, unless otherwise stated.

Joining me today on the call is our Chairman, President and Chief Executive Officer, Bob Patterson; and Executive Vice President and Chief Financial Officer, Brad Richardson. Now, I will turn the call over to Bob..

Thanks, Eric and good morning to everyone who is joining us this morning. I am pleased to report record third quarter adjusted earnings per share of $0.56, representing our 28th consecutive quarter and seventh straight year of adjusted EPS growth. I'm proud of our team.

We delivered growth in what we and many companies are experiencing to be a softening and challenging macroeconomic environment. These positive results and our continued confidence in executing our long-term growth strategy enabled us to increase our annual dividend by 12.5% to $0.54 per share which we announced earlier this month.

This increase represents our sixth consecutive year of annual dividend growth. From a headline perspective, revenue was up just slightly from the prior year.

This may not seem like a big deal, but it is when you consider the weak economic environment we're in, and also when you consider that we have been on a multi-year journey of transforming the former Spartech businesses.

We acknowledge that we did get some help from acquisitions, but underlying growth was up 2.6% when you exclude the impacts of lower year-over-year selling prices in Distribution and PP&S. Distribution had another outstanding quarter delivering record volume growth of 14%.

Consistent with prior quarters this year, volume growth was partially offset by lower selling prices from raw material deflation as net sales increased 6%. Recall that in 2015 we increased our sales force in Distribution by 10%. That is a big investment that is now paying off.

These additional commercial resources continue to impact the business as we take share and secure profitable gains in inside sales and web-based inquiries from customers. In addition to impressive new business gains, our Distribution business has clearly separated itself from its competitors with world class margins of 6.6%.

We relentlessly use service as a key differentiator that customers love and I'd say it shows. Specialty Engineered Materials grew revenue 7% while operating income was up 3%.

The integration of our recent specialty acquisitions of Gordon Composites and Polystrand is well underway, but recall as we said last quarter that Gordon and Polystrand would initially reduce operating income in 2016, which explains why the overall sales increase of 7% led to a slightly lower growth rate NOI.

This is due primarily to the startup nature of Polystrand, which with our help, is bringing to market breakthrough innovation in thermoplastic composites, but it is a challenging marketplace for certain, and many of our businesses were impacted. DSS fell just short of break even.

While our investors know that DSS is in the middle of a turnaround, you also know we expected low-single-digit profitability this quarter. This shortfall is due largely to weaker than expected underlying demand, notably in heavy truck and ag manufacturing segments.

This is certainly unfortunate because we have made some outstanding progress from an operational perspective, improving our on-time delivery, scrap rates and quality claims.

This progress puts us in great position to finally make good on our No Surprises Pledge for our customers and begin winning business and we're at a point now where a little sales lift is going to truly leverage to the bottom line.

Rich Altice and his team are working diligently to engage with customers, old and new, but winning their trust takes time. We've made some promising early gains, but nowhere near enough to achieve the levels of profitability we expect. DSS wasn't our only business impacted by weak economic conditions.

As we projected during our last earnings call, we expected the second half to be more challenging for our Color segment and this proved to be the case. Operating income declined year-over-year driven by weakness in oil and gas and certain packaging end markets.

Recall that one of our color products is used specifically for fluoropolymer wire and cable applications which is heavily dependent on sales into the energy industry, and I believe that we were also impacted by the fallout from Brexit, primarily a weaker pound, and the associated economic impact.

In the third quarter, the pound was down 15% year-over-year and 9% sequentially. More recently, the pound has fallen further, another 5% in October from month end September rates. Despite these challenges, the Color team remains steadfastly focused on serving our customers with specialty services and solutions.

We are not deviating from our time-tested strategy. Like our other segments, Color also invested heavily in additional commercial resources, and these take time to deliver new business gains and to overcome the previously described weakness in demand.

PP&S has been able to leverage its new resources with an expected faster turnaround as lead times are generally shorter than what we see in Color and EM. And PP&S did just that by delivering another outstanding quarter. Although sales fell slightly on lower selling prices, operating income expanded 12% due to improving mix and profitability expansion.

PP&S continues to shift toward higher margin applications in end markets such as healthcare, high performing wire and cable, and decorative lighting. Our PP&S team executes our four-pillar strategy, finding new innovative ways to apply their portfolio of solutions and better serve customers. Just recently we won new business with a Fortune 100 U.S.

manufacturer replacing metal with a vinyl solution. We collaborated with them to find a solution for a network interface device box that was flame retardant, UV resistant and impact resistant, and the answer in this case was a vinyl formulation.

In ways that are unique to PolyOne, we help the customer in design, in material selection, while reducing their total cost of production.

Wins like this are certainly helping to contribute to PP&S's success and playing an important role in their performance this quarter, helping us again to offset a weak economic environment and deliver our 28th consecutive quarter of adjusted EPS growth.

I'll have some additional comments in a moment, but I'd like to hand the call over to Brad now to provide additional detail on the quarter performance..

Well, thank you very much, Bob and good morning, everyone. I'm very pleased to provide additional comments and perspectives on our third quarter results. On a GAAP basis, EPS in the third quarter was $0.50 unchanged from the third quarter of 2015.

Special items in the quarter resulted in a net after-tax charge of $4.7 million or $0.06 per share and included the following. First, restructuring charges of $3.9 million primarily related to the previously announced closure of two manufacturing facilities within DSS. And secondly, acquisition related cost and adjustments of $2.5 million.

Adjusting for these special items, EPS increased to $0.56 per share, a 4% increase over the prior year. Reviewing our segments, our Distribution business had another exceptional quarter with volume growth of 14% over the prior year. This resulted in quarterly operating income of $18.2 million and return on sales of 6.6%.

Our Distribution business continues to outpace the market and gain market share by differentiating through rigorous commercial discipline and best-in-class execution. Our Color, Additives and Inks business reported operating income of $31.4 million with return on sales of 16%.

Operating income was down versus the prior year primarily due to continued weakness in oil and gas and packaging end markets. As we discussed on last quarter's call, we are seeing a decline in high heat fluoropolymer colorants used in offshore oil and gas drilling and continued weakness in packaging applications for carbonated beverages.

Color was also down sequentially in Europe as our operating income was down over 30% from the second quarter. As Bob alluded to, the weakening European economy due to Brexit uncertainty was certainly a contributor.

Our Specialty Engineered Materials business grew operating income to an all-time third quarter record of $20.5 million with the operating margins of 14%. Operating margins were negatively impacted by a decline in sales and material supply to the consumer end markets. In particular, cases for handheld devices.

On the segment as a whole, however, sales increased 7% as a result of our recent acquisitions and the strength of our business in Asia, which I was able to see firsthand during my recent trips to China and Thailand. I was impressed by the enthusiasm of our team and their focus on cross business collaboration.

This collaboration in both manufacturing and commercially is improving performance not only on the segment level, but for PolyOne overall.

Our improved teamwork and one PolyOne mindset coupled with many opportunities for growth in China as their economy transitions to a consumer driven economy, gives me confidence that we are well-positioned to continue to grow in the region.

At Designed Structures and Solutions, we are still being impacted by prior year customer losses and related operational issues that we have since improved. While DSS results were a disappointment in the quarter, the segment remains near breakeven year-to-date.

We continue to invest in the business for long-term growth and our operational metrics and underlying processes are in an improved position to do so. In fact, our on-time delivery in DSS in the third quarter was 92% and our quality claims are now down over 30% from the 2015 levels.

Our key operational improvements are well underway as we've been retooling our operation to be highly efficient at producing products more aligned with our specialization strategic pillar. We are rigorously implementing sales and operation planning and Lean Six Sigma and investing in strategic capital expenditures to enable growth in this business.

The full benefits of these positive operational improvements, however, are being offset by weakening end markets. PP&S maintained its impressive momentum with a strong performance in Q3. Operating income increased to $18 million with margins up 10.5%.

We are continuing to see the benefits of mix improvement in PP&S this year as margins have expanded year-over-year. We are also winning new businesses in the healthcare, LED lighting and electrical end markets which is contributing to our success in PP&S.

I would like to close my remarks by reminding our investors of the key foundational strength of our company and why that's important as we pursue our 2020 Platinum Vision. Our balance sheet remains strong. Our net debt is low and we have favorable interest rates and ample cash on hand to fund near-term investments as well as pursue M&A activity.

This has enabled us to increase our quarterly dividend by 12.5% to $0.135 per share earlier this month.

This is the sixth consecutive year of dividend growth and it highlights our confidence in executing our long-term strategy and it is consistent with our philosophy as one of the levers we utilize to return value to shareholders, while at the same time investing back in the business.

We are executing our four-pillar strategy, just as you've come to expect from us. And I'm confident we have the underlying foundation and the engagement of our global team to deliver our success going forward. I will now turn the call back to Bob..

Well thanks, Brad. Your comments on PolyOne sticking to our strategy is certainly true and important to remember in good times and tough times because like many companies, as I said before, we're seeing sluggish to little macroeconomic growth and volatility in demand throughout the global marketplace.

Growth has been weakening in pockets of Europe and demand is muted in North America. Negative headlines abound in the media and many companies' earnings forecasts reflect this sentiment. And as is the case every four years, the upcoming election can cause some uncertainty and wait and see within the U.S. economy.

Right now, we see some premium brands at end markets such as consumer, electronics and personal care that are stagnant or in decline and we certainly know about oil and gas being way off. There is no doubt it is a tough market and economic tailwinds are hard to come by if they exist at all.

Most notably for us, the weaker economy has played a role in delaying some of the recovery we expected for DSS. For example, heavy truck build rates are down 27% and agricultural tractor retail sales have declined 23% year-to-date. As you know, DSS manufactures sheet that are sold to -- these manufacturers have heavy trucks and agricultural equipment.

And for example, John Deere recently reported sales decline due to weakness in the global markets they serve. Also within DSS, our cell cast acrylic business has slowed this year.

This product is sold in the military and security applications which also are experiencing lower demand, but despite the weakening end markets, we remain confident in the long-term potential of DSS.

As we look forward, and at times like this our experience is that the fourth quarter can be the most challenging, particularly if customers delay purchases or investment into 2017 on the hopes that next year will be a better year.

And for us, I believe if that happens, EPS for the fourth quarter could decline to $0.36 to $0.38, but this is the short-term and let's keep our eye on the full year results which will have expanded 8% to 9% over 2015; an impressive accomplishment given the economic conditions we find ourselves in, and let's also stay focused on the future.

As we've said a couple of times when times are tough, we don't hunker down and we invest in our businesses and people. We work harder with our customers and we ultimately distinguish ourselves from our competitors, which is why it is more important now than ever to focus on innovation and customer service.

Throughout the year, we have continued to invest in sales, marketing and technology resources increasing these each by about 5%. And we're also continuing to invest in innovation from an acquisition perspective with the acquisitions of Gordon and Polystrand that we announced in July.

I've been on the road a lot of this past quarter, meeting with many Gordon and Polystrand customers and I am pleased to report firsthand that there is mutual excitement about our investments in these businesses, and in our new Advanced Composites platform. These customers are hungry to innovate.

It's a shared focus we have with them and are looking forward to collaborating with PolyOne and utilizing our new thermoplastic composite technology. We believe this new technology is exciting and will define lightweighting and material replacement in the future with unparalleled part design flexibility.

My visits and discussion this past quarter validated what we determined in our due diligence prior to making the acquisitions. Both Gordon and Polystrand had reached a critical inflection point in their business lifecycle.

They needed investment in commercial, marketing and R&D resources to take the next big step and that is exactly how we are enabling their immense potential.

Do you know we've created an Advanced Composite platform that has a best-in-class material and solution offering? And we see exciting growth opportunities in transportation, outdoor high performance solution and aerospace end markets, to name a few. And we're not just growing in these targeted end markets.

We're investing in regions and geographies where we see strong, long-term potential for PolyOne as a whole. Earlier this month, we announced new Specialty Engineered Materials production in India; a region we see is continuing to grow and we're going to be a part of it.

We initially opened our Pune, India facility in 2014 and focused on the production of colorants and additives. We will now begin engineered material production at this facility in January of 2017.

Including polymers for use in high performance applications that have the need for flame retardant properties, high strength and durability and certainly chemical resistance and weather ability. We've invested in sales and technical resources in India to increase speed to market and collaboration with our local customers.

We continue to invest in technology and pursue growth in Europe. Some of our latest innovations were showcased and launched earlier this month as we participated in the K Show, one of the world's largest plastic trade events.

Including such materials as high gloss, metallic effect colorants that enable packaging manufacturers to create packaging with a brilliant attention grabbing appearance.

And in collaboration with Merck, we developed a new technology enabling packaging and consumer electronic manufacturers to create surfaces that appear to have extraordinary 3D imagery depth and structure, although they are perfectly flat. We are collaborating better than ever with our customers, and service remains a timeless differentiator.

This includes InVisiO, IQ Design and LSS Customer First, which are all competitive advantages for us and our customers. During a recent trip, one customer said to me, how is it that PolyOne makes me feel like I am your only customer? That is the ultimate compliment and we are working so that every customer feels that way.

While many material suppliers compete on price, we are focused on service and being a lifelong business partner with our customers focused on innovation, and I expect this focus on service and innovation will get us through some short-term challenges that many companies are facing right now.

We've given you some additional specific direction on how we see the year ending and some challenges that we believe that we'll face here in the fourth quarter, but that is as I mentioned, the short-term.

We remain focused on delivering to the best extent that we can to deliver that 8% to 9% growth in 2016 and we're also focused on the actions that will help us deliver, over the long-term, the achievement of our 2020 Platinum Vision. We have confidence in our strategy and our ability to execute. And with that, we have time for questions..

The call lines are now open. Our first question comes from Ben Kallo with Baird. Your line is now open..

Hey, guys..

Hey, Ben..

Good morning..

Thanks for taking the question. So if we think back to oil price and input sensitivity, I just kind of want to understand how $50 oil impacts you now.

Are you seeing pricing pressure from your customers on the specialty side? And then I guess just a follow-up there is, as I look at the Platinum Vision and kind of where you guys were on your operating margins for this quarter, how are you thinking about the long-term targets? I mean, is that still achievable or are they changing because of where you are right now? Thank you..

Yeah. Sure, Ben.

On the first question relative to pricing pressure in the specialty segments, I don't believe that that's a direct correlation or a reflection on where oil prices are, but it is very competitive environment right now, and I do believe that when macroeconomic conditions are flat and/or down and companies are going through a long period where you're just not getting any kind of tailwinds, that increases competitive pressure on all products.

I believe that the margin, the pullback that you see in Color and EM, for example, are actually more of a reflection really of the declining sales in the end markets that we reflected versus a pure price reduction and I think that's been the biggest effect.

That being said, I don't think that erodes our ability or our confidence in getting to our Platinum Vision. I don't think those markets are going to stay down forever, and for the most part and hopefully we've characterized our feelings on that with respect to this being a short-term phenomenon..

Operator, we'll take the next question..

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

Good morning, gentlemen..

Hi, Frank..

Good morning..

Hey, Bob you start out the call by talking about this being the 28th consecutive quarter of year-over-year earnings growth. Obviously Q4 looks like that streak is going to end. Can you talk a little more specifically about what you're seeing in October? And I guess the question – well, let's start with that.

Let's start with that and then I'll ask a follow-up..

Absolutely. I mean, look, well, first of all, you know I am proud of our team for delivering and accomplishing what we have through the third quarter, and that represents seven years of really outstanding performance. And you know at this point in time, the fourth quarter is always the most challenging to predict.

And what we have seen in prior years is that when end markets are challenged or macroeconomic conditions are slow, that typically leads to a weak December. I've always said you can't judge a year based on December or January results because of many of the things that happen at the end of the year in our industry.

However, if I believe that December shakes out like what it has in prior years when times have been tough, then I think we would get to an EPS number that I mentioned on the call previously. So with respect to October, I haven't seen that yet and it really probably is more of an end of the year effect.

So at the moment, October is probably more of a carry-forward from what we saw in the third quarter, but a lot can happen in November and December..

So what you're seeing right now, actually orders booked suggest that you would be able to see some growth. However, based on past experience and anticipated customer behavior, you would anticipate December being soft and therefore precluding you from making this quarter number 29.

Is that a fair statement?.

Yeah. I think that's fair. As you know, we don't have a backlog, right? And we have short lead times. And so our visibility to when you reference orders and looking out into the future is pretty short-term. So, I think that's a fair characterization in the way we see things right now, if I had to call it, is around that EPS I referenced earlier..

All right. So with that lack of visibility I'm not going to ask you if Q1 starts to increase because it's tough to predict. One other question that kind of struck me on Distribution. Obviously blowout in terms of volumes. 14% you said, but EBIT was up 3% year-over-year. I know that some of that was pricing and you were talking about the pricing dynamic.

I guess I would have thought that there would be some more leverage on the volume front.

If we get into an environment where raw materials flat line, can you continue to generate the volumes and therefore, we would start to see some pretty material improvement in profitability?.

Yeah. And I really am very optimistic about that being the case. This has been a year of challenging pricing and in fact it goes back to earlier in 2015. And it hasn't always been the same underlying resin where price deflation has existed, but it seems like it's played out over that timeframe. That's why margins have compressed.

And then when you look at a Distribution business, we really do have effectively its material margin over SG&A.

So when you think about leverage, you don't have the traditional type that you would get with a manufacturing facility, but what I do think will happen is that if we get into a stable price environment and/or you start to see some modest increases, we would see margin expansion as a result of that and I think it would be significant..

All right. Thank you. That's helpful..

Thanks, Frank..

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

Thanks, good morning..

Hey Bob..

Bob, I was wondering if you could talk about your plans, or what you've done lately on the hiring on the sales and marketing side? I know you mentioned last year that you added substantially.

So, wondering if you can give us an assessment of the productivity of those new hires and then what the plans might be as you look forward in this stagnant world..

Yeah. I mean we have continued to hire in 2016. And if I look at the net – and this is an organic comment so it doesn't include acquisitions. If I look what we've added across sales, marketing and technology, we're up about 5% this year. As you know end of 2014 and in 2015, we added more significantly that with a number closer to 10.

So we continue to invest in those resources.

And I'd say that, you don't have to look any farther than what we've accomplished in Distribution to see the productivity gains from them, but admittedly, in our specialty segments, that productivity takes longer to realize as we drive toward specification and the longer sales cycle that those businesses are in.

I'd also say following close behind Distribution is PP&S, where we've had some good early wins and feel very confident in the productivity of these additional resources..

And if I might follow-up on POD, your volume is obviously multiple to the market.

Can you talk about why customers are leaving your competitors and joining your Distribution system?.

I think we're doing an outstanding job from a service perspective and that is a real differentiator in a Distribution business. It goes beyond just on-time delivery. And as you know, Bob, oftentimes the customers that we serve do need advice and counsel on material selection and I believe that we offer that. We've done an outstanding job of doing that.

We've also, in the last couple of years, launched and grown impressively an inside sales organization that is doing the same thing, but just not hitting the street in an automobile. And we're seeing some gains there as well.

And that really, honestly Bob, comes down to more people making more calls and getting back to basics with respect to how we go to market. It's working..

Great. Thank you..

Thanks, Bob..

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

Hey guys.

Hey Bob, when you think about December potentially shaking out weaker, which of the segments would be most affected by that phenomenon?.

Yeah. I mean, look I think it's going to be broad-based. Look, historically, if you look at December it's our weakest month of the year for all of our businesses. If the question is getting towards hey, if there is an additional anomalous or unusual reduction in demand? I think that would go across all the businesses as well.

I don't know that there was one that I would point to outside of potentially PP&S or Distribution where customers may think, well, wait for January or February simply just based on pricing dynamic. So that's probably the best way I can answer that.

Mike, I wouldn't point to one specifically and say that's where you're going to see it more than any other..

Okay.

And then when you think about getting back to growing earnings going forward, maybe on an annualized basis, what do you think needs to happen to show stronger growth for each of your segments heading into 2017?.

Look, I think we have an outstanding foundation in four out of five of our segments and we're building one in DSS. So the investment that we've made in commercial resources is already paying off in POD and PP&S.

In my response to one of the questions that I think Frank had about pricing within POD, certainly if we saw a little bit of an uplift there, I think you see some margin expansion within Distribution.

And while we're delivering new business gains inside of EM and Color, you know it's not offsetting and hasn't at this point just some of the macroeconomic declines we've experienced, particularly in oil and gas and certain packaging end markets. So, I think the foundation is there, Mike, for growth.

The investment certainly is to help drive and push that in 2017. And you know we really are looking for some of these end market recoveries, I think, to get us back up into that higher level of EPS growth that we're looking to achieve..

Great. And then one quick follow-up. Acquisitions, it's been a positive historically.

Any momentum there as you head into the end of the year?.

We're continuing to look at a number of deals and I'm personally spending more time on that with our head of M&A. At the moment, they are really more bolt-on type deals like you've seen us do in the last 12 months. So as you know, I can't comment on any specific names or things that we're looking at, but a good pipeline..

Thanks, Bob..

Sure, Mike..

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

Hi. Good morning..

Hey, Mike..

Good morning..

Morning..

Bob, I was wondering if you could talk in a little bit more detail on DSS. You mentioned that the demand was weaker than you expected, but then you called out heavy truck and ag equipment, both of those have been weak for some time.

So have you been expecting a pickup in those markets?.

No, that's fair. I mean it's a combination of things with respect to probably knowing that those markets are down, believing that we still have – the amount of share that we have, we've got enough out there that we should be able to offset some of that. So I guess in fairness, it's a combination of things.

Mike, one was that market being down; and two, was us not ultimately delivering on the gains over the course of the last year to help offset that. So it's probably better said to say that it's influencing from both of those factors.

And quite candidly, we probably just underestimated the degree to which those markets would ultimately be down and stay down..

And then in terms of the operational improvements that are going on within DSS, it sounds like you feel like you have a lot of good pieces in place, but where are we in terms of any further plant or line consolidations? What other steps are happening over the next few months that give you confidence that we're going to see improvement from an operational standpoint?.

Yeah. I mean look in the last quarter, we did close one facility which we had announced earlier in the year. We don't have any plans to close any additional facilities at this time. In fact, we're really doing the opposite with investing in new lines, for example, at our Greenville facility.

And I think if you were to go there and look at it today, it's night and day compared to what it was three years ago.

That is the best evidence that the operational improvements are taking hold and that we are building this foundation as I described it for Mike Sison in the earlier comments that I made, but it's just very frustrating to not see that go through the bottom-line because candidly you got to have the additional sales to have that hit the operating income.

So I'd say in summary, we're going to continue to make improvements in operations, but we've come a long, long way. And we're at a point now where we really need to see the sales pick up in order to deliver that to the bottom-line..

All right. And then the last question I had is just, in calling out the packaging weakness in Color, you mentioned carbonated beverages. Did you lose some business or walk away from some business in that market? I guess, I generally think of those packages being PET based materials and generally not an area where PolyOne plays..

There's a few questions in there. One is I don't believe we've lost anything on the PET specific applications where we play in those beverages which is primarily with liquid color and additives, but I do believe that the overall market is down and certainly weak as demand for carbonated beverages is declining.

So, to answer your question on that, no I don't believe we've lost any business or shares, specifically on the PET or packaging, but in other packaging applications, there's certainly been a lot of competitive pressure outside of the U.S. and there are some onesies and twosies and things out there.

For example, with some of the business that we inherited from Spartech that we haven't been able to hold on to, that certainly ended up in somebody else's hands..

Got it. Thank you very much..

Yeah, Mike..

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

Hey good morning, everybody..

Kevin..

Wondering if – Bob, I think you mentioned organic growth excluding the lower hydrocarbon pass-through pricing was up 2.4%, I think you said which is a pretty good number in this environment.

I'm just kind of wondering, as we think of total sales going forward, I would imagine the lower hydrocarbon pass-throughs are going to become less of a headwind as some of those lap.

And when we think of the organic side of that equation, how should we think of that because it sounds like you're continuing to add sales force, but maybe macro conditions are sluggish.

So I guess, when we weigh all those factors, I guess how do you think of your sales growth going forward?.

Well, there's no doubt that we're making some gains. From a consolidated perspective when you look at that underlying growth ex the selling price declines, it's there. It's happening now. It's low single digits. A lot of that is, as I said earlier on the call, is some share gain – new business gains.

You're not seeing a whole lot from a macroeconomic tailwind, really more down than anything. And so difficult to answer that question exactly for what the future looks like, but certainly in terms of what we're doing, you know, that's under our control, I think that's in the low-single-digits number, Kevin..

Okay; great. And then, Brad, in terms of the share repurchases, just kind of curious how we should think of cadence there. I guess, share repurchase activity's been a little less than what we've seen the past couple years, here in the past couple quarters.

So kind of curious your thoughts on cash deployment and how we should think of that going forward..

Yeah. Kevin, I mean I think we've been pretty consistent with our cash deployment strategy. We have been keeping our balance sheet preserved, so to speak, in deploying that for M&A and also for share repurchases, all the while keeping our net debt to EBITDA in kind of that 2 to 2.5 range.

And so I think as we go forward, again as Bob mentioned earlier, we are actively looking at M&A, and we'll continue to look at that pipeline and evaluate it relative to what our share price is and execute accordingly..

Great. Thank you very much..

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

Hi. Good morning..

Hi, Jason..

One of your competitors has a target or expectation for the amount of new products launched each year.

As innovations critical for your strategy, do you have an internal target for the amount of expected new product launches and have the new launches met your expectations for 2016 so far?.

We look at our overall success from an innovation standpoint, Jason, with our vitality index which measures the percent of current year sales from products introduced in the last five years. And our goal is to be over 35%, and we're at 40%. So I feel very comfortable with what we've been accomplishing from an innovation perspective.

We're right where we want to be and feel also very good about the mix of innovation with respect to that, which I'd say is directly invented by PolyOne versus originated by a customer or done in collaboration with them. So, I can't say enough positive things about what we've been doing from an innovation perspective..

Okay; great. And how much did the decline of the British pound impact your earnings in 3Q and relative to your expectations.

And also, if the pound remains where it is today, how much of an impact would you expect in 4Q?.

Yeah. I think when we went back to the last quarter and made some projections on that, they're kind of holding true with respect to the weaker pound, probably playing out to be closer to $0.025 or $0.03 for the full year. So that's maybe disproportionate here coming up in the fourth quarter..

Okay.

And then lastly, do you have greater visibility in your order books for any of your businesses?.

Well, they're all very short lead times. And I'll tell you that with respect to certain end markets and specification, you'd probably got better visibility into healthcare and medical devices, for example, that are less immune to recession and/or challenges in the economy.

So those are probably easier to look out and predict, even though you don't have a backlog on those either with respect to orders. And then certainly, if I look at Distribution oftentimes those are same day calls and shipments, so very short lead times..

Okay; great. Thank you..

Yeah..

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

Good morning..

(47:20).

Two questions.

First, can you help us think through the 2017 – like in the near term, how you think about incremental versus decremental margins given the ramp-up you have, depending on how the growth outlook – growth algorithm changes? Secondly, are you seeing more or less churn or volatility in order patterns in your newer products, your innovative category or your core category of products? And third, we're hearing from several companies that trends in Asia continue to be much stronger than I guess many other parts of the world.

Even though it's a sluggish environment, is it worth over the next few years accelerating the investment cadence in Asia?.

I'll try to get to all those. First, the question about margin expansion, I believe as it correlates to sales growth in 2017.

As you've seen Laurence, with the improving margins in EM and Color and over the course of the last year or so, we've been very consistent in saying that to get to that Platinum Vision, we needed sales growth to help push us in that direction.

This is a year when you're seeing that really kind of play out as flattish because of the absence of that sales growth. And I believe that when the growth returns and we get to even something as modest like low-single-digit growth, you could see us adding a point to margins next year.

That's my view overall on the specialty side and clearly not quite the same level of expansion in PP&S or POD. The second question, I think that you had was around, what was going on with some of the end markets, but I may have not understood that one so well. Why don't you hit me with that second one again? I'm sorry..

Sure. So what I was trying to get at is, with your newer higher margin innovation category of products....

Yeah..

...

are you seeing more or less customer churn or pushback or delays in order cycles or lumpiness than you're seeing in your core business?.

Yeah. So, sometimes that might be the case in the sense that when you look at consumer electronics, for example, everything kind of hinges on product launches. And you just haven't had the level of degree in 2016 that we had in 2015.

And so, I guess that's not churn in terms of lost business or lost sales, but it certainly explains some of the declining revenue that we've seen in that space. But that picks up as those new launches start to take place. That's probably where I see, maybe some of that linkage greater than another. And then, your third question again? I'm sorry..

Asia?.

Asia? Thank you, Brad. Asia was actually very strong performing region for us and probably didn't get enough positive attention on this call. I appreciate you bringing that up, but you know the underlying growth rate in Asia, absent, FX was 6% to 7% and so that's one of our best performing regions and continues to be.

And I think you are right that that does warrant additional investment.

We have specifically added and most recently announced the additional engineered materials manufacturing in India, but also believe that we should be driving additional investment in China and Southeast Asia where we think there are bigger and better opportunities to serve some of the local customers than what we have done in the past.

So, I'm completely aligned with that statement..

Okay. Thank you..

Yep..

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

Good morning, guys. Thanks for taking my call. A lot of the questions that I've had have been answered in one way or the other, but I just want to revisit a couple points.

First of all on Engineered Materials, exclusive of acquisitions, did you mention what the organic growth was or did I miss that?.

No. You know that always is in the Q2, but that was down slightly for the quarter. Absent FX, I think it was down about 2%..

Okay.

And was that mostly price pass-throughs or was that volume?.

That really was mostly volume with respect to the consumer electronics as well as some other personal care applications..

Got you. Now Bob, when you talk about consumer electronics, and you mentioned it a couple of times, as a source of weakness outside of sort of the wire and cable applications and the higher growth applications.

Was that specific to certain products or areas or is it just a broader kind of a lack of product launches and feature strengths or whatever it may be.

Is it a broader weakness in electronic markets or is it just you're anniversarying some very strong growth in the up-market with product launches over the last couple of years?.

Yeah. I mean look we've obviously done very well with respect to handheld device accessories like covers, the same thing is true for iPads and any of these electronics that are pick up and carry with you.

And I think there is some lapping effect going on this year where those sales are below where they were in terms of our customer sales and then as a result the accessories and things we play in are down. So like I said, I don't think that we've lost any business.

I just think that without additional or new handheld devices coming out, it's not driving the related accessories market that we're in..

Got it. Got it. And then one last question on DSS.

Can we – I know you're not ready to provide the full outlook for 2017, but can we expect that business with all the efforts that you're making and putting in new lines that are better suited for the type of business you're hoping to run through them and everything that you guys are doing internally? Can we expect this business to deliver above-breakeven profitability for 2017 maybe not in the first quarter, but for the full year?.

Look that's absolutely my expectation and we're driving towards that. As you see this quarter, our expectation was to get there by the end of the year. Operationally, I believe we've done the right things and that was a very first and necessary step in order for us to confidently and reliably go back to our customers to deliver.

And at this point, it's really a sales phenomenon. We've got to drive the additional sales and new business gains to make that happen. And I believe if it does, then we'll see profitability expansion in 2017..

Okay. All right. Bob, thank you very much..

Thanks. We got time for one more question..

Our last question comes from Jason Rodgers with Great Lakes Review. Your line is now open..

Thanks for squeezing me in. Just wanted to ask a question about the fourth quarter.

If December turns out to be soft, just based on historical trends, would you expect to make that business up in Q1 and is there any reason not to expect EPS to be up year-over-year in the first quarter?.

Well look, we had an incredibly strong start to the year this year. And that wasn't isolated to just January. That was actually even a stronger effect in February than January. I will tell you historically it's not unusual to see if you've got weak demand in December to have that offset by a stronger demand in January and vice versa.

So, I think it's a natural and appropriate conclusion that if December is weak, that January should be everything else held equal, better as a result but I'm not sure that it necessarily you find yourself in a situation where it's better than where we were in January of last year because like I said incredibly strong start to the year.

So really too early to tell how that's going to play out, Jason..

Okay. That's helpful. Also wondering if you could quantify the impact of integrating Gordon and Polystrand in EM during the quarter.

And if you expect that to be a similar amount in the fourth quarter?.

Yeah. And as I think as we said, look, the combination of the two businesses is roughly breakeven results. That's right where we expected it to be. So that helps you to put into perspective the margins in EM..

And just looking at the new iPhone, it seems like there's some strong demand for that.

Is that something that could potentially boost the Color and EM segments?.

Yeah. I mean it will help us out with respect to, again, some of the accessories that we supply into that market such as iPhone covers, et cetera. I think that we can see an uplift from that as those sales improve..

And just one more.

The expected tax rate for the fourth quarter and any thoughts on 2017?.

Yeah. I mean I think we'll be somewhere between 31% and 32% for the fourth quarter and that's probably a good proxy for where we see 2017 at this point..

Thank you..

All right. Thank you very much and also to everyone who joined us on the call today. We appreciate your support, continued interest in PolyOne and look forward to speaking to you at the conclusion of our fourth quarter results. Thank you..

Ladies and gentlemen, thank you for participating in today's conference. You may all disconnect. Everyone have a great day..