Avient Corp (AVNT) 2016 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the PolyOne Corporation fourth quarter 2016 conference call. My name is Kevin, and I will be your operator for today.

(Operator Instructions)

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, Kevin. 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 statements. 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 2016 to the fourth quarter of 2015, unless otherwise stated.

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

Thanks, Eric, and good morning to everyone joining us on the call today. For the full year, I am pleased that we delivered record adjusted earnings per share of $2.13. This is an increase of 9% over the prior year, and represents our seventh straight year of adjusted EPS growth.

This is truly an impressive accomplishment, and one that we are all proud of, particularly because 2016 was a tough year in many respects. We faced a number of macroeconomic challenges, including lower selling prices in distribution and PP&S, due to hydrocarbon-based raw material deflation, unfavorable foreign exchange, and a significant drop-off in demand in certain industries. And DSS continued to struggle with winning new business as a result of prior-year integration and operational issues, which was most pronounced in the fourth quarter.

As we discussed on our last earnings call, we anticipated a small decline in adjusted fourth quarter EPS to end the year, primarily attributable to the DSS results, but also unfavorable mix and potentially some year-end destocking.

Certainly we are disappointed to see our quarterly earnings streak come to an end. But on the bright side, I think we are finally lapping the lackluster demand effects we have seen in certain industries such as oil and gas, and perhaps we'll even see some up side from this market in 2017.

Well, regardless, we're not waiting for a recovery in any market. We are leveraging the investments we have made in the last two years, investing for our future, and focusing on serving our customers with new and innovative solutions. This is a theme that you will hear more than once before this call is over.

Recall that in 2015, we increased our sales force by 10%. In 2016, we further added to our commercial resources by an additional 6%. We saw a near immediate impact from these additional associates in distribution and PP&S who delivered record operating income for the year.

PP&S increased operating income by an impressive 30% over 2015, attributable to strong mix improvement, serving our customers exceptionally well, and selling the full value of doing business with us. We also saw a modest recovery in the acquired Spartech business that was absorbed into this segment.

Distribution reported record operating income for the year of $68.2 million and I recognize that from a headline standpoint this may not appear significant over 2015. But it is when you consider that falling resin prices negatively impacted sales by nearly $80 million in distribution last year, which is something that's outside our control. As you know, this compresses margins.

What was in our control, however, was putting our new sales force additions to work, and we did, increasing volume 11% over last year. We took share, and we secured profitable gains from our inside sales force created just two years ago.

It's obvious our investment in commercial resources paid off for these two segments last year from the results that I just reviewed. We have always forecasted that it will take more time to see gains in our longer sales cycle businesses, and I am pleased to report the first signs of success in Asia.

Collectively in 2016, our engineered materials and color businesses in Asia increased sales 7%, with operating income expanding 21%. I was particularly pleased to see us expand our presence in the packaging and health care markets, with applications such as colorant for new consumer applications, and new formulations for medical devices.

Asia was a real bright spot for us this year and I mention it again as evidence that our commercial additions are beginning to deliver. As we look to 2017, these prior-year investments will be going to show a return for color and EM more broadly in our mature regions of North america and Europe.

I'll have more comments later about our results and outlook, but first I would like to turn the call over to Brad to review our segment highlights and balance-sheet metrics.

Well thank you, Bob, and good morning, everyone. I am very pleased to provide additional comments and perspective on our fourth-quarter and full-year results. On a GAAP basis, earnings per share in the fourth quarter was $0.40, an increase from $0.04 in the fourth quarter of 2015.

Special items in the quarter resulted in a net after-tax gain of $2.2 million, or $0.02 per share, and included the following: A mark-to-market pension and other post-retirement gain of $8 million, driven by higher return on assets; restructuring charges and other legal costs of $5 million; and acquisition-related costs of $1 million. Adjusting for these special items, EPS for the quarter was $0.38, down from $0.39 in the fourth quarter of 2015. For the full year, we reported record adjusted EPS of $2.13 a share, a 9% increase from 2015.

Reviewing our segments, PP&S ended the fourth quarter strong, continuing its momentum to finish out what was a record-breaking year. Our PP&S team has made significant improvements to sales mix, which led to a quarterly increase in operating income of 14% to $15.4 million, with a return on sales of 9.7%. Underlying growth was up 8% over the prior year, due to new business gains in the consumer and industrial end markets. For the full year, PP&S delivered record operating income of $74.4 million, representing a 30% growth in OI, and operating margins of 11.1%.

We have delivered some outstanding results in PP&S and POD, and our color and SEM businesses have had an outstanding 10-year run. For those of you who are familiar with PolyOne, you know we have a long history of improving mix by shedding high-volume, low-margin commodity businesses for often smaller, yet more profitable, specialty applications. This defined our transformation, and we have no intentions of going back to the commodity space.

While mix improvement has clearly been our ally, in the fourth quarter some of our most profitable niche applications were impacted by the decline in demand for specialty wire and cable, and composite materials used in the oil and gas sector. This was particularly apparent in our color and SEM segments.

In addition, we experienced lower demand for additives used for traditional food and beverage packaging. Lower sales in these end markets negatively impacted mix for color additives and inks, which reported operating income of $23 million, and margins of 12.4%. Color's operating income was also negatively impacted by a $1 million charge for a warranty claim in the fourth quarter.

Specialty engineered materials held fourth quarter operating income relatively flat year over year, at $15.8 million, with operating margins of 11.7%. Similar to color, the weakness in energy-related end markets impacted our composite sucker rods used in oil and natural gas production. Although it is a small market for us, oil and gas more than offset growth in our other segments, as well as an outstanding year for our Asia team.

Although we face challenging market dynamics in 2016 in our engineered materials business, the future of composites is very promising. Recall that within our SEM business is a new advanced composite platform that we launched last year, following the exciting acquisitions of Gordon Composites and PolyStrand.

In early January, I spent time with our advanced composites team, and was inspired to see first-hand the impressive technologies and manufacturing capabilities we have added to our Company. The team is just as thrilled to be part of PolyOne because of our deep material science capabilities and greater access to specialty growth markets. Our opportunities with advanced composite platform is tremendous, especially in our key industries like transportation and outdoor high-performance, to name a few.

At Design Structured and Solutions, we spent the year working hard to rebuild trust and credibility with customers, which we know first-hand takes a long time, after disappointing them in the earlier years of the integration. Over the course of 2016, we invested heavily in DSS to improve operations.

These investments included $5 million for our new Royal Light line, which will be operational in the first quarter; $7 million for a new PETG line, which we expect will be fully operational mid-year; and $8 million for SAP, which will be fully implemented in all facilities in the first quarter. These investments in our ongoing LSS initiative have positively impacted our operations.

Our one-time delivery to customer request increased to 91%, from a low of 48%. In addition, our injury incident rate, a leading indicator of the state of our manufacturing, has improved over the prior year. And in fact, DSS went two months without a lost time accident at the end of the year, the first time this has happened since we owned Spartech.

We are at a point in transforming DSS where a little sales lift is going to positively impact the bottom line. Rich Altice and his team continue to work hard to generate sales and gain trust back with customers.

Distribution finished the year with another outstanding quarter, with volume growth up 9% over the prior year. We have continued to gain market share through our best-in-class service and portfolio. Unfortunately, as we mentioned before, falling hydrocarbon-based raw material costs, including polyethylene and polypropylene, impacted sales and compressed margins year over year, offsetting these new business gains. This resulted in quarterly operating income of $14.7 million, and return on sales of 5.8%.

Moving to our balance sheet highlights, our cash position remained strong, and we ended the year with a cash balance of $227 million, and total available liquidity of over $600 million. Our net debt to adjusted EBITDA remains modest at 2.5 times, providing us with ample liquidity to continue to pursue organic investment initiatives and bolt-on specialty acquisitions.

We also continue to return value to our shareholders through share repurchases and dividends. This past quarter, we repurchased 1.2 million shares, bringing our total shares repurchased for the year to 3 million.

For every Company that is in pursuit of growth, there is always a crucial need for balance; the balance of driving near-term performance while at the same time investing for the future. In 2016, we struck the right balance. Investing $8 million in additional commercial resources, funding capital expenditures of $84 million, and $164 million for acquisitions, all while still returning over $120 million to shareholders via dividends and share repurchases. Bob, that concludes my remarks. I will turn it back to you.

Thanks, Brad. And it is our significant cash flow generation that has made possible our investments in innovation, commercial resources, and M&A, as Brad pointed out, while also returning cash to our shareholders. In fact, I think our cash flow generation is often under-appreciated.

As I look back on the last few years, I know that we have fallen just short of our annual goal of delivering double-digit EPS growth in 2015 and 2016. Much of this is due to a number of macroeconomic challenges already discussed, and the turn-around of DSS. But through it all, we have still generated a tremendous amount of cash, and we have used that cash to invest in our future and reward shareholders along the way.

Consider this. Since 2011, we have returned $155 million to shareholders through dividends, and repurchased $700 million in outstanding shares. And we have done this while increasing our resources in sales, marketing, and technology.

We have invested more in research and development, and last quarter is a great example. We hosted a Global Innovation Summit, where we brought together nearly 130 of our research and development experts from all regions. At the summit, we shared best practices to accelerate collaboration and innovation, while highlighting our top R&D projects.

Our teams discussed how we can leverage and grow technologies, like composite solutions for alternative energy. The popularity of wind turbines, for example, as an alternative source, is growing rapidly, providing an exciting opportunity for us and our advanced composites team. We discussed new colorant solutions, such as on-color super concentrate, which allows our customers to use less product, achieving the same end result, but potentially reducing their overall costs.

We discussed new additives for packaging solutions, such as a new exciting development from our color team, with a light blocking additive that allows for longer life for perishable food and beverage containment. These are all value-creating technologies that have been developed by our research and development teams, and they're now part of our leading portfolio.

Of course not all innovation needs to be developed internally and this year we have added important new technologies through acquisition. As you know, we've been active on the M&A front, having acquired five businesses over the last 15 months.

In December of 2015, we acquired Magenta Master Fibers, broadening our portfolio of colorant and additives for fiber applications. In January of 2016, we acquired certain assets for TPEs from Kraton. This acquisition added new technology in adhesives and protective films.

Our acquisition from July, which included Gordon Composites and PolyStrand, is progressing very well. The opportunity for these lightweighting technologies are limitless. We saw it at the recent North American International Auto Show in Detroit, where we met with automotive manufacturers and suppliers. We saw the same at the Archery Trade Association show in January, where we met with many customers, listening to their needs and collaborating for solutions.

In the outdoor performance markets the Gordon acquisition further strengthened our offerings in this particular segment. The dedicated team we created to outdoor high performance solutions just over year ago is serving this market with tremendous early success.

In fact, organic sales into this market expanded 15% in 2016 over 2015, including our Gordon acquisition, we're up 26%. We have won new business in this end market, with components and colorant for all-terrain vehicles and reinforced polymers for the shooting sports market, to name a few.

Sometimes you have to get small to grow big. And these are great examples where we have won in a niche market by increasing our commercial presence with a dedicated team.

While our acquisitions in composites might represent a newer technology for us, we also utilized M&A to invest in our long-time specialty technology portfolio like color and additives, and we started 2017 with two great additions in our portfolio, Comtech and SokoTech.

Though small, Comtech and SokoTech expand our offerings of high-performance colorant for silicones and floral polymers in end markets such as health care, transportation, and aerospace. Adding about $10 million to $12 million in revenue combined, we are confident that we can further grow both of these businesses with our invest to grow integration approach.

Brad and I have both acknowledged that 2016 was indeed a challenging year that included weaknesses in some of our key end markets, and a number of macroeconomic economic pressures. In fact, I would say we've reviewed them so many times over the last 20 minutes you're probably tired of hearing them, just as I am tired of talking about them. So, I want to close my remarks by looking ahead.

For our investors who have followed us for long time, you know that PolyOne underwent a significant transformation from our early years to shed commodity business, overhaul our culture, and become more specialized and for many years we were in a fix-it mode. And the results have been phenomenal.

But what got us here to where we are today is not necessarily what will get us to where we want to be in the future and we have been evolving into a growth mode. This is far from easy, as we have learned.

For starters, the impact of pruning a lower margin business has taken longer than expected. Second, as we transform to specialty, the overall engineered complexity of our new product offerings increased, driving longer product development cycles, and so did the service requirements for our customers.

Finally, the acquisition of Spartech added additional complexity, bringing in a fix-it business at its time when we were shifting to growth for our other segments. Disappointing results from our DSS segment has often overshadowed record-breaking performances in our other businesses.

But that is in the past. We must look forward as we endeavor to fix DSS, and get it on a path to growth, as well. With all of that going on, to make our shift to growth mode we needed additional commercial resources. And as we have said and I will do so again, in 2015 we began to do just that, adding much-needed new associates in sales, marketing, and technology and we further increased these resources in 2016.

Admittedly, we sacrificed short-term results to do this and I can appreciate that for some investors, this has been frustrating. It's not lost on us that in 2016, we benefited from a lower tax rate, reduced interest expense, and a lower share count.

As we look to the coming year, we are at an important time in our journey, where we must grow our sales and operating income. And I have never been more confident that 2017 is the year where we can, and will, do both. With that, we have time for questions.

(Operator Instructions)

Mike Sison, KeyBanc.

Hi, Bob. Happy new year.

Hi, Mike. Thanks.

Good morning, Mike.

When you think about 2017 and you look at GSM and global color, 2016 was as you noted, the first year didn't really hit your growth goals that it normally has hit. Can you maybe walk us through what type of growth you think you can get in 2017 with those two businesses, given the commercial resources? Can we get back to double digits? What could be the key drivers in getting you back on that path?

Yes, certainly 2016 was disappointing for a few reasons. One of which I just want to expand on is the underlying influence of mix, which really came through in engineered materials in the composite space. Then on the color side, with respect to some of the colors that we sell into, high-end wire and cable applications for that same end industry, both of which were significant impacts on the year and the quarter.

As I look forward to 2017, I believe that underlying growth can get back to 10%, which includes a couple of the small acquisitions that we have done along the way. But I also need to a knowledge that we've got a little bit head wind with respect to currency coming our way, if the euro continues to remain weaker against the US dollar.

Then also, as we pointed out in the past, a weaker pound for us is bad. Maybe they were closer to a high single digit growth rate, with those things in mind, but the underlying growth rate I think does get back closer to that 10% level.

That's for both?

Yes.

Okay. Then just when you think about PP&S, the margin improvements, the growth, very impressive there. Do you consider this business now in your specialty platform, and where do you think you can take it from here?

I mean look, it's been an exciting year for business. I look back to the changes that really began in 2015 under Michael Garratt's leadership, and really setting this business up, I think, for really good long-term success, and we really saw that in 2016.

Ultimately, specialty is defined by really the overall engineered complexity of the products we sell, the ability to put a service along side of that, and earn in my opinion a sustainable double-digit return. This business is on its way to I think getting that recognition.

As I look to 2017, I think we're going to have growth in operating income and margins in that segment. The one thing that I just think about here in the near term is we had a very strong first quarter in PP&S last year. I know that when we were discussing the results at the time, it was really difficult to determine if that was just a pent-up demand from fourth quarter of 2015 or a weak first quarter in 2015, so it remains to be seen how the first quarter plays out; but for the year, I've got a lot of confidence in PP&S.

Okay. Then just one final -- if Global Color and GSEM can get to high single digits, and it sounds like PP&S can continue to grow, your balance sheet's still in pretty good shape, how close can you get back to the double-digit EPS growth in 2017?

Yes, I think it will be close. On the surface of it, if I were to put an 8% type growth number out there, I would say what is very different about that in 2017 is that it's really going to be driven by the underlying performance of our business. In my own prepared remarks for today, I acknowledged that 2016 did benefit from lower interest, taxes, and shares. When I look to where the growth is going to come from in 2017, it's going to come from sales and operating income growth. I think that's a real massive shift in improvement for us that I just want to recognize.

Great, thank you.

Yes.

Robert Koort, Goldman Sachs.

Good morning. This is Ryan Berney in for Bob.

Hi, Ryan.

Hi. I just wanted to go in a little bit to maybe the underlying volume and acquisition-related assumptions in the color with the acquisitions business in 2017?

Yes. Look, I think that the acquisitions add a real modest amount of operating income in 2017, probably around -- let's say $2 million to $2.5 million. The deals that we did were pretty small. I think we'll get a little bit more benefit, too, from the Magenta deal that we did back in the end of 2015.

When I look at the underlying growth from there, and maybe just shift that to -- that was an operating income observation there, Ryan. I think we're going to have low single-digit revenue growth; but candidly, with the observations that I made about the euro and the pound, specifically, that is -- impacts our color business more than any other. That's the one thing I'd have out there is a caveat for that growth rate assumption.

Understood, that's helpful. Then I know you were pretty excited about the Gordon acquisition when you first announced it back in the third quarter. At the time it didn't seem like you were expecting a huge contribution in the near term, but I am wondering if as you've integrated into the business if your views have changed at all on the medium or longer-term growth potential for that business, and if you could maybe put some numbers around that?

Well, first of all, thanks for reminding me of that, because I had meant to mention that in response to a question that Mike just had on EM, which was that -- look, it's true, and we had talked in the past about that acquisition coming in July of last year really with around break-even to a slight loss, primarily because of the nature of thermoplastic composites and where it is in its development. That ended up being true for the year. Part of the reason why EM's margins are down when you look at the second half of the year is because of that acquisition.

Now that doesn't take anything away from it, and for the long term we absolutely love the space. I think we'll see a little bit of an up-tick in 2017; but in terms of overall operating income dollars that might be in the neighborhood of 1%, to put it in perspective. Pretty small, but I think it starts to move that margin needle in the right direction.

Thanks much.

Frank Mitsch, Wells Fargo.

Yes, hi. I was sitting here puzzling, trying to figure out why Mike Sisson, who I love, is talking about happy new year, and I'm realizing wait a minute, tomorrow is Chinese new year. I'm very pleased that I was able to figure that out.

Just following up on his question, Bob, obviously you acknowledged just falling short of the 10% EPS growth the last couple years, and suggesting this 2017 is going to be a challenge. Any thought about backing off of your Vision 2020 double-digit EPS growth metric?

Not at this time. I appreciate that's something we do need to revisit every year. Most importantly, I think that we're looking at sales growth combined with margin expansion to help us get to those profitability targets. But with respect to 2020 and looking out four years, our goal is still to deliver double-digit EPS growth, so that's not changed at this time.

Okay, that's fair. Look, obviously DSS, you mentioned the positive momentum in terms of on-time delivery and so forth, but on an EBIT basis took a material step backwards in Q4. How do we think about that business in 2017?

Yes, and let me just expand on that, if I can, because I really need to, I think with respect to the fourth-quarter results, specifically, which did come in certainly significantly below where they were in the prior year. Look, a lot of that really comes down to where the overall sales level is, related to our underlying infrastructure.

I made it really clear, hopefully through the last year, that I wasn't going after additional cost reductions in this business. I just wanted to focus on improving quality, on-time delivery, and getting that customer satisfaction rating up. As a result of that, when we were so close to break-even, a little bit of decline in sales candidly really hurts the bottom line. That's what we saw in the fourth quarter.

As we look to 2017, I still think we have a lot of work to do to win back these customers in the business. I think that's going to get us closer to break-even in 2017, looking at making that happen.

I think the first quarter will be down year over year, not to the magnitude that it was in Q4, but I think we'll start to see progress here in the middle of the year. But it really comes down, candidly Frank, to those sales numbers.

So your expectation is you're targeting break-even for 2017 in DSS?

Correct.

Thank you, sir.

Yes.

Mike Harrison, Seaport Global Securities.

Good morning. This is Jacob on for Mike.

Hello, Jacob.

Hi. Just wondering, how do you feel about trends in the specialty business in Europe heading into 2017?

Yes, I think that if I look back at 2016, I feel like we actually started to see a little bit of positive trend with respect to the underlying markets there. It's a very broad statement. For us, we were and have been particularly -- I would say are disproportionately impacted by some of our additive sales in the packaging, and a little bit of what we saw with respect to wire and cable going into the Middle East. Those things hopefully end up getting a little bit better in 2017, as I said in my prepared remarks.

Look, I still think Europe is a slow grower. For us, a lot of that growth, is really going to come from the additional resources that I mentioned.

Then on the DS&S business, how did customer retention rates look in the fourth quarter?

The customer retention rates -- I mean look, that's a great question. You go back to the beginning of -- really end of 2015, and I really felt like getting into the beginning of 2016, we'd finally gotten to a point where we weren't losing additional business.

Certainly some of the business that we lost in 2015 had to lap itself through the end of the fourth quarter this last year. I think that's really improving. I think the customer relationships with those that we have, have gotten better. Really, it's a matter of winning the trust and confidence of those that have left, and that's where an opportunity is now plus new applications.

All right, thank you.

Yes, absolutely.

Jason Freuchtel, SunTrust Robinson Humphries.

Hi, good morning.

Good morning, Jason.

Following up on DSS, have you been able to recapture any of the business that transitioned away from PolyOne yet? With that, how long does it typically take from when a customer begins exploring moving business to a different compound, or to when volumes actually show up?

Well, there's a couple of questions there. The first is -- or let me take the second first, if I could. Look, with respect to DSS, the acquisition of Spartech, and the frustrations that customers felt through the integration process, we learned that it actually takes in some cases a fairly long time for customers to go out and qualify an alternate supplier and move business away.

As a result of that, I think we can assume that bringing business back can also take a long time, not because they couldn't just shift it back to us, but because of the time and effort they spent finding somebody else. Look, you know how it is, it takes a long time to earn and build trust, and you can lose it quickly, which we did.

I'd still say that's going to take -- it's going to take time. We are winning back little pieces of business. The way that works is customers will give us another shot, but oftentimes it might be on a smaller application, or one piece of business, but nothing close to the order of magnitude of what we used to have with them. I'm encouraged by the -- I would say the little opportunities that we're getting with those customers, and I think ultimately if we do well and perform on those, we're going to get another shot at the remainder of the business.

Okay, great. I think we've heard about some other compounders adding salespeople recently, an attempt to drive top-line growth similar to PolyOne's strategy. Do you anticipate that could increase competition for sales and potentially delay the timing of when you see the benefit of your commercialization efforts?

No, I don't think anything that's going out there with anybody else in the industry is -- I mean, look, it's a competitive universe, so that's the nature of what we do. That's what our sellers and marketing technology resources are prepared for.

I genuinely see momentum from those resources coming in 2017. It doesn't mean that I'm not concerned or thinking about what the competition is doing, but I don't see it impacting the momentum that I previously described.

Great, thank you.

Kevin Hocevar, Northcoast Research.

Hey, good morning, guys.

Good morning.

Wondering if you could comment on the first quarter was kind of funky, because I think -- trying to determine if it's a tough comp or not, because I think earnings were up 22% in the first quarter last year, but that came on a very easy comp. How do you view that?

You had mentioned de-stocking -- or at least it was a concern in the fourth quarter. Did that de-stocking occur, and is there any chance of re-stocking here in the first quarter? I know polypropylene has moved up. Curious with all that in mind how you think of the first quarter here? Can earnings grow, or is it the really tough comp that's going to be tough to top?

Look, there's no doubt that we had a very strong first quarter last year. I think you've accurately portrayed the questions around that first-quarter performance against 2015, and then also looking forward to this year. It's a little early to call, I guess, the way I would say that right now, Kevin.

At this point, I would say it's a stretch to get past that number, because of how strong, I think just some of the anomalous maybe re-stocking effects were in the first quarter of last year. But I might feel differently about that at the end of February. I really just think we need a little bit more time to see.

Sure, and then in terms of corporate expense, how should we think of that? It's been down I think here the last two years, and I think incentive comp was running lower. How should we think of corporate expense in 2017?

Yes, you're right. If you go back in time and look at where we were in 2013 and 2014, certainly running at a higher level than where we were in 2015, 2016. Incentives is the largest explanation for that. As you know, we haven't hit our double-digit goal, so that's a big factor. In addition, I just think we've also done a really good job of managing our overhead expenses. That has been largely driven by our desire to move that money towards funding our commercial additions.

As I look forward to 2017, we want to deliver on our results, and to the extent that we do, you could see higher costs related to incentives. But it's a self-funding prophecy, right? We've got to deliver on the top and bottom line in order to make that happen.

Okay, great. Last question, on DS&S, I think back to Frank's question you mentioned that maybe flattish earnings this year is the way to think of it, but what's the multi-year outlook here? What type of progression do we need to see over the next couple years to see that? The investments that you're making are working as you expect, and what do we need to see to see that you're on track to hit the Platinum vision? I think it was 8% to 10% margins, I think is your target there. What do we need to see out of that business over the long term, to see the investments you're making are working?

One thing -- I guess I'd make a couple of comments in that regard. First of all, look, I would say that the industry itself is a healthy industry that supports a margin profile than where DSS is, by far. What we've set as a goal for 2020, I think, takes that into consideration. As we've probably said all along, it's not a broken industry, but we've got a lot of work to do with our specific business in it.

One of the things that we'll be paying close attention here to really is how well are we doing at improving our sales funnel, right? How well are we doing at growing the best few opportunities and ultimately bringing those to close is a key metric of our success.

With respect to the underlying investments that we've made, it really comes down to, Kevin, doing a double-digit return on invested capital. That's how I think about our objectives there. Obviously with my comment to Frank about where I think OI lands in 2017, that's not going to happen this year, but I think it will between now and 2020.

Okay, great. Thank you.

Tyler Frank, Baird.

Hi, guys. Thanks for taking the question. When do you think that we'll start seeing the real up side from the recent hiring in sales? Just looking at the prepared remarks and the press release, which indicate 2018; but given the fact that you've been hiring through 2015 and then 2016 as well, I sort of thought we would see more benefit sooner. With the longer lead time or sales processes segments, when do you expect to see that start to flow through?

Yes, look we had -- as you know, we really covered the distribution and PP&S impacts in 2016 quite a bit. The one thing I tried to expand on with respect to my earlier remarks was we are already seeing that in Asia. When I looked across all the businesses that we have and all the regions we're in, I look at the fastest close cycle business being distribution, and then moving towards our PP&S and then specialty in Asia, which is a little faster than North America and Europe.

I say that I guess as a recap that it's really about when are we going to see those benefits in those two regions, and I think that's going to be in 2017. If the release moved you to thinking that was an 2018 impact, we'll take another look at that. But it was really around -- I see it in 2017.

Okay. When do you expect, I guess, the turn-around for DSS -- if it's going to be break-even in 2017? Moving beyond that into 2018, should we expect growth there? How long will this process continue on?

Look, we have to see growth. It's not about what we expect. That's what has to happen in DSS. Getting to break-even is one step in that process. We have to see growth, or determine what other course corrections are necessary to improve the business. It's not lost on us where we are. That's right, that's spot on. That has to happen in 2018.

Okay, thanks, guys.

Yes.

Laurence Alexander, Jefferies.

Yes, Hello, this is Nick Cecero on for Laurence. I was wondering if you could elaborate on some of the end market trends you're seeing, especially in transportation, packaging, construction, as we move through 2017.

Yes, absolutely. Look, I look at maybe three or four of our largest markets, health care, packaging, transportation, consumer for example. For us, the transportation industry is the largest space that we play in. If I were to exclude the impact of some lost business that we had in DSS, I would say we were really right in line with probably what you would recognize as US, Western Europe production in 2017, because candidly, we don't have a whole lot in Asia with respect to that.

Looking forward to 2017, there were some question marks around what is going on with passenger cars, and if we've got too much inventory, is a correction necessary there, and I think it probably is. But I don't see that there's anything for us that's any different than probably what you expect for the market overall. Again, I categorize my comments around transportation around North American auto, because that really is the largest driver there.

Around consumer, consumer is actually one that's got some really good momentum for us. I talked about the outdoor performance industry. A lot of the work that we're doing in other areas of consumer goods, including some of the inks that go into sportswear, et cetera, and I see that as being a positive going into 2017, meaning potentially better than 2016.

Then lastly, I would probably just comment on health care, if I can. This continues to be a focus market for us. With some of the business that we picked up as part of the acquisitions this last year, I think that helps us in 2017. The global medical device market continues to grow at about 6%, and that's a place where I think we really need to be, and we'll see some benefit from in 2017.

Thank you very much.

Yes.

Dmitry Silversteyn, Longbow Research.

Good morning, guys. This is Matt Skowronski on for Dmitry. My first question is how should we be thinking about the cadence of the share buy-backs throughout 2017? Then secondly, in Asia, I believe you guys mentioned you were up 6% to 7% excluding FX last year -- or last quarter, year over year. Did you see an acceleration of this growth in the fourth quarter? Thirdly, within Asia, what is your visibility into January?

First of all, with respect to your question about shares, we've always stated that look, our goal is to offset dilution from equity awards. I would assume that's still going to the case this year, and we'll remain opportunistic with respect to buying them back.

At this time of the year, we've really never given a whole lot of guidance on that, that being because we don't have a regimented buy-back program where we buy X amount of shares every quarter, every year.

With respect to Asia, I think really Asia had a very good year all year. Fourth quarter actually might have been just a touch better than the balance of the year, but nothing that I'd call out specifically. I think that rate of about 7% or 7.5% was all in including FX, if I remember right.

Perfect. That's all the questions I have, thank you.

All right.

David Stratton, Great Lakes Review.

Good morning. Thanks for taking the questions. Most of them have been answered already, so I apologize if I double up on anything. Looking at 2017, where are your CapEx plans setting out? Then also, you mentioned you're going to have the head wind of a low tax rate in 2016. What are you targeting for 2017's tax rate?

Yes, David, I think as you look at the capital that we put into the business in 2016, it was about $84 million. We have a lot of opportunities for reinvestment back in the business, and we're targeting between $90 million and $95 million in 2017. Your comment on the tax rate, I'm very pleased with the work that we've been doing from a tax standpoint. Our full-year rate came in right around 30%. That obviously had a positive impact on the income, but that's also been a big driver of our cash generation. As we look at 2017, I expect that we'll be in line with the rate that we had in 2016.

All right. Then you mentioned wind turbines. I'm just wondering if you could give some color around how you see that playing out as part of a growth strategy, with maybe hesitance in the national commentary on differences in energy viabilities?

Obviously the discussion around what happens relative to administrative or policy changes is obviously beyond the scope of what I can cover here in the next 30 seconds. Look, for us, I think that the wind blades are a really exciting and interesting opportunity for composites.

I think this acquisition that we did in July provides us with a new and different way of actually getting composite material out into the field to facilitate construction there for turbine blades that candidly are getting bigger and bigger and bigger, with logistical issues of moving them. Look, for 2017, I don't think that's anything that's going to move the needle for us in a big way, but something that I think over time it could.

All right. Thank you very much.

Yes. All right, well thanks. I know that brings to conclusion the callers and the questions that we had on the phone today. I just want to say thanks for everybody joining us. We look forward to updating you on our first-quarter performance when we release our results towards the end of April. Thank you.

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect, and have a wonderful day. We thank you for your continued interest in PolyOne.