Avient Corp (AVNT) 2015 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the PolyOne Corporation fourth-quarter 2015 conference call. My name is Candice, and I will be your conference operator for today.

(Operator Instructions)

As a reminder, this conference call 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, Candice. 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 & 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 fourth quarter of 2015 to the fourth quarter of 2014 unless otherwise stated.

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

Thanks Eric, and good morning to everyone joining us on the call today.

For the fourth quarter, we delivered record adjusted earnings per share of $0.39 an 8% increase over the prior year. This marks our 25th consecutive quarter of year-over-year EPS growth, and brings us to $1.96 for the full year, an increase of 9% above last year. While we just missed our goal of delivering double-digit EPS growth for the year, I'm pleased with our results, considering the negative macro-economic headwinds we faced, as well as challenges with the ongoing integration of Spartech. On a constant-currency basis, EPS expanded 14% over the prior year.

Perhaps most importantly, I want to highlight for our investors the prevailing power of specialization, as evidenced by the outstanding performances from our color and engineered material segments. In 2015, color established new records for profits and profitability, as operating income reached $135 million and operating margins hit 16.7%. This is particularly impressive when you consider that half of this segment's sales were impacted by unfavorable foreign exchange, notably a weaker euro. On a constant-currency basis, color's operating income increased 17% over the prior year. Specialty engineered materials grew operating income10% versus the prior year to nearly $80 million, with margins of 14.7%, a 260 basis-point increase over last year. Like color, EM was also impacted by unfavorable foreign exchange, yet was able to overcome it and deliver record results, with strong growth in North America, specifically in health care, wire and cable, and composite applications.

These two segments have been the driving force behind PolyOne's specialty transformation, delivering year in and year out. They've embodied our four-pillar strategy in every way, coming along almost unimaginable distance from where they started. If you recall, in 2006 these two segments were operating at margins below 2%. That's when we started down the path of transitioning from volume to value. Today these two businesses represent over 60% of our operating income. As I said, they have achieved record operating margins of 16.7% and 14.7%, respectively. But this has not been a cost-cutting story. In fact, since 2006, SG&A has more than doubled, as we have invested heavily in additional sales, marketing, and technology resources over this same time horizon.

With results like these, you can see why we are continuing to invest in these businesses and related technologies. It's in that spirit that I'm excited to kick off the year by announcing our acquisition of Kraton's TPE business. This is a win for our customers as we make this investment for their product design, development, and performance goals. It's also a win for Kraton and PolyOne. Kraton will supply us with styrenic block copolymer, the basic building block of TPEs. From PolyOne's standpoint, we will accelerate growth in this business by doing what we do best -- creating unique formulations for our customers' advantage. This acquisition will be immediately accretive to PolyOne's earnings.

Recall that TPEs are often found in consumer applications such as razor and toothbrush handle grips, but they're also used in many other specialty applications, such as medical devices and tubing and high-performance packaging. TPEs offer unique capabilities, such as vibration dampening, sound abatement, and improving aesthetic feel. Since our highly successful acquisition of GLS in 2008, we have continually invested in, globalized, and grown in TPE innovation and its wide-ranging, value-added uses. Not only does this latest purchase allow us to grow globally with new customers in core applications, it also expands our reach into applications such as protective films used in transportation, appliances, and electronics.

This deal follows closely on the heels of our exciting December acquisition of Magenta Master Fibers. Magenta broadens our solutions portfolio of color and additives technologies for fiber applications, and will directly accelerate global growth with local manufacturing and commercial presence in Europe and Asia. Magenta's solutions span a wide range of uses, including fiber colorants used in apparel, outdoor equipment, high-performance products, and materials in the transportation industry. Consistent with the mega-trend of improving health and wellness, additional growth opportunities include applications within hygiene health care and medical. Similar to our past, color acquisitions of ColorMatrix and Excella will utilize our invest-to-grow approach to help our customers innovate and succeed. We already have plans for investing in additional commercial resources to support our growth projections for both Magenta and our new TPE product lines and technologies. We welcome both of these new businesses to PolyOne; and as I said, it's a great way to kick off the new year, and drive growth for the future.

As I reflect on delivering 25 consecutive quarters of EPS growth, clearly our color and engineered materials businesses have been at the heart of this success, but our distribution and PPS businesses have also achieved solid improvements in operating income and profit. These two businesses also embrace our four-pillar strategy, instilling the same principles of commercial and operational excellence employed by our specialty businesses to drive improvement. No longer are they just focused solely on volume. They too have improved their mix, with increasing focus on less cyclical markets such as health care, consumer, and electronics.

When you look at the remarkable success we have had with turning around color, EM, PP&S, and POD from their early days, you can see why we had confidence to embark on another specialty transformation with the acquisition of Spartech. While we have made progress in changing the culture and mindset of the organization, we still have a long way to go. Most notably, we have focused on improving mix and the underlying profitability of the sheet and packaging businesses now included in DSS. Unfortunately, the loss of certain large customers has overshadowed smaller yet very relevant specialty gains, and we need to continue to take further actions to right-size our footprint accordingly. This was evidenced by our fourth-quarter results. Candidly, this only reinforces our strategy of focusing on specialty niche applications, where big is often not better. It's singles and doubles. In specialty arenas those add up. It also reminds us that progress with a transformation such as Spartech, or PolyOne in its early days, is not necessarily linear, and we may have to take a step back to move forward.

As with the transformation of our legacy businesses, these smaller wins have a longer sales cycle similar to our EM business, and takes time to ramp up. When they do, we will see a substantial improvement in mix and profitability, just as we delivered when we began to transform color and EM several years ago.

Regarding the cost improvement actions I mentioned, we are closing our Wichita, Kansas, facility in an effort to right-size our manufacturing footprint, and we are further reducing general and administrative expenses throughout the Company. This does not mean we are reducing our efforts to improve and invest in commercial and operational excellence. In fact, we are investing in and expanding these areas. Some companies might choose to make drastic across-the-board cuts to more easily get to a near-term number. That's not our approach at PolyOne. We will not make short-term decisions at the expense of our long-term goals of investing in technology, innovation, commercial excellence, and value-added services to our customers.

For example, at DSS, we are moving forward with targeted capital investments in our Royal Light, PETG, and Polycast product lines, and expect certain of these investments to be operational by the end of the fourth quarter. We have over 100 active lean Six Sigma projects at DSS, and expect to train over 50% of our associates. These projects are working. I am encouraged to see sequential improvement in key operational metrics at DSS. For example, on-time delivery in December was just over 86%, up from a low of 45% one year ago. While this is still not at our stated goal of 95%-plus, we made significant progress in 2015, and I am confident DSS will soon provide world-class on-time delivery on par with PolyOne's other businesses. We are continuing to build our commercial bench strength at DSS, and expect to increase commercial resources by 10% to 15%.

Lastly, we are just starting to get traction, with collaborative cross-business-unit innovation projects, focused on leveraging color and additives, as well as composite materials, to create new sheet and packaging formulations for aerospace, defense, health care, and consumer applications. While the recent results for DSS have been disappointing, and we have a lot of work ahead of us, we see tremendous upside potential in the intermediate and long term for DSS, as I do for all of our businesses.

In a few moments, I'll make some additional comments about recent innovations, and how they, along with our investments in commercial resources, will drive growth for the future. But for now, I would like to hand the call over to Brad, who will discuss our fourth-quarter results in more detail.

Thank you very much, Bob, and good morning, everyone. I'm very pleased to provide additional comments and perspective on our results for the quarter and the year.

As Bob said, we delivered record fourth-quarter adjusted EPS of $0.39 per share. I'm extremely proud of our team's ability to navigate the uncertain macro-economic environment and shortfall at DSS to deliver year-over-year growth. For the year, we reported adjusted EPS of $1.96 per share, an increase of 9% from 2014. The weaker euro alone reduced earnings per share by $0.08 when compared to last year. In other words, if we reported our earnings on a constant-currency basis, adjusted EPS would have grown by 14% for the year.

Since Bob already covered the DSS results, I will focus my comments on other segment performances and other items impacting Q4. Turning to color, color additives and inks posted strong results, with fourth-quarter operating income expanding to $28 million. In addition, return on sales increased 80 basis points to 14.9%, despite a weaker euro, which negatively impacted year-over-year OI by over $800,000 for the segment. Our North American color and additives business grew operating income by over 17%, driven by new business wins in transportation and health care applications.

Specialty engineered materials fourth-quarter return on sales grew to 13.1%, an increase of 80 basis points over the prior year. Operating income declined slightly, due to the timing of order patterns for certain consumer projects in 2014, and weaker than expected results in Europe in December of 2015. Our North American engineered material business finished very strong, capping a banner year for the region, with full-year revenue growth of 15.6%, and operating income growth of 72%, demonstrating the tremendous leverage we have in our business -- a fantastic team effort all around.

Performance products and solutions resumed its momentum in the fourth quarter, and increased operating income over the prior year. OI expanded 15% to $14 million. In addition, operating margins grew by 260 basis points to 8.9%, as PP&S continues to successfully optimize portfolio mix and improve operating efficiencies. We also hope this is a positive sign for continued strength in North America.

You have heard us highlight our innovations in the health care and electronics industries, and our new-found possibilities for vinyl have led directly to higher-margin business that has helped to partially offset the negative impacts of de-stocking and pricing driven by lower hydrocarbon-based raw material cost. Our distribution segment also had a solid quarter. Q4 was our third consecutive quarter of year-over-year volume increases, enabling us to overcome the substantial customer de-stocking that occurred in Q1. Margins expanded 70 basis points to 6.4%. Despite the negative effect of raw material pricing on sales, POD was able to increase operating income 4% over the prior year to $16 million. Our investments in new sellers and training are paying off.

On a GAAP basis, EPS in the quarter was $0.04, versus a $0.16 loss in the prior-year quarter. Special items in the quarter resulted in a net after-tax charge of $30 million, or $0.35 per share, and included the following: debt extinguishment cost of $16 million associated with the refinancing of our 2020 notes; restructuring charges of $16 million, primarily related to actions taken in DSS; and a marked-to-mark pension adjustment of $12 million, driven by lower financial market returns on our invested pension assets.

Free cash flow for the quarter was $68 million, and we ended December with a cash balance of $280 million. Our working capital has also remained world class, as we improve to 9.7% of sales on a trailing 12-month basis, from 9.9% last year. From a balance-sheet perspective, in November we completed a very successful refinancing. We issued $550 million in Term B notes, with a stated interest rate of 3.75%. This is substantially lower than the 7 3/8% interest rate we had on our 2020 senior notes which were retired. Additional proceeds from the note offering were used to repay all amounts outstanding under our revolving credit facilities, and our 7.5% debentures due in December of 2015. With total liquidity now over $620 million, our balance sheet is strongly positioned to allow us to navigate these uncertain macro-economic conditions, and fund future growth initiatives.

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

Thanks, Brad.

As I reflect on 2015, it was a year of overcoming many short-term challenges, but a closer look reveals it was also a year during which we made the right choices for the long term. It was a year in which we delivered 9% EPS growth when many companies were challenged to grow at all. In 2015, we continued to invest in commercial resources, technology, and new facilities and equipment, despite the short-term macro challenges we faced. A few examples include: we proudly opened our new state-of-the-art Asia Innovation Center in Shanghai for improved collaboration and speed to market for our customers. We invested in commercial research and development and marketing resources, and previously stated that we increased our sales team by 9% over the prior year. We invested $90 million in targeted capital investments to expand our specialty offerings within engineered materials, and to improve operational efficiencies at DSS. We invested in our leadership team, including adding two new proven executives: John Midea to head operations globally, and Rich Altice to lead DSS. As you saw, in early January we welcomed Joe Rathbun back to lead M&A. In that regard, we recently completed two bolt-on acquisitions that will accelerate our specialty growth.

Last, but certainly not least, we continue to invest in innovation, which is at the core of what makes us a specialty Company. In 2015 our vitality index reached 43%. Recall that this measures the current year revenue impact from products introduced in the last five years. It is a very important reflection of how well we are bringing new specialty solutions to market. You have often heard us mention that singles and doubles are the foundation of growth, and they do make up a big part of our vitality index.

Sometimes we also bet big, and in November we announced a revolutionary new fiber coloration technology. This new technology combines color matrix liquid color concentrates and our proprietary equipment to enable late-stage color injection for fibers. Typical fiber dyeing today can use up to six gallons of water to color a single pound of fiber. Our new melt-inject ColorMatrix technology uses no water, less energy, and fewer chemicals. We believe this revolutionary technology, coupled with our acquisition of Magenta, is a game-changer for PolyOne. Together, these investments position us in a high-growth market that we have not historically participated in. We are confident that our entry into the fiber colorant market has the potential to be much greater than a typical single or double.

At PolyOne, we remain focused on providing our customers with differentiating service and unique value-added offerings as we concentrate on penetrating our key end markets. We were excited to launch our new dedicated PolyOne outdoor high-performance solutions team, focused on certain segments of the consumer market. This group of associates will collaborate across all of our businesses to deliver solutions in outdoor recreational activities as well as certain applications for law enforcement and the military. This is right in our sweet spot, where we can leverage our formulation and technology expertise to create lighter-weight, more durable metal replacement solutions.

In recent years, we have quietly achieved early success in growth in this market. A great example of this success includes the recent announcement by Guns & Ammo magazine to award our customer Polycase with its prestigious Ammo of the Year award for its polymer ammunition utilizing our propriety Gravi-Tech material. We have won the trust and respect of many senior leaders in the industry, who are now looking to us to collaborate with them to bring new and innovative products to market. During a recent meeting I had with a customer in the industry, he said to me, I know you guys are great at plastics, but that's not what defines you. What defines you is service, and that's what I love about PolyOne. Having you as a trusted supplier has been a game-changer for us.

Service is our timeless differentiator. We continue to formalize additional service offerings that extend well beyond specialty polymer formulations, and are value-added for our customers. To receive this comment from our customer is the highest compliment we could receive.

During Brad's remarks he shared with you our recent refinancing, which allowed us to substantially lower our stated interest rates, extend debt maturities, and increase liquidity to over $600 million. Let me add that overall we are very modestly levered at two times EBITDA. In short, we have a very strong balance sheet.

As investors you should know we are well positioned for the future, including whatever short-term challenges lie ahead. We will continue to focus on what we can control, and transforming the legacy Spartech businesses is a priority. From an earnings prospective, I expect double-digit growth from our legacy PolyOne businesses to more than offset weaker earnings from DSS, as we take actions to improve mix and the underlying assets needed to support this segment. Longer term, I believe our earnings power returns to strong double-digit growth as we execute our four-pillar strategy.

Key drivers of this include the 9% increase in sellers I previously mentioned that we added this year. They have hit the ground running and are already delivering ongoing benefits from operational excellence and lean Six Sigma, as we continue to invest in and train our associates in these important principles; improving DSS, and achieving an uplift from its earnings profile in the latter half of 2016. Lastly and most importantly, innovation will deliver the most significant and sustainable growth in earnings, with numerous singles and doubles, and a few big bets coming to fruition.

If this sounds familiar to you, it should. As investors, you know our commitment to specialization is unwavering. This is not a time to change for change's sake. Our established specialty businesses will continue to thrive, but we are investing in the right areas to drive long-term growth in all of our segments, with innovation underpinning revenue and margin expansion in each. We have the right strategy and team in place to guide us toward and reach our platinum vision for 2020.

With that, we have time for questions.

(Operator Instructions)

Frank Mitsch, Wells Fargo.

Bob, I just wanted to share the excitement I had when the issue of Guns & Ammo magazine hit my doorstep and I saw you guys won Ammo of the Year award. That was certainly something that warmed the cockles of my heart. I wanted to see what else has happened within PolyOne? If I think about where the earnings come in, this is a bigger miss relative to consensus than we've seen before. I know that Brad mentioned Europe was weak in global specialty engineered materials in December. Was there anything else that happened within the fourth quarter that turned out a little bit more negative than you had originally anticipated?

On balance, the results for designed structures and solutions fell short of our expectations, Frank. That obviously has been a theme throughout the first three quarters of the year, but got worse in the fourth quarter. One of the observations I made in my previous remarks was that we have observed some losses with larger customers, and had one in the second half of the year, or actually in the fourth quarter. These larger customers have had the ability to in-source production.

As we talked about earlier in the year, we knew about one or two of those. One of them took place before we bought Spartech, one was ongoing. We knew some of these could take place. We've been working diligently to try to effectively present our value proposition to these customers, and we were unsuccessful with this most recent customer. I would point to those DSS results as being the single-largest disappointment and/or difference vis-a-vis our expectations; and would say that's the largest reconciling item, probably, to the street expectations, as well.

All right, that's very helpful. You mentioned in your closing remarks that you're anticipating double-digit growth out of the legacy PolyOne businesses to more than offset lower earnings at DSS. Were you implying that 2016 for DSS is likely to be below the $13.8 million in 2015 EBIT for DSS?

Yes, with this recent in-sourcing discussion we just had, that's certainly going to be the case for 2016. I do think that we have growth opportunity in the latter half of 2016, but in the first half we'll see a year-over-years earnings decline. My sense is even with an up-tick in the second half, we'll still have lower earnings overall for DSS.

I appreciate the candor. Thank you.

Mike Sison, Keybanc.

Hi, guys. Good morning.

Hi, Mike.

Can you walk us through some of the drivers of generating double-digit growth from global color, engineered materials, and I'm assuming PP&S and distributions should play a part into the growth of 2016?

Yes, my comments about our expectations here -- one is that we expect double-digit EPS growth from all of our segments. That's our goal. On a consolidated basis, the same is true. When I look at the components of that here in the near term, I obviously just outlined that we have to overcome lower earnings in DSS. I expect color and engineer materials to continue on the trajectory they have been for the last six years, and I can talk about some specific drivers for that.

For PP&S and distribution, we still have some pricing influences to overcome with respect to where hydrocarbons are. If you look at the start of the year, they are lower than where they were in 2015. We've got some level of that to overcome, but believe we will. We're seeing positive trends already from a volume standpoint in both of those two businesses going into 2016, so see that as a positive.

Look, with respect to what's going to drive growth in color and EM, it's going to be a continuation of our focus on winning new business in specialty applications. Often times those are singles and doubles, Mike, as you know. There's isn't one large win I would point to. But as I look beyond 2016, we are particularly excited about the new fiber colorant technology we just introduced, which has the potential to be a real game-changer for PolyOne.

Okay, great. A quick follow-up. The double-digit EPS growth from the $1.96 pins you somewhere in that $2.15 range. Is that the way to thing about it?

Then I'm just a little bit confused on the DSS commentary. I think the last quarter, the expectation was maybe hitting in the low 20s, and you lost one big contract that sounds like a $5 million, $6 million, $7 million, $8 million in terms of the hit. Is that the way to think about that one hit? I'm sorry, I'm piling the questions on, but what do you think needs to happen to get profitability where it needs to be for DSS longer term?

The most -- the transformation here for DSS really needs to follow the same transformation we experienced with EM and color in our legacy businesses in its very early days. If you recall, back then PolyOne struggled with its identity in terms of who we wanted to be and what we were going to do in the market place. We quickly learned and transformed away from large volume-oriented commodity applications, and moved forwards specialty applications which are often lower volume.

In the short term, that has been an earnings hit for DSS. Certain of these have been larger customers who have in-sourced their production, meaning they're just manufacturing this for themselves. That is a big disappointment for us. In categorizing the composite impact of that going into next year is lower earnings, primarily in the first half of the year. I guess that's the best way I would categorize that.

There remain opportunities to reduce costs in DSS. When we first bought Spartech, we announced a certain number of plant closures, said that we would continue to evaluate our base, and we do that with the underlying business that we have. With this larger loss, we expect to close the facility I mentioned today, as well as take some broader cost actions across general and administrative expenses. That's the best way I can really characterize for you, Mike, what we're seeing in DSS, and what our focus needs to be on these specialty smaller applications and in improving the profitability of them.

Okay, great. Thank you.

Bob Koort, Goldman Sachs.

Good morning. This is Ryan Berney on for Bob. I had a quick question on the acquisition from Kraton. Was the EBITDA number you quoted, assuming it was a TTM number, was there a negative LIFO impact included in there that might make that multiple excluding that a little bit cheaper?

No LIFO impact. There is a certain level of working capital that we acquire that you could look at as a good guide. It was included in the purchase price. As I said earlier, we do believe it's EPS accretive. That's probably around $0.02 to $0.03 a share here in 2016.

Okay, great. Then in the medium run, do you think that -- do you feel like deal multiples are now falling to a level that you're comfortable with now, with both Magenta and this acquisition being closed in the last couple months?

Well, it's -- obviously there were a number of high-multiple deals done last year by other companies. When I look at what we paid for Magenta at around $7.5 million, and Kraton, the TPE business at $9 million, I think that's more reasonable than what other companies paid in a previous year.

For us, when we focus on these smaller specialty niche companies, we're focused on those that can deliver growth. If you look over time, what our track record of success with GLS, ColorMatrix, Glasforms, NEU, for example -- these have all been great acquisitions. At the multiples we paid for them, they've all declined dramatically over time.

It's hard for me to draw a conclusion across the broader market, Ryan, in such a short period of time. That may be taking place with the recent down-turn in the market. I think what we paid was a fair price for both businesses.

Great, thanks. One more if I could real quick. If you could comment on the volume growth you saw in the EM and color businesses in the fourth quarter?

Yes, we had -- we're going to have more specifics, I know, in the K when that comes outs. Volume was down a little bit in color, and most of that was actually related to some of the legacy Spartech business. We were up a little bit in EM, and then POD was up I think about 4% or so in the fourth quarter. Typically, when you look at that business, that's an important metric, just because of the influence of raw material prices on the top line for sales.

Great, thank you.

Certainly.

Kevin Hocevar, from Northcoast Research.

Hi, good morning, guys. I think you've talked in the past about sales -- total top-line sales potentially turning positive some time in the first half of 2016 with all the added sales force and everything. Just wondering your take on that now, given the developments in Spartech, and if you think that can still turn positive some time in the first half of the year, or if you think that's pushed back a bit?

I think we've still got a chance to get there exiting the second quarter, inclusive of this acquisition we just completed. When I look at where DSS results landed in Q4 and the challenges we just talked about, Kevin, those certainly have to be overcome to accomplish that. I see that being more of a second-half story than first half.

Okay. Then when I look at PP&S segment, you grew gross margins pretty strong, up 400 basis points in the fourth quarter, making that by far the best performance in terms of the margin profile of that business for the year. Seasonably this tends to be the lowest margin. Wondering if you could go into a little more detail on what allowed that to happen? Was there any one-time benefits, any price raws or anything like that, and how you expected that margin profile to carry forward into 2016?

There's no one-timer to point out. Inside of that segment we really have two different businesses, our historic vinyl business, the Geon brand; and our contract manufacturing, as well as what we acquired from Spartech. It's a mixed story there with the Geon vinyl business doing very well, and the contract manufacturing being down. On a net basis, just continuing to improve our mix. Geon is probably the best and single-largest influence I can point to 2015 over 2014.

Okay, great. Thank you.

Jason Freuchtel, SunTrust.

Hi, good morning.

Hi, Jason.

Touching on the acquisition a little bit more, can we assume the margin profile of the business is similar to the margin profile of your specialty engineered materials business? Is the supply agreement for hydrogenated SBCs or unhydrogenated SBCs? Have you previously had a relationship with Kraton, or did you source SBCs from other producers?

First of all, the EBIT margin is a little lower than where EM is right now. Interestingly, it's actually very close to where I'd say GLS was when we first acquired them. With response to your question about our relationship with Kraton, they have been a supplier for ours for many years, and a supplier to GLS well before PolyOne acquired GLS. We've had an ongoing relationship with them in terms of some of their product lines and some of their supply. For the most part, what they would be supplying into us are HSBCs.

Okay, great. So far in the first quarter, are you seeing any softness in any particular geographies for any of the seconds?

Yes, it's always hard to draw a conclusion from either December or January. I really like to see how the quarter evolves to do so. December was not as strong as we were expecting it to be. I would say January is probably right on par with where we thought from an expectations standpoint. There's certainly a lot of uncertainty in the market place. Customers routinely cite that in terms of ordering in smaller quantities and lower volumes and shorter periods of time and less lead time. There's definitely a lot of uncertainty out there. There isn't one conclusion I would draw on a specific end market that I can share with you from my experience so far in January, however.

Okay, thank you.

Ben Kallo, Robert Baird.

Hi, good morning, guys. This is Tyler Frank on for Ben. Quick question, I wanted to touch on the cost-reduction programs that you have in place. When we think about the acquisition, and then also the closing of the Wichita facility, how should we think about SG&A costs in 2016 compared to 2015?

Yes, the cost reductions -- first of all, with respect to the plant closure we discussed, that obviously will take some time to affect, and we'll start to see the benefits of that in the second half of the year. Everything held equal, as I look forward into 2016, do expect SG&A to be up, but not in the area of general and administrative costs. I see that coming down.

However, as we have said a number of times on the call, we have increased our sales force by 9%, and see that trailing into the next year to give us an overall up-tick in SG&A for 2016. You will see some of that in the first quarter, more of that coming in the second half of the year, with respect to the DSS savings.

Great. Then can you discuss the on-time deliveries you guys saw in January? Obviously December was a very strong number, but did you carry that forward into January? Do you expect to carry that forward throughout the remainder of Q1?

Yes, we did. It continued to show improvement. I think that was a DSS-specific question, but it's true for PolyOne as well, that we continue to have improving performance for DSS, and at or near 95 for the balance of PolyOne's businesses in January.

Great, thank you.

Laurence Alexander of Jefferies, your line is now open.

Good morning. Can you clarify two things? First, can you walk through any non-operating items that affect the cash bridge to free cash flow in 2016? Secondly, your comment around offsetting the weakness in DSS, is that true for Q1 -- i.e., should earnings be positive in Q1, or is that just more true for the full year?

I will take your second question, Laurence, and then Brad can comment on the cash flow expectations for next year. My comment on DSS is we are going to immediately see lower earnings here in the first part of the year. That was an observation I am making about Q1 and Q2, with an opportunity to start to show some improvement in the second half of the year.

Just to be clear, is that lower earnings for the entire Company, or lower earnings in DSS.

I was talking about -- sorry, DSS.

Yes, and Lawrence, in regard to your question on non-operating items that might impact the free cash flow in 2016, right now as we sit here, the announced restructuring actions that we took in the fourth quarter, there will be an additional $10 million worth of restructuring charges in the first half of 2016, and then we will have our ongoing environmental costs. I expect the overall special charges, if you will, to be about $15 million, which about half of that is cash. Those are -- that's the only really significant -- what I call non-operating factor impacting our free cash in 2016.

Any working capital relief from lower input costs?

No, I would expect the working capital this year, in support of the second half, as we begin to move the top line of the Company, I expect the working capital to be a slight negative.

Okay, thank you.

Dmitry Silversteyn, Longbow Research.

Good morning, guys. This is [Matt Skironsky] on for Dmitry. In your PP&S segment, you guys did a good job of expanding -- going off of Kevin's question -- margin during the quarter on a year-over-year basis. Was there any hit from the Canadian dollar slide during the quarter? I know you guys are pretty heavily exposed to it.

We have -- it's not a material number by any stretch. Yes, we do have I think 5% to 6% of our sales in Canada, a preponderance of which is in POD and PP&S, but nothing that I would point to as any level of significance.

Okay. All right, thanks. You mentioned the slow-down in specialty engineering materials within Europe in the December quarter. Can you talk about the end markets, and whether that was a macro thing, or do you think it was just customer specific?

I think it's too early to determine whether or not it's a macro thing. Like I said, I try not to draw too many conclusions for what happens here in December and/or January. In February I think we start to get a clearer picture on what to conclude for the year.

At this point, I don't know it was macro, as much it was probably a hesitation to advance orders in December versus the beginning part of this year. As I look at where things are in January in Europe, I see that trending a little bit better than what we saw in December. Hopefully that plays out to be a little bit of momentum there going into 2016.

That's all the questions I have. Thank you.

Thank you.

Mike Harrison, Seaport Global.

Hi, good morning. Bob, I was wondering if you could give just a little more detail on exactly what you're getting from Kraton. Are you purchasing plants there, or it more technology and customers? That is going to go into the engineered materials segments, correct?

Yes, it's going to go into engineered materials, more specifically the GLS business. We are acquiring certain technologies. We are acquiring certain assets, but no plants. The ultimate goal and objective is to ultimately transition manufacturing into one of our existing PolyOne facilities. That's the easiest way to think about that, Mike.

Do you have any sense of what that is going to look like, what the transaction multiple would look like on a post-synergies basis?

I think certainly once we have those products up and running on our lines that there is some synergy benefit. When you consider what that is on a multiple basis, that probably takes a couple of turns off of it. It's candidly a small part of the deal. I really look more at the commercial aspects and growing the business. We will invest in additional resources to help support that, which is offsetting some of that benefit. I wouldn't draw a significant conclusion or benefit from the consolidation itself.

All right, and then for Brad, I was just looking for some guidance on below-the-line pieces. The tax rate, interest expense, and share count, if you can maybe talk about what the repurchase plans might be for 2016?

Yes. I think in terms of the tax rate question, we'll probably average about 32%, which is in line with how we closed out 2015. In terms of the interest costs with our refinancing that we've done, I would expect that our interest costs year over year would be down $5 million to $6 million. That's a substantial savings from the outstanding work we did on the refinancing. Certainly, the share count, as we have always been, we will look for opportunities in the market to repurchase our stock; but I'm not ready to announce what that is. Again, we ended the year with about 86 million shares outstanding.

All right, great. Thanks very much.

Sure, thanks, Mike. We have time for one more question.

Thank you. Our final question comes from the line of David Stratton of Great Lakes Review. Your line is now open.

Hi, David.

Can you tell us about those large customers in DSS? Are there any others that have the ability to switch over to in-sourcing? If so, is that forecast into your 2016 earnings?

The short answer to that is that I don't see any additional customers making that same decisions. In terms of the types of products and services we are offering, again they're more smaller niche applications that are getting closer and closer to what we do well with color and EM.

I don't see that as a risk in the future, to answer your question. Look, with respect to what I view as the future or forecast for DSS, I've been pretty clear on what I think the earnings impact is going to look like in 2016. That really incorporates everything I know today.

All right, thank you. Can you give us any guidance on what your CapEx for 2016 looks like?

Yes, I think this year we spent about $90 million. That's a good -- between $85 million and $90 million is a good proxy for 2016.

All right, thank you very much.

Thank you. I just want to say thanks for all of our investors and analysts who joined us on the call today, and your continued interest in PolyOne. We look forward to speaking with you again at the conclusion of our first-quarter results. Thank you.

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