Giuseppe Di Salvo - PolyOne Corp. Robert M. Patterson - PolyOne Corp. Bradley C. Richardson - PolyOne Corp..

Michael J. Sison - KeyBanc Capital Markets, Inc. Frank J. Mitsch - Fermium Research LLC Michael Joseph Harrison - Seaport Global Securities LLC Colin Rusch - Oppenheimer & Co., Inc. Dylan Campbell - Goldman Sachs & Co. LLC Kevin Hocevar - Northcoast Research Partners LLC Laurence Alexander - Jefferies LLC James Sheehan - SunTrust Robinson Humphrey, Inc.

Rosemarie Jeanne Morbelli - Gabelli & Company.

Good morning, ladies and gentlemen, and welcome to the PolyOne Corporation's Third Quarter 2018 Conference Call. My name is James, and I will be your operator for today. At this time, all participants are in a listen-only mode. We will have a question-and-answer session at the end of the conference.

As a reminder, this conference is being recorded for replay purposes. At this time, I would like to turn the call over to Joe Di Salvo, Vice President, Investor Relations. Please proceed..

Thank you, James. 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 are 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 uses 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 third quarter of 2018 to the third quarter of 2017 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..

composites, fiber colorants, flame retardants and barrier technologies. These platforms remain our investment and commercial focus. We are confident that strong market pull for sustainability, combined with our ability to formulate innovative solutions, will allow us to drive future growth.

And it's our long-term focus and commitment to our four pillar strategy that has allowed us to deliver our third quarter results despite weakening currencies and higher raw material and freight costs. Inflation is impacting all of our businesses. In terms of freight, costs were up $3.5 million this quarter over the prior year.

Our teams have been working diligently with our customers to minimize the impact from this inflation but it is often the case that higher prices are inevitable. This quarter we implemented surcharges and we are just beginning to capture them. As you know, inflation has been a persistent theme throughout 2018, and Q3 was no different.

With respect to raw material costs, nylon and butadiene for example, which are key inputs for our Engineered Materials segment, were both up more than 50% year-over-year. Inflation is not new, particularly in the areas I just covered.

What was new this quarter and really happened just in September was a slowdown in demand in certain North America end markets, such as building and construction and appliance as well as in Asia. Performance Products and Solutions, and Distribution were the most heavily impacted by these challenges.

And that was observable as their operating income declined year-over-year. The demand slowdown was abrupt, with certain customers delaying orders at the end of the quarter. They are citing concerns over tariffs, rising input costs, and weaker consumer demand, as the primary drivers.

I will have more to say on our long-term perspective and strategy, our outlook for the balance of the year after Brad provides a segment review and financial highlights..

Well, thank you very much, Bob, and, good morning, everyone. Let me first start with our GAAP results. GAAP earnings of $0.62 per share. Special items for the third quarter of 2018 did not result in net earnings per share impact as environmental remediation costs were offset by tax benefits recognized during the quarter.

Adjusted EPS from continuing operations for the quarter was $0.62, up 7% from $0.58 in the third quarter of 2017, marking a new PolyOne third quarter record. Color, Additives & Inks drove this performance with 11% sales growth while gaining leverage on the bottom line to improve operating income 13%.

Clearly, our organic and acquisition-related investments are working in this business, as seen by a 6% organic revenue improvement and 6% growth from acquisitions which was offset slightly by FX impacts of a negative 1%.

Our performance is geographically balanced as well, with all regions contributing as new business gains and pricing initiatives help to offset weaker demand conditions observed in September. Beverage packaging and consumer applications in particular continue to perform well in all regions and wins in this market are improving overall margins.

These customers' sustainability goals are increasingly focused on improving shelf life and eliminating waste. PolyOne's barrier technologies from oxygen scavenging additives in bottles to light-blocking additives to replace unrecyclable multi-layer packaging are solving those problems and gaining market traction.

Engineered Materials also had a strong third quarter and continued its positive trajectory, expanding revenue by 7% and increasing operating income by 7%. Underlying gross margin improvements from our composites portfolio drove this expansion.

Our growing commercial team continues to use this technology to close new specialty applications to replace metal, wood, and glass in various end markets, such as next-generation furniture where we are having great success.

Our composite material is improving the performance of springs and office chairs for example, leading to weight reduction, design enhancement, durability and ergonomics in workplaces everywhere. Our outdoor high-performance customers also benefit from the high-strength anti-corrosion, and precision performance achieved through the use of composites.

For example, composite applications in end markets such as archery helped to expand our outdoor high-performance business 30% in the third quarter.

Growth, with application like these, despite elevated raw material costs like nylon and butadiene, both up more than 50% over the prior year is allowing our EM segment to increase both revenue and operating income just as they did this past quarter. Performance Products and Solutions had a challenging quarter, no doubt.

Sales did grow slightly, but margins were compressed due to higher raw material and freight cost, as Bob mentioned. Freight cost alone impacted operating income by about $2 million.

We also noticed the softened demand toward the end of the quarter within the appliance, and building and construction end markets as customers delayed orders citing concerns about consumer demand for these applications. This late quarter softening demand largely impacted PP&S, but also POD.

In fact, POD volume was flat for the quarter, entirely driven by a drop-off in orders in September. POD margins were also impacted by freight increases which are surcharges only partially offset as they were implemented in August.

It remains, however, that our Distribution business is the premier world-class provider in this space with unmatched service. We do not believe we have lost any share, and that the previously described weaker market conditions relate to end market demand.

You will note that all of our segments continue to generate tremendous free cash flow, and we are on pace to deliver over $200 million in total company free cash flow in 2018. We will continue to deploy that cash in organic growth initiatives and accretive bolt-on acquisition, the investments that have and will continue to fuel our growth.

We will also continue returning cash to shareholders, as evidenced by our announcement earlier this month to increase our dividend by more than 11%. This is consistent with our planned three-year commitment to deliver a 60% increase.

We finished this quarter with more than $480 million in available liquidity allowing us ample ability to fund our dividend increases, invest in our strategic growth areas, as well as opportunistically buyback shares. And in this recent market volatility and pullback, we will of course take advantage of such opportunities. Thank you.

And with that, let me turn the call back to Bob..

Thanks, Brad. So to recap, Color and SEM drove another strong quarter of growth to PolyOne, with both top line and operating income expansion. This was made possible as I said earlier by the important investments we've been making in commercial resources, specialty acquisitions, and innovation.

With respect to innovation, consider the challenges companies are facing today in terms of consumer expectations around sustainability, what it means for their products and what it means for their business.

Consider the challenges associated with the global political arena which is introducing everything from currency volatility, turmoil in Turkey, and wide ranging tariffs. There have and always will be challenges, but we've built and committed to our improvement strategy that not only helps us navigate them, but to find opportunities therein.

At our Investor Day, we highlighted what sustainability means to PolyOne, and the four cornerstones of people, product, planet and performance. And our technology platforms are inherently sustainable solutions for our customers to utilize.

Recycling is clearly at the forefront with local and global organizations beginning to understand and invest in infrastructure that will enable consumers to increase recycling. And we are there to support them, as well as our customers and OEMs with polymer solutions that increase the recyclability of their products.

At the same time, leading-industry association such as the American Chemistry Council are taking leadership positions to advocate for the tremendous value that plastics bring. The benefits, when one compares total cost of production and the life cycle of using and recycling plastics, in many instances is very clear.

So there's broad marketing done by our industry to first educate consumers, OEMs, and governments about the value of plastics, but also to engage deeply to be part of the multi-stakeholder solution to increase recycling at this important juncture.

Earlier I referenced our four key technology platforms and how they are well-aligned with these important mega trends. Barrier technologies and additives improve shelf life, reduction of material required, processing efficiencies and food safety.

In composites, which Brad mentioned, can light-weight just about anything in reducing environmental footprint, costs and fuel consumption. We really began building our platforms and capabilities around composites back in 2012. We later expanded our technologies with the additions of Gordon, Polystrand focused on the next-generation materials.

And in June of this year, we expanded our portfolio even more broadly, adding a high-growth long fiber technology component by our acquisition of industry-leader, PlastiComp. And we will continue to invest to grow in this important space.

Our fiber colorant technology is another core area with clear sustainability benefits as production can be done with less water required and wastewater generated. And our flame retardant materials science gives consumers and the environment increased safety and reassurances for end markets like wire and cable and construction, to name a few.

These are just four of the many areas we're innovating for our customers. And as you know, innovation is the lifeblood of a specialty company and our vitality index continues to exceed 35% which we view as world-class.

So, I am incredibly excited about our long-term growth prospects, and emphasize our goals of delivering double-digit EPS and increasing return on invested capital. We need to always keep this in mind and not lose sight of our longer-term objectives as we, along with many other companies, face near-term challenges today.

Higher raw material and freight costs aren't going away, and it is likely the same can be said for tariffs which we expect will impact us directly by $5 million on an annualized basis given what we import today. Although our business in Turkey is relatively small, we do expect recent turmoil there to impact us in the fourth quarter.

But most significantly, customers are increasingly pointing to a slowdown in certain end markets in North America and China, and we are experiencing this firsthand as Brad mentioned in building and construction, and in appliance to name a few. And I want to put September in perspective, so please consider these data points.

For PP&S, combined sales for July and August were 7.5% higher than last year but September sales declined 12% compared to last year. For Distribution, July and August sales were up 15% while September sales were nearly flat.

In short, the September drop-off was abrupt, and if I look at the order rate for PolyOne as a whole, for October, it suggests flat sales for the month ahead and given increasing prices I believe this implies that unit sales are down slightly.

Although Color and Engineered Materials are expected to expand operating income in the fourth quarter, their growth may not be enough to overcome what we are seeing in PP&S, in POD and the other challenges that I outlined and we believe that this will translate to EPS of approximately $0.41 which is flat with the prior year in the fourth quarter.

Hopefully, what we are hearing from our customers and what we're experiencing today is short-term, and during times like this we have to remain even more vigilant and focused on taking care of our customers. We are a company a culture built on excellence and execution of our strategy.

We ensure it's built to last and we stay true to it in good times and it helps us to navigate the challenging times. We recently completed our annual strategic planning process with our leadership team and board.

And while implementing freight surcharges and staying ahead of raw material inflation was a major part of the conversation, we talked more about PolyOne's underlying businesses, how we must invest and lead the company to achieve strong, sustainable performance.

We discussed how to maximize the momentum from our commercial investments, where to make more and when. We challenged each other on our world-class service model and asked, how can we make this even better? And at this type of approach, which has led to hallmark customer offerings like LSS Customer First and IQ Design.

So we continue to ask the question and examine what investments into our customers' experience are necessary for our next, innovative service offering. We studied our technology platforms to ensure they are still positioned well with high growth mega trends, such as lightweighting, recyclability and improved packaging.

And our investments are aligned accordingly to ensure our portfolio solutions is broad and sustainable.

We spent a lot of time discussing the customer experience and what digital tools and service improvements can deepen our relationships with current customers and earn the trust of new ones, with focus on our people, how we will invest in leadership and next-generation talent to execute our strategy and realize the growth potential here at PolyOne.

And of course, we will always, always put our customers first and provide exemplary service to help them innovate and grow their business and ours. That concludes our prepared remarks. We will now open the discussion for questions..

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

Hey, guys..

Hi, Mike..

Good morning, Mike..

I guess, Bob, when you think about the headwinds that you're facing both in demand, raw materials, and as we head into 2019, what do you think the propensity for PolyOne to continue to grow or hit your EPS growth goals of double-digits going forward?.

Obviously, we outlined our expectation for the balance of this year as well as we can and seeing what we do right now. I think it's too early to comment on 2019, Mike. When we get through the end of the fourth quarter and report our results in January, I think we'll be better prepared to do that.

Certainly with respect to the investments that we have made in our commercial resources, where we are positioned from an innovation standpoint and focus on sustainability, I think we're really well positioned to do that. But given these headwinds, that's certainly a challenge in the short-term..

Got it. And then in terms of the demand weakness and you obviously have a pretty good feel from your customers.

Do you think September, October, maybe some of the fourth quarter will be more destocking? And once they get through that, could volumes rebound down the road?.

It's possible that there is a destocking effect here because that is the type of feedback that we got from our customers. As you know, we don't have a long backlog and pretty short window of visibility out into the future.

What we did here from customers was that they had more inventory on hand, in some cases, the middle of September and weren't planning on taking any more at this time.

So it's possible that there's a destocking effect which has impacted September and maybe October, but what I have seen so far is that I'm not seeing that go up appreciably in November but again it's a little too early to say..

Great. Thank you..

Thank you. Our second question comes from Frank Mitsch with Fermium Research. Your line is now open..

Good morning, gentlemen..

Good morning, Frank..

Hey, guys, obviously you've put in surcharges, I guess, in August you mentioned. In light of the weakening in demand that you outlined, what has been the receptivity to these surcharges and maybe you can work that in with your thoughts on when we get margin recovery and expansion in the businesses..

Well, look customers – I think, first of all, customers really don't ever like getting a price increase of any kind whether or not that's on the underlying material or service provided or surcharge. I think that their understanding of the present landscape is better now than it was at the beginning of this year.

Everyone has an appreciation for what we are all facing. And as a result of that, our ability to capture those I think is really high. The reality is though when they got implemented in mid- to late-August that just made it – we just couldn't cover everything that incurred in the third quarter.

So I think from a freight standpoint, we should be in much better shape in the fourth quarter. What, of course, is still a challenge for us is on the raw materials side which I think will still continue to see inflation in the fourth quarter..

I see.

And then your expectation in terms of when you'll be able to push through pricing to offset those raws? Is that a 1Q 2019 event or first half 2019 event, an all year 2019 event? What are your thoughts there?.

Yeah. I'm sorry, I missed the second part of your question there. With respect to Color and Engineered Materials, I think we have a really good line of sight to starting to see margin expansion. And you've seen some early signs of that through the middle part of this year, where I don't think that's going to be the case is in PP&S and POD.

So with what I know or what I see right now, I think that can continue into the first part of 2019..

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

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

Hi. Good morning..

Hey, Mike..

Mike..

I wanted to see if we could dig in a little bit more on what you're seeing in Asia, specifically what end markets are you seeing that are moving lower and are you seeing any signs that there's sort of a temporary shift going on of manufacturers as they move some production out of China and maybe into other parts of Asia or other parts of the world?.

Well, we're certainly having or we're certainly hearing from our customers concerns around tariffs, Mike. And that they are giving consideration to where their production should take place. So I think that's part of it.

I think to Mike Sison's earlier comment too, there could potentially just be some destocking in preparation for where those moves are taking place. It's too early to say definitively on where things are going to land. But that could very well explain some of what we saw in Asia in the third quarter.

For us Appliance was a comment that we made broadly mostly around North America, but I think that was also impacting Asia, plus just general industrial applications if I looked at the biggest impact to us in China..

All right. And was wondering if you could talk broadly about what you're seeing in the Engineered Materials business, maybe talk a little bit about the impact you're seeing from higher nylon prices, what you're seeing in wire and cable? I know that's been under pressure. Maybe also comment on the auto market..

If I can take those in maybe reverse order just to make sure I don't forget the beginning. But look, from an auto standpoint overall, we have a category called transportation when we think about our end markets. But it really is made up of, let's say, two-thirds traditional auto and one-third recreational vehicles and heavy-duty.

If you just look at auto, U.S. auto for example, that was for the quarter actually down slightly, whereas recreational vehicles and heavy-duty were up and they had kind of canceled each other out for the quarter which impacted EM really to the tune of probably just being flat in that end market. Where EM has seen great traction is in composites.

When I mentioned the outdoor industry that does include these off-road vehicles that I had mentioned, and that's up. Brad mentioned archery as well. And those are the reasons why we're seeing expanding profits and profitability in that segment. So, pricing is actually – we compare and contrast where we were in 2017 from a pricing standpoint.

We are doing much better this year, we're getting ahead of it, moving fast, and again, to my earlier comment, customers I think have a better appreciation for the dynamics that exist today. It's not to say that they willingly accept these price increases but I think they're more aware that they're coming.

So that's I think being reflected in the better margin performance of the segment..

Wire and cable and nylon impact in EM?.

So the nylon impact, again, I think we're actually ahead on price for a net positive. And then, wire and cable, we have some new business that's actually coming to fruition which is helping us to offset what I think is some slower conditions from a demand standpoint.

Wire and cable though, Mike, didn't stand out like appliance, and building and construction did. So at present, we haven't seen the same demand effects there..

All right. Thanks very much. And good luck to your Wolverines (00:30:36)..

Thank you..

Thank you. Our next caller comes from the line of Colin Rusch with Oppenheimer. Your line is now open..

Thanks so much. Guys, can you give us an update on the potential M&A pipeline and how you see that essentially playing out over the next 6 to 12 months.

Are there some later stage processes that you're going through at this point and are there some assets that you might have to or might want to acquire as folks reconfigure their geographic exposure?.

Can you repeat the beginning of that Colin, it broke up a little bit?.

Sure. Just looking at the state of the M&A pipeline (00:31:18).

...yeah. We have at the beginning of the year, it felt like things were a little slow and it's always amazing how fast things can change in the course of a quarter or so. We had a really good pipeline and a number of things that we're looking at right now.

In fact, a couple of bolt-on acquisitions that could come to fruition in relatively short order in Engineered Materials. So, obviously, I can't say much more about that and it's never done until it is but the pipeline is really robust.

I'm not seeing anything from a seller's standpoint that suggests at this point that they're doing that because of what's going on with the end market but maybe so. And from our perspective if we can capitalize on that, we will. So, pipeline looks really good. Some pretty cool specialty bolt-ons..

Okay. That's helpful. And then just in the PP&S, you could – the headwinds, how much of that is coming from Asia and how much of that is coming from the U.S.

with the residential construction slowdown?.

Well, construction – I mean, PP&S Asia is pretty small. Operating income there was down some year-over-year so that does impact the bottom line. Well, with respect to the end market observations, that was predominantly a North American one..

Okay, perfect. Thanks so much, guys..

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

Good morning. This is Dylan Campbell on for Bob..

Hey, Dylan..

In the context of the $0.41 for fourth quarter, can you give an updated outlook for free cash flow generation in 2018?.

Yes. So, Dylan, in my comments we're on track this year to generate about a little over $200 million of free cash flow. So that's consistent with what we've been sharing with you..

Got it. Thanks.

And then I guess going into 2019, can you give kind of broad outlook, some of the puts and takes that we should expect going into the next year?.

Puts and takes in terms of the operating performance or the free cash flow?.

Free cash flow..

Yeah, so I mean I think, look, the free cash flow in 2019 will be driven by the underlying earnings performance of the company. I do think, maybe our capital expenditures, we've got a lot of – we've been averaging about $75 million in capital expenditures.

I think it might be up next year just with again what we're funding in terms of capacity expansions. So that could be an additional $10 million or so. Our cash taxes maybe up next year just with the impact of tax reform here in the United States. But net-net, I would expect that we would have another year of growth in our free cash generation..

Thank you..

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

Hey, good morning everybody..

Hi, Kevin..

Kevin..

Bob, I just want a quick clarification. You mentioned that October sales were flat. Was that a POD – you were you talking about POD right before that.

So was that a POD comment or was that a total company comment?.

That was then moving to a total company comment. But you can make the same statement about really POD and PP&S..

Okay, got you. And can you comment too on the slowdown in Asia? You had mentioned – you gave us a good color on the magnitude of the change in PP&S and POD. How July and August looked versus September.

Can you give some type of comments on how the quarter progressed in Asia? Do you see similar bigger slowdowns in September? Just any color you can provide on how the quarter progressed in Asia, and how that's continued into October, would be helpful..

Yeah, and maybe I'll frame that in the context of the full year as well. Because I think if you went back to the full – the first half of the year, unit sales were up 6% or 7%, and for the quarter they're up 2%. So, it was still a growth period for us heavily weighted towards July and August.

And I'm not sure the September effect manifested itself the same way in Asia as what we saw in North America. And there are maybe something to the stocking comment that was made earlier on the call.

But from a sales standpoint, sales in July and August were higher than they were in August but not quite as extreme as some of the changes I mentioned for POD, PP&S..

Okay. Got you. And then, in the building and construction end markets, you'd mentioned – trying to term it as the destocking, is it a greater slowdown. In your conversation with customers in some of our building products coverage, it sounds like weather – it's a pretty wet September, so that caused some slowdowns.

It sounds like that caused some slowdowns in parts of the country.

So, wondering if weather had an impact at all, if you heard that, and I don't know if you heard that, that was an impact as well?.

It's possible that customers were citing that. What I was getting back though I think more loudly than weather was really around how much inventory they had on hand. It's possible that, that was weather-driven but we didn't get sort of the driver of that.

We were mostly hearing that candidly they just got more inventory than they need or projected they do for the near term. So, it's possible that was a factor..

Okay.

And last question on – so obviously raws have been a headwind here for a while and will continue to be, I'm wondering if you can give us some color on price versus raws, how the net impact of that and how that's trended throughout the year and as you look into the fourth quarter, has that been kind of stable or getting any better as you've been realizing some price, getting worse because inflation has been picking up, like how is the net impact of that been trending?.

Yeah. So for Color and Engineered Materials, it really has trended quite positively throughout the course of the year. As you know, Kevin, we had some challenges in 2017 in EM and to start of this year. I would say that where we are right now we are past that relative to pricing being ahead of raws.

It's a little hard to bifurcate how the quarter would have shaken out for the company as a whole had it not been of course for what we saw in September for unit demand. So PP&S was sort of flat except behind on freight. So freight was still a really net bad guy for PP&S.

And then as you know on POD, for the most part, that's a pass-through based on our supplier pricing..

Yeah. Got you. Okay. Thank you very much..

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

Good morning. Given the environment you're seeing, can you discuss a little bit how you're thinking about the pace of new hire, increasing staffing levels, and the efficiency of your technical sales force..

Yeah, I had mentioned that during our strategic planning session a couple of weeks ago with the board, I said, hey, look there's a really important theme that I want to convey this year which is around the efficiency of those commercial resources. We have, as you know, put a lot of investment into hiring over the last few years.

And I believe that has been a big driver of our sales growth. But I also believe that you can't just continue to only hire, you do have to continue to see efficiency gains from those resources. And so that was a really important focus. I think we are seeing that right now.

Laurence, as you know, when we brought those resources on, our average seller territory size, actually went down, right? That went down. So from an efficiency standpoint, that sounds like it's going backwards.

But I think we're starting to see that actually begin to improve and expect that to be this case in 2019, absent the macro stuff we've talked about here. Look, with respect to our hiring plans, no change to what we intend to do from a commercial standpoint.

And sometimes when markets are like this, you can find really outstanding people who have been displaced for one reason or another. So at the moment, no changes to that. But I can tell you without question, we will be closely monitoring all of our other discretionary spending and expenditures, including CapEx, as we go into 2019. It's not lost on us.

We need to do that under the current circumstances..

And can you give us a feel for how you think about the response function if there is further erosion that is like – is there a certain level of end-market decline or customer behavior where you change course or is it more of a gradual iterative approach?.

Well, one of the things I think that we will be giving more consideration to is that Brad had talked about CapEx and expectations for next year and I think we do have, at present, some capacity constraints in a couple of places in the world. It may very well be, hey, if this continues to pull back and doesn't get better.

Those capacity constraints solve themselves unfortunately and maybe that ends up in a little less CapEx for next year.

I really want to keep the long-term in focus and think about where things are going to be in three, four or five years of course and make the right decisions in that regard, but it's possible in the short-term some of those things correct in that way..

Okay, great. Thanks..

Thank you. Our next question comes from Jim Sheehan with SunTrust. Your line is now open..

Good morning. In the second quarter, you noted that you would close 2,500 new business opportunities.

What did that number look like in the third quarter?.

Pretty similar number. I would say that if it were July and August, my expectation was that was going to be even better, but of course with the September results that really negated that being the case..

Great. And on raw materials, what proportion of your Engineered Materials consists of butadiene as the input? It looks like butadiene prices are starting to ease here.

Do you think that butadiene has peaked and do you expect that to start to become more of a tailwind going forward?.

I would say that roughly one-third of the segment is a TPE material which has as a basic building block, butadiene going into the styrenic block copolymer. So, that helps to put hopefully sort of order of magnitude into perspective. And to the extent that butadiene does come down and eases some, I think that helps us.

We have seen that in the past for that can be the case in periods of deflation where we can benefit from that and hopefully that's the case in the near-term here..

Could you describe the lag that you have between when raw materials peak and when you start to see a benefit?.

Look, for the most part, in our Color and Engineered Materials segments, it's pretty very – it's close to arm's length transactions as we can relative to pricing. Obviously, we struggled with Engineered Materials in 2017 with some of the spikes, and there was a lag because we weren't able to get the pricing that we wanted to.

So, I think that with respect to deflation, that can happen really inside of a quarter. So, I think if we had deflation, we could see a benefit for that inside of 60 to 90 days..

Thank you..

Yes..

Thank you. Our next question comes from Rosemarie Morbelli with Gabelli & Company. Your line is now open..

Thank you. Good morning, everyone..

Good morning..

Good morning..

I was wondering, Bob, when you – your comments about the capacity expansion or shortages in certain categories, could you give us a feel as to what the categories are?.

I'm going to do this by – well, I'll do it by region first, which is that where we were most capacity-constrained, really was in China. And so we had been spending some time looking at where we would invest in a new facility to not only handle that constraint, but also to support future growth.

Obviously with everything that is going on in China, we have to take that into consideration. And if things change materially, that could change our perspective on that. But, so China was number one. Number two, really relates to being able to broaden our composites, our penetration into Europe and also in China.

So first and foremost, I think it's the region of China. But secondly from a capability standpoint and technology, it's around composites..

So have you changed your mind in terms of adding capacity in Europe? I understand that you may have, vis-à-vis China, but what about Europe? Can you give us a feel as with the economic environment, given the environment is there?.

At this point, no, we haven't changed our perspective on Europe. I really haven't changed the perspective on China either. If I'm optimistic about the future and where we'll be long-term, it still makes sense to invest. So nothing new. Obviously we're aware of what's going on right now. We need to take that into consideration.

But in the near term, I don't think it changes anything for us..

And when you are talking about slowdown in China, does that encompass all of Asia, or is it specific to the country?.

Most of Asia for us is Mainland China. Of course a lot of things that we make in China find their way to the rest of the world based on where our customers ship them. So mostly, I'd say this was a China effect.

India actually really did well for us despite sort of devaluation of the rupee which we've seen but mostly this is a China set of observations..

Thanks. And if I may ask one last question.

You talked about the decline in September for building and construction demand, could it be that inventories that your customers had been pre-buying in anticipation of price increases, and therefore it would be kind of a short-lived type of period as opposed to being the industry itself being in trouble or slowing down..

That is a possible explanation for some of the inventory. I don't think all of it. Inflation has been with us now for some time. And so while we may have seen at the beginning of the year, I don't know if that has carried forward to where we are today.

With respect to what our customers were telling us, it was mostly their concerns around end market demand as being the bigger reason for concern and not taking additional product in September..

All right. Thank you..

All right. Thanks. Well, that concludes our calls and questions. We appreciate everybody taking the time to listen in on our third quarter results and l look forward to updating you on our fourth quarter and full year results in January..

Thank you. Ladies and gentlemen, that does conclude today's conference. Thank you very much for your participation. You may all disconnect. Have a wonderful day..