Eric Swanson - Director, IR Bob Patterson - Chairman, President and CEO Brad Richardson - EVP and CFO.

Mike Sison - KeyBanc Frank Mitsch - Wells Fargo Securities Mike Harrison - Seaport Global Securities Colin Rusch - Oppenheimer Dylan Campbell - Goldman Sachs Jason Rodgers - Great Lakes Review Dan Rizzo - Jefferies Dmitry Silversteyn - Longbow Research Jason Freuchtel - SunTrust Rosemarie Morbelli - Gabelli and Company.

Good morning, ladies and gentlemen. And welcome to the PolyOne Corporation Fourth Quarter 2017 Conference Call. My name is Liz, and I’ll be your operator for today. At this time, all participants are in 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, Liz. Good morning and welcome to everyone joining us on the call today. Before beginning, we would like to remind you that statements made during this conference call may be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Forward-looking statements will give current expectations or forecasts of future events and are not guarantees of future performance.

They’re based on management’s expectation and involve a number of business risks and uncertainties, any of which could cause actual results to differ materially from those expressed in or implied by the forward-looking statement.

Some of these risks and uncertainties can be found in the Company’s filings with the Securities and Exchange Commission as well as in today’s press release. During the discussion today, the Company will use both GAAP and non-GAAP financial measures.

Please refer to the earnings release posted on the PolyOne website, where the Company describes the non-GAAP measures and provides a reconciliation from the most comparable GAAP financial measures. Operating results referenced during today’s call will be comparing the fourth quarter of 2017 to the fourth quarter of 2016, unless otherwise stated.

Joining me today on the call today 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. We’re pleased to announce record full year adjusted earnings per share of $2.21 for 2017 and that represents a 7% improvement over last year and our eighth consecutive year of adjusted EPS growth.

As you heard us highlight before, our investments in commercial resources including sales, marketing and research and development as well as our relentless focus on service, continue to be a difference banker.

These investments really began to pay off last year as we delivered 7% organic sales growth and that’s the highest since coming out of recession in 2010, and the momentum we’ve generated from these investments, continues. In the fourth quarter, sales grew 15%, 10% of which was organic. All segments and geographies contributed to our success.

And this is a broad-based credit to our sales team for their collaboration with our customers, our sourcing team for working through an unprecedented and volatile raw material environment, of course to our R&D team for developing specialty products and services and to our incredible facilities and functional teams who bring these materials to life every day around the world through safe and efficient operations.

The expansion in sales allowed us to overcome significant raw material inflation this year as well as supply chain disruptions related to Hurricane Harvey. In the face of rising costs, our team worked closely with our customers and suppliers to ensure service support and consistency of delivery.

One customer in particular was so impressed with our service and performance that we since been awarded an additional of $2 million of new business with them. Of course, design remains a key element of our service offering.

And that’s been exemplified consistently well by our Color team, who won significant new business in the fourth quarter, based on their ability to service these customers with a broad product portfolio, ranging from pearlescent colors to performance additives that provide UV stabilization.

These are great examples of how we’re able to differentiate PolyOne by collaborating with our customers in the earlier stages of R&D and material selection. But, in addition to innovating organically and leveraging our existing portfolio, we also continue to pursue acquisitions.

And in last 18 months, we have bolstered our colorant portfolio with four bolt-on acquisitions. And I am excited that we kick off 2018 by welcoming another specialty colorant and additive business to our team, I Q A P or IQAP. Our future M&A funnel remains robust and includes additional specialty companies that embrace innovation just like we do.

Our M&A focus in on companies that will add to our formulation expertise and technology that are complementary to our existing portfolio, or bring us new presences in geographies, like IQAP. I’ll have some additional comments in a moment, but to review some additional details about the fourth quarter, let me now turn the call over to Brad..

Well, thank you, Bob, and good morning, everyone. Let me first start with our GAAP results. In the fourth quarter, we reported GAAP earnings of $0.43 per share.

Special items in the quarter resulted in a net after tax gain of $2.2 million or $0.02 per share, which primarily related to tax benefits, recognized in anticipation of and in connection with the Tax Cuts and Jobs Act, here in the United States. The Act provides for a lower U.S. corporate tax rate, beginning in 2018.

These tax benefits were partially offset by the onetime transition tax on foreign earnings and foreign cash. Adjusting for special items, EPS from continuing operations for the quarter was $0.41 per share, a 5% increase over last year. Revenue for the fourth quarter increased 15%, our highest quarterly increase of the year.

This included 10% organic expansion, 3% from acquisition, and 2% from FX. While all segments and all regions contributed to our growth, continued raw material inflation and supply chain disruptions negatively impacted margins in every business. Let’s take a closer look at each of our growth contributors.

Color, Additives and Inks, closed out the year with a record fourth quarter, as operating income increased 24% to $28.5 million. This was driven by organic sales growth of 5% and the benefit of acquisitions which were partially offset by higher raw material cost.

Customers continue to value PolyOne’s unique ability to offer consistency, in both solid and liquid colorants across the globe. That expertise is pivotal in earning the trust of larger multinationals. And our capacity to deliver is wining new business every quarter. It’s not just our Color segment either.

We see similar trends across the entire PolyOne portfolio, like in Engineered Materials, where our team grew revenue 8% organically in the quarter. Our GLS team delivered 11% growth, with impressive wins in next-gen markets, such as advanced biometrics.

In today’s world of data collections and analysis, sports scientists are developing real time tracking technologies to optimize athletic performance. Our materials are on the ground floor of several new product rollouts, ranging from hydration delivery to underwater sports equipment.

This market has a promising future and I am excited PolyOne is one of the key collaborators for material and design. In addition to GLS, Engineered Materials was particularly strong in Europe, delivering impressive fourth quarter performance with sales and operating income growth of 17% and 46%, respectively.

Expansion in Europe has been a strategic focus for PolyOne and our investments in the commercial team are paying off. To further leverage this system momentum, we’re simultaneously underway with several CapEx projects that will generate excellent returns and stimulate additional growth in the years to come.

Even with our record sales performance in 2017, 2017 was admittedly a difficult year for Engineered Materials and industry as a whole as we were challenged with raw material pricing pressures. For some key feed stocks, the pricing was nearly unprecedented up nearly a 100%.

In the fourth quarter, the majority of our input cost increased including nylon, butadiene derived styrenic block copolymers, polypropylene and polyethylene to name a few. On average, our material costs were up 10% sequentially from the third quarter and are up 15% to 20% year-over-year.

We anticipate raw material cost to further increase in the first quarter and do not expect year-over-year income and margin growth in SEM until the second half of 2018. Performance Products and Solutions capped off another excellent year with strong sales growth in the fourth quarter, achieving a 12% increase in revenue over 2016.

Our PP&S team has continued to hold technical seminars and collaborative sessions with our customers where recently we identified a new opportunity this quarter for over a $0.5 million in revenue.

As we invest more into our commercial team, they’re leveraging resources to work closer with both new and existing customers and we’re gaining market share because of it. Unfortunately, $2.5 million of higher cost as a result of Hurricane Harvey negatively impacted Q4.

But all things considered, we delivered another strong performance and one that we expect to build upon. Last but not least is PolyOne Distribution, which finished 2017 with nearly $73 million in the annual operating income, a new record for the segment.

POD’s world-class service continues to be the driver of its success and led to a 13% sales increase in the fourth quarter and an 8% increase in overall volume. We are winning new business in distribution by our relentless focus on service. For example, this past quarter, we closed new projects for an interior trim auto application.

Our customer made the switch to PolyOne due to our existing relationships and their collaboration with other PolyOne business segments. As we’ve highlighted in the past, our Distribution segment is armed with a world-class line card, technical knowhow and an eye for new product development opportunities where we can help.

Also, I would like to remind our investors that as we projected on our last call, corporate costs were up $6 million in Q4 versus the prior year due primarily to incentive cost. By comparison, incentives in Q4 of 2016 were low, due to the underperformance of DSS.

Before I hand the call back to Bob, I’d like to briefly discuss our thoughts on tax reform and its impact on 2018, as well as cash flow highlights. As a result of the recent passage of the U.S. tax reform legislation, we estimate our consolidated 2018 adjusted effective tax rate to approximate 25% compared to 26% in 2017.

Our rate will be higher than the 21% statutory rate, as a portion of our foreign earnings will be subject to U.S. taxes on an ongoing basis, and certain deductions will be reduced or eliminated.

In addition, while we haven’t completed our analysis, we may repatriate cash to the United States in the future from certain foreign jurisdictions as we take advantage of the new lower rates here in the U.S. This may result in additional taxes. Moving to our cash flow.

In 2017, we generated strong free cash flow, which enabled us to repurchase 2 million shares of common stock, increase our dividend 30%, the largest in our Company’s history, and fund the acquisitions SilCoTec, Rutland, Mesa, and IQAP.

We accomplished all these successes without significantly increasing our leverage, and we ended 2017, with nearly $600 million in total liquidity. We expect our cash flow to only improve in 2018, reflecting underlying earnings improvements, savings from new and ongoing LSS projects and the benefit from lower U.S. tax rates.

I remain extremely confident and optimistic as we begin the year. And I am confident that 2018 will mark our return to double-digit adjusted EPS growth. Bob, I’ll turn it back to you..

Well, thanks, Brad. Certainly, as we look back on last year, I think it was an inflection point for us in a few ways. First, we delivered the highest level of organic growth, as I mentioned, since 2010. Second, we repositioned and strengthened our portfolio, with the sale of DSS and reinvestment of proceeds in the specialty color acquisitions.

And then, third as Brad just mentioned, we really affirmed our confirmation in returning to double-digit EPS growth with the 30% increase in our annual dividend and plans to increase that dividend cumulatively 60%, over the next three years.

If you go back to further in time, recall that in 2014, we began investing heavily in commercial resources and over the last three years, we continue to do so increasing those by nearly 20%.

And that’s significant, but it was exactly what we needed to do, in order to generate growth, through an increasing servicing to our customers and it’s now paying off. Investors have often asked us for metrics, related to these additional resources and/or leading indicators regarding sales growth.

So, after three years of experience with these increased resources, we have got some metrics we want to share today. And first, I’d say, look, we’ve invested and increased headcount and resources across all of our segments and regions, choosing to expand them across the board.

But it’s not simply putting feet on the street, in addition to hiring these new personnel, we focused on equipping existing employees with the necessary tools and training to optimize their performance. These new resources allow us to better target customers and get closer to their operations.

So, consider this, since 2014, our average sellers’ sales territory’s down about 4%, and that’s a good thing as that’s allowed us to reduce our attrition which by its own nature is increasing sales. And look, that’s no coincidence. Customers value our hands-on approach and smaller territories mean more contacts better sellers and our customers.

With this additional capacity, we’ve seen a 20% increase in sales calls per seller. That combined with our new hires has led to a 40% increase in total sales calls overall. It is simple, more calls mean more opportunities; and more opportunities mean more for PolyOne to deliver.

Our sales funnel also validates that our investments are working as it’s increased nearly 80% since 2014. And also consider, if you went go back three years ago, we’ve added 6% in terms of the total number of customers we’ve had who were not doing business with us three years ago.

And finally, our success rate or hit rate, if you will, on opportunities is up nearly 25%. So, we’ve never been better positioned to realize that sales growth. As you can see and as we believe, these resources have been a difference-maker. And as evidenced by 2017, they’re absolutely working.

But now that we have achieved sales momentum, we have to sustain it. And we emphasize sustainability every day in our people, products, planet, and performance.

We create it through our safety culture that keeps employees informed and healthy with our in-house training that develops our work force, so can be our best, and also by our commitments to the environment and community. We invest in these things because they matter and it’s what helps to create a world-class sustainable organization.

Because of the culmination of these and other commitments around continuous improvement of PolyOne, we recently achieved certification as a Responsible Care Company with the American Chemistry Council. It’s one of our proudest accomplishments from 2017 and it’s taken a long time to get there and we’re very proud to share this with you.

And this commitment includes investing for the future. And a great example is our recent investment and launch in PolyOne Advanced Composites. In December, we unveiled Hammerhead Marine Composite Panels at the Advanced Materials Expo in Florida.

Initially targeted at marine applications, these new composites offer 50% weight savings versus traditional plywood options.

These continuous fiber thermal plastic composites provide boats with a lighter, more efficient alternative to traditional building materials, and are certainly translation opportunities to other applications and other markets such as auto, aerospace and truck.

We have a robust pipeline of innovative composite materials to serve these and other markets, and estimate more than 50% revenue growth from composites, in the next five years as these materials make their way to market.

Composites is a newer technology we’re investing in, but it’s not of course at the expense of other proven areas where we’ve excelled for years, like the inks market. Inks have been a key contributor to our portfolio for a long time.

But, with our acquisition of Rutland as well as internal investments in our own Wilflex brand, we’ve seen an expansion of our market share and innovation capability. Rutland was an important acquisition for us last year. And of course, as I said, I’m excited to start off this year with another outstanding addition to the team, IQAP.

IQAP was founded by Xavier Rovira and is now led by Josep Castanyer. They are innovative producer of color and additive masterbatch materials, headquartered in Spain, and officially joined the PolyOne family in our Color and Additive segment.

They bring about $45 million of annual revenue to this segment as well as a diverse array or end markets that match very well with our existing portfolio. We are particularly excited about their strong positions in wire and cable and textile applications.

Both are industries that we know well, and we expect we’ll realize growth and innovation opportunities in the years to come. From an integration standpoint, IQAP will benefit from our invest-to-grow approach, and leverage increases in resources to gain new business and expand margins.

It’s a formula that’s delivered across the board growth for us in 2017; we know it works; and we are confident, you will see the same results in IQAP. And as you’ll recall, we also added Mesa and SilCoTec to the Color platform last year, and I am pleased to report that integration with each is going very well.

So, these and combined with the organic growth we’ve seen and as we look ahead to 2018, I am expecting PolyOne to build upon the growth that we delivered last year, despite continued pressure from raw materials that Brad mentioned. And I am confident, sales will continue to increase as our commercial resources gain even more leverage in all regions.

Macroeconomic conditions seem to be continuing in a positive direction, perhaps now fueled by a lower tax rate in the U.S. and that seems to set the foundation for continued demand for our consumer products that contain our materials.

Lastly, I expect PolyOne will continue to generate substantial free cash flow, as we always have, which can be used to invest in growth initiatives, M&A or returns to shareholders. So, as we look ahead to 2018, I think it’s a very exciting year. We certainly thank all of you for listening to our prepared remarks.

And we’d like to take any questions that you now may have..

[Operator Instructions] Your first call comes from Mike Sison, with KeyBanc. Your line is now open..

Hey, guys, nice end to 2017. In terms of pricing, I think you noted that competitors didn’t follow but started to after Harvey.

Are they pushing pricing at a level that you needed to be? And maybe walk us through, how pricing should work through in the first half of 2018?.

Well, I think, it really varies by segment. And I think that in the fourth quarter, we really saw the distraction on the Color side, Mike. And also, of course, if you look at PP&S, you really have to kind of factor out the impact of Harvey, and I think Brad mentioned, that was about $2.5 million.

So, that kind of helps maybe calibrate the margin performance for those two segments quarter-over-quarter. The real challenges have been on the engineered materials side. And at this point, I really can’t point to any different dynamics that we’ve seen from a competitive perspective in that regard. And then, lastly, I’ll just touch on distribution.

For the most part, the margin change there was mostly mixed as the fourth quarter had heavier tilt toward commodities versus a number of the engineered resins that we distribute. So, that’s probably the best thing that I can say or the most accurate thing I can say about the competitive environment, as I said, the most challenging being in EM still..

Great. And then, just a quick follow-up on engineered materials.

Given that you’re going to struggle a little bit in the first half because of raw materials, and margins dipped a little bit here in 2017 versus 2016, what do you think is the right margin for that business, longer term? And given how well volumes are going, where should it get to, over time?.

Yes. Well, if you go back over time, we’ve seen some pretty step change increases as well, if you go back to 2015 for example. And so, what we saw is a pull back, this year is unfortunate. But, I don’t really think that organically it changes our long-term view on what this segment is capable of.

And one of the things that I always like to remind everyone is that we’ve made significant investments in composites, particularly with some recent acquisitions that really are very akin to research and development at this point which is effectively increasing our cost structure.

So, organically, I don’t see any reason why we can’t continue to get to a 20% margin level. But, certainly, as we’ve gotten questions about what do we think about the targets we have out there for the Platinum Vision. I think we need to recalibrate the impact of M&A, the investments we’ve made in composites as well as lastly, really growth in Asia.

We’ve had outstanding growth in Asia. But, the reality is, I don’t see Asia having a margin platform that ever gets to what we have in Europe and North America. So, our intention is to outline some more details around that in our upcoming Investor Day in May, and we’ll have more to say about longer-term margin expectations then..

Your next call comes from Frank Mitsch with Wells Fargo Securities. Your line is now open..

Happy birthday to you. Happy birthday, Bob. .

You’re so nice, Frank. Thank you. I feel younger..

Well, congratulations on this birthday gift to yourself. So, you mentioned 10% organic growth in the quarter.

How does that split between price mix and volume? And what sort of expectations should we be thinking about for 2018 on the organic side?.

Yes. The volume number, as you know, we hate the volume word, but that was about 4%, which was pretty consistent with what we saw really throughout all of 2017. It may have varied plus or minus a percent here or there based on the quarters.

And I think mid single-digit expectations for next year are in order, again just on the volume side just based on what we’re seeing going into this year..

So, mid single digits for volumes, and then, you already talked about pricing initiatives. So, we should be thinking about mid to upper single digits in terms of organic growth in 2018.

Is that what I’m hearing?.

I think all-in that’s a good way to think about that. There’ll be a little bit of benefit from M&A as well. But, I think that mid -- rather high single digit is the right place to think about for revenue growth in 2018..

All right, terrific. And then, speaking of M&A, you spent $164 million last year and the same number in 2016; I don’t know if there is anything magical about that number. But, you slowed down share buyback in Q4; I am guessing part of it was knowing that you were going to do IQAP.

How should we think about the interplay between share buyback and what the M&A outlook is for you guys?.

Well, to some extent that was based on the expectations for IQAP is now -- every now and then what will happen is we may go through a quarter and not have any buybacks and then people just assume we’re doing a deal and in the coming quarter, it coincidently worked out that way, couple of times, but not always that perfect.

So, look, expectations are that we’ll buy back shares at a minimum to offset equity dilution from our grants as well as we try to get in a little bit more than that every year, opportunistically. And think we can do that inclusive of continuing bolt-ons even at the same pace that we have done for the last two years..

Your next call comes from the line of Mike Harrison with Seaport Global Securities. Your line is now open..

Happy birthday, Bob. I will spare you the singing. I was wondering, just in terms of the EPS guidance, you’ve talked about targeting double-digit growth.

But, as we think about getting some improvement in pricing versus raw materials, particularly in the second half, you’ve got some contribution from acquisitions, leverage on the sales and marketing resources, better FX, tax reform, share repurchases.

It seems like you’ve got a lot of levers to be able to maybe drive something meaningfully better than just 10% EPS growth.

So, I was wondering if maybe you can share some of your thoughts or maybe internal targets for what you would expect to deliver in terms of underlying sales -- sorry, earnings growth in 2018, given what you just commented would be maybe high single digit top-line growth and some expectations of eventual margin improvement?.

Yes. Look, I think that if you were to -- I mean, you’ve certainly said a lot of things there with respect to going into 2018. The one thing that is really unknown is what is going to happen with raw materials going into the year.

But, with where we see things right now as we have projected, we see that really being a challenge for EM in the first half with their operating income coming up in the second half of the year. I think, if you did a composite of all those things that you just mentioned, that could be EPS growth of 15%.

So, I think you’re going to see that sales growth really translate into, as you said, meaningful double-digit EPS growth. And as we said, the raw materials continue to be a challenge, but think that we can overcome that with what we’re looking at right now..

Right. And then, you mentioned in engineered materials some CapEx projects. Are those specific to Europe? And can you give maybe some additional color on what those are? When we should expect to see some benefit? And just remind us, what is your return on capital or ROIC hurdle rate for CapEx projects..

Yes. There is really two -- and actually I said the two largest projects, candidly actually it’s three projects, really relate to expansion of our engineered materials businesses, two are in Asia, one is in Europe, namely around the soft-touch TPE materials. You are familiar with the GLS brand name.

So, most of that’s actually to invest in expansion of GLS in those regions. And I’m sorry, you asked about ROIC. Yes, when we do internal projects or rather on capital requests, they have an ROIC in excess of 20%. And sometimes we’ll talk about an M&A and typically we use the exact same threshold for that.

So, usually when we’re looking at CapEx, that’s a pretty fast payback..

Your next call comes from the line of Colin Rusch of Oppenheimer. Your line is now open..

Can you talk a little bit about the dynamics in PP&S from a margin perspective outside of the hurricane-related costs? Are there some things going on there that are depressing margins a little bit?.

Well, if you actually added back Hurricane Harvey, the margins would be up in the fourth quarter versus fourth quarter of last year. So, I think that’s trending in the positive direction. We’ve had a little bit of challenge going back into the third quarter in that respect.

So, that business I think is doing a really good job of delivering additional sales growth to some extent. There is probably some benefit from leverage on underlying assets we have deployed in the business, but, I also think a better mix is helping to drive that forward longer term. So, at this point, look, we’re optimistic.

We think margins are improving and have the opportunity to continue to do so in 2018?.

Okay, great. And then, just moving to some of the working capital dynamics, days inventory are just a touch higher than you started out the year, but notably, payables are down on a days’ basis, so cash conversion is much faster.

Is there something kind of more structural going on there, is that one-time item, should we think about you guys turning the cash over more efficiently going forward?.

The one thing I’d just offer is a quick passing comment on that is that when you look at the end of year, if you just look at a very short-term set of statistics, you might see something that’s really very different from what you see for the year in whole.

Typically, in our business, we’re building working capital in the first part of the year and sort of bringing that back in, in the last half.

But, there has really been no structural changes outside of the fact that when we do acquisitions, they almost always have a higher level of working capital than what we do and that’s one of the synergies I think we bring to M&A..

Your next call comes from the line of Bob Koort with Goldman Sachs. Your line is now open. .

Hi. This is Dylan Campbell on for Bob. I guess, talking I guess a little bit about the margins year-over-year, I know you mentioned, obviously raw material pressures was a significant factor and then also compensation with the lack of the DSS business as well is another pressure.

Was there anything else, maybe integration, the M&A opportunities that could have had an impact on 2017 relative to 2016?.

There is nothing from an integration standpoint in terms of additional costs that are going into the business. The only observation that I have about M&A -- or actually, I have two, one is that of course -- look, if you looked year-over-year and second half of 2018 -- or 2017 versus 2016, we obviously owned the composites businesses.

So, those aren’t really influencing the comparison. But, do want to point out that that really is a net outflow of operating income while we invest in that business. But, if you just look at all the other acquisitions that we’re doing, they’re coming in at lower margins than our existing business. That’s fine.

I mean, there isn’t anything wrong with that. I still think they have a great specialty margin starting point and that we can move them closer to our Platinum Vision. So, it’s not an integration challenge, it’s an opportunity, and it’s one of the reasons why we are doing these deals..

Got it. And then, secondarily, can you talk a little bit about your free cash flow expectations? I think, fourth quarter was -- CapEx was higher than I think the run rate is expected to be.

So, can you talk a little bit about what CapEx levels do you expect going forward?.

Yes. Let me just -- and I did see your note in terms of the free cash flow estimate for the year of a $123 million, I think was in your note. And I just wanted to kind of clarify something on that.

If you really take out the effect of DSS, which was losing the cash flow negative in the first half of this year, if you take that out, our overall free cash flow generation was somewhere between a $155 million and $160 million. So, again, I just wanted to point that out.

As we think about free cash flow next year, I am very optimistic because Bob mentioned how typically we will build working capital in the first half of the year, but we did come into the year with stronger levels of working capital or higher levels of working capital in support of where we see the business being started here in 2018.

And there is also effect of the timing of some cash tax payments. So, as I think about our free cash flow, again this year is somewhere in $160 million range, I think we could be in the $200 million to $220 million range in 2018..

Your next call comes from the line of Jason Freuchtel with SunTrust. Your line is now open..

Hey, Jason?.

Apparently, Liz, I don’t think Jason is on the line.

Can we move on to the next question, please?.

The next call comes from the line of Jason Rodgers with Great Lakes Review. Your line is now open..

Yes. I wonder if you could talk about what’s driving the strong operating income growth in the Color segment in Europe and the sustainability of that..

That’s -- we’ve seen really strong operating income growth in all of the regions from a Color perspective. I guess, there is a couple of places that I would probably point to, from an end market standpoint. Packaging, organic sales were up 7.5% for PolyOne in the quarter, and that is always a very good thing for the Color business.

And as we’ve talked about in the past, some of our most profitable business is in Europe, based around the additive materials that we bring to beverage containment. So, I’d say, packaging was a real good guy.

And then, also, in addition, what we saw just across the board in consumer really in Asia and also in the North America I think all helped to leverage that growth, so. And a little bit I think we’re certainly getting some traction around raw materials where we were behind that in the first part of 2017..

And as far as acquisitions, you mentioned they will contribute somewhat to the top line in 2018.

Given the ones that you’ve made, what percent do you think that will be? Is it 2% or 3% or…?.

Yes. It’s not 3%. So, it’s probably a little less than 2% when I think about 2018 on those deals..

And you mentioned EM will not be increasing margins -- or not likely to increase margins in the first half.

Does that mean you are expecting the other segments to show margin improvement year-over-year in the first half?.

I think that we’ve got an opportunity to really get there on Color and PP&S what -- as we just commented EM and hopefully that’s going to be the case. On distribution, I think it really remains to be seen what happens with raw materials coming into the year. So, Brad commented on seeing raw material costs go up.

When we say that, in the fourth quarter, what we’re really referencing is sort of indexed pricing and/or quoted market pricing. And then, we see the effects of that in the second -- a quarter or two later.

So, for distribution, sometimes we get a little bit of benefit from rising raw materials, so that may happen here in the second quarter, but I’m not certain we’ll see in the first quarter..

And if I could squeeze one more in.

Brad, I’m sorry if I missed this, but could you quantify your estimated CapEx for 2018?.

Yes. It’s going to be in the neighborhood of $75 million to $85 million..

Your next call comes from the line of Laurence Alexander with Jefferies. Your line is now open. .

Hi, guys. This is Dan Rizzo on for Laurence..

Hi, Dan..

If we think about the pricing pressures in raw materials, is it possible to go to different sourcing to try to mitigate some of the higher input costs? Is that an arduous process or is it something that’s doable at all?.

Well, look, I can tell you, we have explored every opportunity, but that’s not just in reaction to what we experienced this year. It’s something that we do on an ongoing basis. And so, we try to get our materials from those suppliers who offer us the best service, on-time delivery and price. So, we look at all those factors.

And one of the things that I can tell you we’ve experienced is that by localizing supply in Asia, for example, where you may have shorter terms or different supplier partners, sometimes you actually open yourself up to more volatility.

So, we saw that in 2017 and it maybe a reminder to us to practice exactly what we preach with respect to some of these longer-term relationships. So, we look at that and we’ve done everything that we can and where there is an opportunity to move and get better terms on all those fronts, we do..

And then, in the past, I think you’ve kind of pointed to the vitality index as kind of a measure that you use to see how you do with new projects, new products and new wins.

I was wondering if you still use that, if it’s still important and where is that?.

Yes, absolutely. And I guess shame on us for not revisiting that here in our remarks, we certainly will at -- in our Investor Day that’s coming up here in May. The vitality index remains an incredibly important way for us to gauge how well we’re doing with respect to bringing new products to market. It’s right close to 40%.

We think anything over 35 is world-class. And that represents the dollar value of sales from products introduced in the last five years over total sales. So, anyway, that’s still going very well and it’s a combination of primarily organic, but periodically, we pick up some additional technology through M&A..

Your next call comes from the line of Dmitry Silversteyn with Longbow Research. Your line is now open..

Good morning, guys. Couple, if I may. First of all, just want to understand a little bit better. So, on the 15% growth that you delivered in the quarter, 3% was acquisitions; I think you said about 4% was pricing -- sorry, volume; pricing probably kind of 2% or so. So, the mix is the remainder kind of 6%.

Is that still sort of how you guys are positioning the Company to continue to go after mix and if volume comes great?.

I think that if you were to compare and contrast this to how we would have talked about our strategy five years ago, certainly, mix would have been really all of the growth, right? And as we have gotten our segments to higher levels of profitability, we’ve really been emphasizing driving the ultimate sales growth, because we have less to shed.

I think it was a very good end of the year where we had a little bit of both where we saw some mix and price improvement on top of about 4% volume growth. So, I think a good quarter all way around, in that regard..

What was the foreign exchange contribution, then? Because, I mean, I am looking at the euro at $1.24; and from what I remember, about 35% to 40% of your business in specialty, both Colors and EM, is in Europe; and then, obviously, you have a little bit of Asia and Latin American exposure.

So, how should we think about foreign exchange tailwind both for the fourth quarter and as we get into 2018?.

I think Brad mentioned that there was about 1.5% in the fourth quarter, we may have rounded that to 2 in passing. But, one of the things I point out, so that’s a revenue impact from that. As we look at the bottom line, typically, that’s a good thing for us, if we got a stronger euro.

Didn’t see as much of that as we would have liked in the fourth quarter, primarily because some of the good guy that we had in operating income was offset by some below the line items. If you look at other income and expense, and that’s really just FX exchange related.

So, anyway, as we look at where rates are today, that should be a little bit of a good guy going into 2018, if everything else held equal..

Okay.

And in terms of the top-line, tailwind maybe kind of a similar, 1.5% to 2%; and then, kind of whatever the contribution is, translates to profitability?.

Right. Just assuming that -- that would be of course for the first three quarters of the year, if it’s flat on Q4, but yes..

Yes. I mean, obviously, assuming rates stay where they are. Okay. You mentioned, and you’ve been talking about this pretty much regularly on all the conference calls, the growth opportunity as well as some of the realized opportunity for growth in the composite segment.

As it becomes a bigger part of EM, is there any thought about that business being broken out separately in terms of reporting or being run separately in terms of operations or is it that well integrated into EM that it really doesn’t make a difference whether it’s separated or not?.

No, we wouldn’t -- we don’t have any plans to break that out as separate segment. I do think there is a lot of integration within the EM business. And I wish it was that big, it’s just not yet. So, maybe in the future, there is an opportunity there, but I don’t see that in the foreseeable timeframe..

Got you. And then, final question. You kind of got back after the Spartech divestiture to these bolt-on M&As, $30 million, $40 million, $50 million, $100 million type of deals in terms of revenue. Historically at least in the past, you have talked about every three -- two or three years, whatever, perhaps being on the lookout for a larger deal.

Are there any sort of elephants in your pipeline of M&A where you’re kind of looking at big deals still or is your focus now entirely on the bolt-on, easy to integrate, globalize, improve margins type of business?.

Yes. I mean, there isn’t -- just as we look back over time, I think, it may be more coincidence on timing than anything else that some of the bigger deals happened when they have. We really are just emphasizing looking for specialty deals that add technology or geography to portfolio. It really hasn’t happened over the last 18 months or so.

We’ve just found the best fit and best use of our cash for these smaller bolt-ons. So, there are bigger things that are out there that we know about, things that we’ve been thinking about for a long time, and they’re just not for sale. So, if at some point in time, they become available, we give them a look.

But, at this point, really, what we’re seeing are these smaller deals..

Got you. Thank you. That’s all I have, Bob. Thanks a lot..

I think we’ve got time for one more call..

And we do have a call from the line of Jason Freuchtel with SunTrust. Your line is now open..

Hey, good morning. I apologize for earlier. I got disconnected..

No problem..

And thanks for the color on the 2018 free cash flow expectations.

Which of the contributors that you mentioned in the prepared remarks are expected to have the greatest impact on the $40 million to $60 million free cash flow improvement next year?.

Yes. Well, certainly, again, just Bob pointed to be underlying earnings improvement and he’s answered that. So, that obviously has a pretty meaningful impact on our free cash flow improvement that we see next year. Just again, you can do your own math on that. But also, again, our cash taxes will be lower next year.

Again, I mentioned timing of tax payments; our overall working capital need should be a little lower. So, those are the key drivers..

Okay, thanks. I believe you mentioned that PolyOne’s experienced strong growth in Asia.

Have you seen any changes in industry competitive dynamics in China and Asia, more broadly in the past six months or so? And, can you provide a little more detail on why margins in Asia could remain lower than the other regions?.

Yes. I’m not sure I would point to anything specifically in the last six months, but one I think I look at over the last year, if you will. Sometimes I think you can see some exacerbated raw material volatility there and we certainly experienced that. So, that put pressure on margins.

And in general, I think just looking at the sort of composite type of business that’s going in there and the overall level of competition, and I know that’s kind of a sweeping generalization. But, that to me is the longest term real effect on what we see from a margin standpoint. So, that’s why I think it’s more pressured there.

But, also that has been in existence for a long time enough and nothing new in 2017..

Okay. Thank you. And good luck for next quarter..

Thanks. I was premature on my count. We’ve got time for one more call..

This call comes from the line of Rosemarie Morbelli with Gabelli and Company. Your line is now open..

I was wondering if you could talk a little bit about PPS and the impact of the growth in housing on that particular business.

How much of PPS is now linked to housing and what do you see in the growth of that particular market, next year?.

Yes. Some of the stats that we had coming out of the fourth quarter were actually quite positive around building and construction. That seem like it was maybe flattening out a bit earlier part of the 2017. So, honestly, it was kind of a nice surprise coming out of the fourth quarter and hopefully continues to be a good guy for us in 2018.

When I look at building and construction in total for the segment, I think it approximates roughly 40%. So, still a pretty big number for PP&S; as you know quite a bit smaller for PolyOne overall, if you look back to where we were 10 years ago..

Thanks. And then, I may have missed it. And if I did, I apologize. When you look at raw material inflation in 2017, was that 10%? And if so, what do you expect it to be in the first and second quarter? Do you anticipate that it will flatten out in the second half? And if I am correct with that 10% and price was up 2%, then, you are still lagging by 8%.

Is that going to get worse in the first half of next year?.

Yes. I think that if you look at the composite spend on raw materials, we were up over 10% in 2017. As I look at the fourth quarter, we were making some progress with respect to raws from a pricing standpoint.

But, with the reason increase is that we now know about in the fourth quarter coming at us and really the first and second quarter of next year that may mute that benefit. So, I guess, as I stand here today and think about the raws and the increase we see in the fourth quarter, if they held for the balance of 2018, that’s probably about 10%. .

Okay, thanks.

And still about 2% to 3% on pricing; so, still lagging until 2019?.

Yes. I mean, I have answered that question very well in the latter part of that. But I think that we have an opportunity to get ahead of that in 2018. It varies by segment and really was EM being behind it in the first half, but catching up in the second half.

If I look at the balance of PolyOne, I think pricing can offset what we are seeing in raw materials overall. But, as people are looking at revenue growth and trying to translate that to the bottom line, I do think it is muted by these higher costs..

Okay, thanks..

Yes, absolutely. Well, thank you everybody for joining us on the call today. We’ll look forward to sharing our first quarter results with you in our next call. Thank you..

Ladies and gentlemen, thank you for your participation in today’s conference. This concludes the program and you may now disconnect. Everyone, have a great day..