Avient Corp (AVNT) 2017 Q1 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the PolyOne Corporation First Quarter 2017 Conference Call. My name is Shannon, and I will be your operator for today. (Operator Instructions) And 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, Shannon. Good morning, and welcome to everyone joining us on the call today.

Before beginning, we would like to remind you that statements made during this conference call may be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements will give current expectations or forecasts of future events and are not guarantees of future performance. They're based on management's expectation and involve a number of business risks and uncertainties, any of which could cause actual results to differ materially from those expressed in or implied by the forward-looking 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 first quarter of 2017 to the first quarter of 2016, 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. I'm pleased to report record first quarter adjusted earnings per share of $0.59. I'm very proud of our performance, and there are many factors that drove it, which we'll cover on the call today. But the main reason was the prior investments that we have made to generate organic sales growth, namely increasing our commercial resources. As many of you know, over the last 2 years, we have invested heavily in adding new sales, research and development and marketing professionals, and this proved to be the difference maker in the first quarter as we delivered organic revenue growth of 5%.

In total, sales increased 6% to almost $900 million, as acquisitions added 2%, but were partially offset by weaker foreign exchange, which negatively impacted the top line by a point. Operating income expanded the new first record highs for each segment, except for DSS.

Our prior investments in commercial resources delivered near immediate returns in POD and PP&S last year. Their momentum continued in the first quarter as sales increased 6% and 11%, respectively, for these 2 segments. They continue to shine and are not showing signs of slowing down.

In Color and Engineered Materials, we have noted how sales cycles are often longer than in POD and PP&S. The time required for the marketing, formulation, testing and qualification expands as the complexity of the required science increases. We understood this when we made these investments in the prior years, and we have been patient as our commercial teams have deployed. And I'm very pleased that in the first quarter, we started to see those seeds of growth take root as both EM and Color delivered organic revenue growth.

From an EPS perspective, these outstanding sales results were partially offset by the expected loss in DSS as well as near unprecedented spikes in certain raw material costs. And as I mentioned, weaker foreign exchange negatively impacted our earnings, primarily in Color and EM. But I am not going to dwell on the negative today. We had a great quarter. And our sales growth is a clear indication that we are doing what we said we would, and that it's working. The investments in commercial resources, the increased focus on innovation, our customer-first mindset and leveraging our unique service offerings, it's all working.

In concert for our customers and our stakeholders, I'll have comments -- a few more comments in a few minutes. But I'd first like to turn the call over to Brad who will review our segment highlights as well as our balance sheet performance.

Well, thank you, Bob, and good morning, everyone. Let me start with our earnings. On a GAAP basis, earnings per share in the first quarter was $0.57, an increase from $0.46 in the first quarter of 2016. Special items in the quarter resulted in an after-tax charge of $1.9 million or $0.02 per share. Adjusting for these special items, EPS for the quarter was $0.59, a 5% year-over-year increase from $0.56 in the first quarter of 2016.

Now I typically close with comments on our balance sheet, but I'm going to begin with them this morning. A large part of our success at PolyOne has been our strategic deployment and management of capital, and we've made -- recently made several improvements to our capital structure that further enhance our position.

In February, we amended our asset-based lending agreement. In addition to upsizing availability from $400 million to $450 million, we also reduced pricing, and we'll benefit from the diversification and extension of our debt maturity profile. Additionally, we were able to take advantage of favorable market conditions to reprice our existing term loans, reducing the interest rate by 50 basis points.

Also, related to our capital structure, investors have experienced our commitment to returning capital to increase shareholder value. From 2011 to 2016, we deployed nearly $700 million to repurchase shares. And in the first quarter of 2017, we continued repurchasing 1 million additional shares for $34 million. You know our management team feels very confident in PolyOne's long-term outlook. We see value in every share repurchase, and we'll continue to pursue our opportunistic buyback strategy. In the future, we will also expect to increase our annual dividend, which we have done the last 6 years.

And as our business leverage commercial investments to achieve organic growth, I'm proud that our finance team is identifying and converting opportunities to also strengthen the company and generate shareholder value. We were able to capitalize on these opportunities because of significant cash flow generation. Our current cash position is strong. We ended the quarter with $158 million in cash and total available liquidity of over $550 million, which is available to pursue organic investment initiatives and bolt-on specialty acquisitions, just as we have and will continue to do.

Let me shift to our segment performance, starting with PolyOne Distribution. It was another fantastic quarter with volume growth of 8.5% over the prior year. A best-in-class commercial team armed with expansive portfolio and a customer-first mindset has enabled us to consistently grow this business. It was the primary driver of a 6.4% increase in sales in Q1, which translated to the bottom line, increasing year-over-year operating income by 6.3%. PolyOne Distribution also plays a key role in our strong cash flow generation. Its low capital requirements allow us to utilize the cash generated strategically, investing back into high-return innovations and service offerings.

Our Color business finished the first quarter with solid momentum, delivering both revenue and operating income growth of 3% and 1%, respectively. Recall that we had a disappointing second half last year in Color with unfavorable mix and a sales contraction. As a result of the commercial resources we have added, we are pleased to see this trend begin to reverse. I believe we would've had seen better results had it not been for inflationary challenges in raw material cost that Bob mentioned and unfavorable foreign exchange. Most significantly, the rapid rise of TiO2 pushed pigment pricings and pressured margins. All things considered, we view Color's top and bottom line expansion for the quarter as a positive and an encouraging starting point for the year.

In Engineered Materials, our team delivered an impressive first quarter revenue increase of 13% driven by 5% organic growth and contributions from acquisitions. Regionally, sales grew in both Asia and Europe, overcoming currency impacts. I'm especially proud of our EM team in Asia, which grew operating income by 20% in the quarter. Like Color, SEM had a disappointing second half last year. And as a result of our commercial investments, we're pleased to see this trend also begin to reverse.

Although SEM's operating income grew modestly at 1%, there were a few factors that partially offset the positive sales gains. First, our recently acquired Polystrand business currently operates at a loss. Thermoplastic composites is a next-generation technology. So this business is viewed as a start-up for now, and its P&L will temporarily reflect this while the science gains market acceptance and its mass potential is realized. Second, we had an unfavorable mix and foreign exchange. And third, SEM was also impacted by significant cost increases in raw materials. For example, a key raw material component in our GLS thermoplastic elastomers is a styrenic block copolymer, which is made up primarily of the raw material butadiene. Butadiene was up 200% year-over-year. Other materials, such as polyethylene and polystyrene, were up approximately 20%.

Several factors influenced this significant run-up and highlighted how quickly these feedstock markets move globally. Asia supply shortages and increased demand in the fourth quarter drove much of the butadiene inflation. Supply tightness of ethylene and propylene, combined with increased benzene prices, drove other markets. Current forecasts have many of these dynamics normalizing over the remainder of the year.

During these periods of raw material volatility, our first priority is that all of our customers receive uninterrupted and exemplary service from us. And that's what we've provided, by working closely with all of our stakeholders in the supply chain. But ultimately, we do have to capture price increases, and these are underway. As they take effect, we expect SEM's continued sales growth to translate to stronger operating income improvement.

Designed Structures and Solutions delivered a disappointing result this quarter as sales were down 6%, resulting in an operating loss of $3.3 million. However, we are pleased we improved sequentially versus the fourth quarter of last year and continue to make underlying improvements in the business. For example, DSS has gone more than 6 months without a recordable injury. This is huge as safety is the first step and precursor to the transformation of culture, process discipline, and performance. In our sheet business, business gains exceeded losses, showing that our efforts to stop attrition and increase customer intimacy to close new accounts is working. Our packaging unit is winning back business and generating positive operating income. DSS is now fully operational on SAP, our common platform that enables financial, operational and commercial processes and improvements. And in our operations, we continue to deploy Lean Six Sigma to improve safety, quality and service. Still, the business is not currently performing to our expectations or its potential, and Bob will have additional commentary later in the call on this.

I saved Q1's best for last, and I'm very pleased to share the performance of PP&S, which delivered 11% revenue growth and a 12% increase in operating income. There's a lot that went into the performance, and it starts with the leadership of Don Wiseman, who took over as President just about a year ago and built on a strong foundation that Michael Garratt previously established. They have taken advantage of recent commercial investments to improve innovation and service with our customers. It's made all the difference with 1/3 of our sales growth having come from products with little to no sales in the prior year. It has been about service, speed, and innovation: service that is collaborative and value-added for our customers; speed in our delivery, response and result in new product time to market; and innovation as the lifeblood of our company, always in pursuit of what's next and pushing preconceived limitations.

That concludes my segment review and remarks. I'll now turn the call back to Bob.

Thanks, Brad. Our first quarter results indeed validate the investments we have been making over the last 2 years have been the right ones. The more specialty our mix is, the greater our ability to perform despite tough market and macro conditions. We see this in all of our businesses, but I want to highlight PP&S, which is demonstrating how niche and complex solutions that utilize vinyl can shift toward a specialty formulations spectrum.

A great example is our recently captured business for the production of a medical bar code scanner. Health care settings now demand flawless information, and the industry is moving toward bar coding all patient touch points. These devices must deal with a rough environment, characterized by frequent handling, portable use and constant disinfection. Our recently launched resilient vinyl technology was selected for the scanner because of its durability and chemical resistance that expands the life cycle of their product.

Our vinyl solutions continue to gain traction and acceptance on a variety of other next-generation products as well. These include our recent collaboration with Halo Labs on its smoke and carbon monoxide smart home devices. And we are winning new vinyl business within the LED lighting market.

Although metal and glass were the preferred materials for LED designers in the past, we have seen increased demand for polymer solutions. They offer higher durability benefits with lower cost to manufacture. These solutions require colorants, stabilizers and other additives and also demand specifications that will pass strict UL testing approvals. And we are able to provide all of this and more to our customers through our trusted and innovative Geon brand.

In fact, our company-wide focus on service and innovation has never been stronger. Our unique service offerings build trust and collaboration with our customers and ultimately lead to sales pull-through, services such as InVisiO Color Design, where our expertise has us teaming with major OEM brands who understand the importance of color in driving consumer preference. InVisiO can work in tandem or separately with our IQ Design Labs, where our in-house industrial designers bring formulation and material know-how into the earliest stages of product development. IQ Design has been instrumental in a number of product launches in the outdoor high-performance market, and they routinely win accolades and praise from our customers who value this service, oftentimes, viewing our team as an extension of their own marketing and engineering.

And with Lean Six Sigma customer first, we have helped many customers with their process and operational challenges to improve their efficiency, quality and service. Of course, LSS remains a core component of our own internal operational effort as well with over 300 projects taking place at any given time within the company.

A number of these are within DSS. And although it was another difficult quarter for this segment, our team continues to make progress. In February, we lapped the loss of a major customer. Brad mentioned some of the infrastructure and ERP system improvements we're making, and you know about our new production lines and capital investments that are being ramped up. Despite this great work, progress in capturing lost business and winning new accounts takes considerable time. We are seeing positive trends with customers who are using small orders to gauge the success of our operational improvements. They're testing us right now, and I don't blame them. We need to earn their trust. So drastic improvement and growth are not coming overnight. This is a critical year for DSS where we look to see both an improvement in our sales funnel and progress toward our 2020 Platinum Vision. If we don't have measurable improvements or clear visibility to reaching the high potential of this business, then we have to reevaluate with necessary course corrections.

But PolyOne will always be bigger than just one of our businesses. Our diversification of materials and end markets is a unique key strength, and so is our global footprint. In Asia, for example, we're off to another great start this year with 20% sales growth in the first quarter. I recently visited our operations in China, Thailand and India to meet with the teams and learn more about their success. These trips reinforced yet again that our strategy is the right one. Our Asia team is executing very well. We're taking great care of our existing customers and winning new accounts.

Recall that in 2009, we launched our initial presence in India with a small facility in Mumbai. We have limited production capability for Color and Additives. Our dedication to service began to resonate with customers as we settled into the region and we saw increased demand for differentiated specialty solutions. And we since invested to grow, building and launching a state-of-the-art facility in Pune that expanded both production capacity, and it was also the benefit of adding liquid color and technologies. And most recently, we added to those capabilities with a line for Engineered Materials production. With our ramp-up of commercial presence and operations over the last year, the return on investments are coming to fruition as sales have grown from nearly 0 to $11 million last year. India, like all of Asia, is another great example of delivering the type of organic, top line growth that we have been promising.

And I often reference investments that we've made in our resources. But I have to tell you, it's not been as simple as just hiring additional sellers. It's about hiring the right people and giving these new associates the proper technical training, encouragement and collaborative mindset for service that we commonly refer to as One PolyOne.

It's also about utilizing our culture of innovation and best-in-class lineup of solutions and services. Michael Garratt, our Chief Commercial Officer, is spearheading an exciting new training effort to leverage this unique position we have. It relies on our breadth of offerings and service and global footprint. This comprehensive One PolyOne approach allows us to leverage our key account resources and capitalize on opportunities with certain customers that require multiple varied materials for more than one of our businesses. It creates an ease of doing business and service for them and, at the same time, increases our sales. And of course, we also invest in LSS training for our commercial team to maximize their efficiency, and this is done to better provide each customer with a high level of personalized service that they have come to expect.

Service alone, however, can't drive growth. The foundation must be a portfolio of value-added performance, materials and solutions that help our customers. And PolyOne's current portfolio and ongoing commitment to add to it is yet another factor in how we grow. Ultimately, it's about service, speed and innovation. These wins all feel great, and we're optimistic for the future. But a single quarter of top line organic growth is not our goal. Our goal is to generate revenue and margin expansion for the year and every year. There's work to do and challenges persist, but we have the right team in place at PolyOne to build from any single quarter and turn it into our next big streak.

With that, we have time for questions.

(Operator Instructions) Our first call comes from Frank Mitsch with Wells Fargo.

Bob, obviously, a relief in terms of organic top line growth here in Q1. How confident are you that this is the -- that you've turned the corner on organic growth and that this is something that we should be expecting as we progress through the year?

I'm very confident in the momentum that we have, Frank. I mean, we really saw that coming out of last year. Of course, it was primarily within POD and PP&S, but now we've seen that extending EM and Color. And I don't see any reason why that doesn't continue for the balance of the year.

Yes. Sure, Bob. I mean, we heard you say that a quarter ago, but we didn't believe you. But now that you've demonstrated the results, it's looking much better. And if I could just try and get a sense of the range of what the -- on DSS, what the necessary course corrections would -- as you reevaluate that business or force to reevaluate that business as you progress through the year. What sort of things are you contemplating in that necessary course correction?

Look, I think -- as I had probably said a number of times last year, we made it a point not to take any further cost out of this business as we had done in years prior. We've gone through significant restructuring efforts in '13 and '14 and probably, to some extent, into '15, and candidly, to some extent, that resulted in lost business. So we made it very clear that we didn't want to take any further cost actions last year, Frank, as all I really wanted to do was just to make the customer happy. And so that's what we have focused on, but there's no doubt that I think we have an underlying infrastructure that's too large for the size of business that we have today. And I'd say first and foremost, we would be looking at potentially additional restructuring efforts for some of our businesses, if we don't see things improve here in the near term.

Your second call comes from Robert Koort with Goldman Sachs.

This is Ryan Berney on for Bob. Just had a question for you. As you look out in the back half of this year and I think a lot of the consultant data for now seems to have some reductions in polymer prices built in, if that were to happen, do you think that you should be able to capture and keep some of that sustainably on the specialty side of the portfolio?

Yes. I mean, look, if that happens, I largely always characterize that as probably largely timing related. And certainly, what we experienced in the first quarter of this year went against us. So it's possible that with some declining prices in the future, that we see a benefit for that in 1 quarter or another. I think that's a reasonable way of thinking about things, Ryan. I mean, look, we're in the middle right now of discussions with really all of our stakeholders, both suppliers and customers, with respect to dealing with the most recent inflation that we just experienced. And that's first and foremost. But as you just said and as Brad did, I think, earlier, there is an expectation, I think, that, that does settle down towards the end of the year.

Great. And then -- again, just thinking on the Engineered Materials side. I know that in the past, you had a little bit of weakness there and kind of the last couple of quarters, especially in the European side of the business. Kind of -- thinking specifically there, has there been an uptick in kind of your business trends specifically there?

We did have a good quarter in Engineered Materials in Europe. One of the things that we really pointed out in the prior year was weakness in oil and gas and, specifically, how that related to some of our composite materials. I think we have lapped that. So that's good news. And EM in Europe actually had a really -- a very good quarter, up -- sales up about 7% or so on organic basis.

Your third call comes from Mike Sison with KeyBanc.

I know you give this data a little bit later when the Q comes out. But when you think about the volume and price and your organic growth for Q1, can you kind of split that out for us and how that looked by each of the segments?

Let me -- I'll just give you a headline number, if I could. First of all, total sales growth was up 6% for the year. Acquisitions -- so organic, it was 5%. Acquisitions added 2%, and then FX was a bad guy at 1%. So I think we probably covered that. Volume, however, was actually up on an organic basis by 7%. So what that tells you is that across the company, we actually still had some price deflation in the first quarter of a point or 2. And I think that -- it may sound strange to hear that, based on everything we said about experiencing inflation on the cost side, but we really didn't get the -- anything on the price side this quarter. So -- and I think going into the quarter, we still have some deflation that had to come through the system, and that's what weighed on prices. And that's actually a pretty good way of looking at how things played out for the other -- the segments, I'm excluding DSS from that observation, but from the other segments as well.

Right, great. And then global Color, do you expect that organic growth to pick up as the year unfolds? You spent a lot of resources there over the last year, and it looks like we got a little bit of a glimpse or improvement here in Q1. And so how can that accelerate as the year unfolds?

Yes, we did. I think -- as you know, the second half of last year was weak. We reported year-over-year OI down at that time and thought that it was a possibility we could see that continue into the first quarter. So I was pleased to get to where we did, and I think that's a positive sign for the balance of the year. I think we still got some work to do to post double-digit OI growth in that segment. As we stand here today, FX is still a bad guy for us for the balance of the year and so is some of what we saw in raws in the first quarter. But it's absolutely moving in the right direction, Mike, and maybe we're a quarter or so ahead of where I thought we would be.

And your fourth call comes from Ben Kallo with Robert W. Baird.

Good progress over the last quarter. I'm looking at the operating margins over the last 3 years, and I kind to want to just tell you that it looks like great progress is very clear when I'm looking at PP&S. And then there's -- it kind of jumps around, depending on how I slice and dice it. With that backdrop, can you just talk about your Platinum 2020 targets and how we should think about the operating margin progress towards those on each of the segments? And we can leave out the DSS.

Yes. When I look at Color in the first and -- if you go back to 2014 and 2015, there's no doubt that we saw really significant expansion in margins going from '14 to '15. To some extent, I think that, that was mix-related, but it was also partially due to what we saw going on with raw material dynamics at the time. As we were going into 2016, I really didn't have an expectation that we would see additional margin expansion of that magnitude. In fact, I really doubt that would be the case. I thought we might get some. But as it turned out, we didn't, and that was largely mixed driven with some of our more profitable business being down year-over-year. So as we head into 2017, then I think that the mix should start to improve. We did have some negative impacts from inflation in both EM and Color in the first quarter, which hurt us. But I don't think anything structurally has changed about our business model or what our view is on the 2020 Platinum Vision. So I still feel comfortable about getting those businesses past 20% OI by 2020. If you go back in time in those same periods of time with PP&S and the POD, POD has been pretty, I'd say, stable with respect to being around 6.3%, 6.4%, 6.5%. And I think that's world-class margin performance for a distribution business. We've never had a goal of having it get too much higher than that. I think that it can, over time, through growth, but not much really on just pure margin expansion. I think there's a lot of promise with respect to PP&S and how far those margins can go. As you know, from the time that we first set our 2020 vision, we actually increased the margin expectation for that segment. And that might be something we revisit again, largely driven by what we're seeing in mix improvement. And I highlighted one of the examples today around health care applications. So if we can continue to get more and more into health care, I see that moving towards more specialized-looking margin profile. So there's been some underlying raw material dynamics that was positive in the first quarter of last year and negative this year. But over time, I see those things evening out.

Your fifth call comes from Mike Harrison with Seaport Global.

Congratulations on a nice quarter. Wanted to start with a couple questions on DSS. You noted some of the business is coming back. What kind of visibility do you have on sales for Q2 relative to the $102 million you just posted?

Yes. As you know, we have, really, a very short lead time, and that's true for really all of our businesses. So it's always difficult to answer that visibility question. I think that with respect to your first part of your question with the gains that we've seen, like I said, they're very small. I feel like customers are testing us with sort of how I described that earlier in this morning. So I don't see that adding meaningfully to the revenue number today as we stand here. But I do think that we got a chance to getting close to that $100 million figure for the second quarter, possibly, a little bit better than that. But we'll know a little bit more here as things play out in April. So we did $102 million in the first quarter. We ought to see a little bit better second quarter, just based on seasonality, but we'll see how that plays out over the next month.

And in terms of not really seeing that sales pickup contributing to operating leverage or to an improvement in the bottom line, is it fair to say that as you're being tested by those customers, you're maybe incurring some additional cost to make sure that they're getting service in a way they need?

Well, that's for sure. I'd say we're doing a lot of additional work to ensure that we are improving quality and on-time delivery. The last thing we want is to be given a second chance and not deliver on that. So I do absolutely believe there's some additional cost going into making that happen. However, I would say, with respect to your first part of that comment, I think that as we get above $100 million in revenue, we do start to see operating income growth from that number. So I think it's -- that $100 million number is -- we lost money in the first quarter at that. So we clearly got to get up to probably $105 million, $110 million or something like that to start seeing some operating income.

All right. And in terms of your confidence on the volume momentum, are you confident enough to provide us with some guidance on your expected 2017 EPS growth versus 2016?

Yes. One thing, I guess, I would point out is that -- I think right now, that consensus out there is for EPS growth around 8% or so, which is a number that resonated with us and we may have even commented on that in the first -- the call that we had this year back in January. I still think that's a good number. I know we had a beat in the first quarter. As I just kind of look at how the quarters play out, the one thing that I'd just ask everyone to just take a look at is we do have seasonality in this business. And right now, the third quarter number that's out there seems like it's high relative to Q2. But that's really the only comment that I have, Mike, at this time. I think we'll see how the second quarter goes and maybe we're going to do a little bit better than that. But for now, we're kind of sticking with that very high single-digit growth rate.

Your sixth call comes from Laurence Alexander with Jefferies.

I guess a couple of different questions. First, on the new products in PP&S. As you -- as the efforts to upgrade the portfolio matures, is it getting more difficult -- do you need to put more resources into each new product launch? Or are you actually getting efficiencies because as you get more practice and you know how to position products for customer better? That's the first question. The second question one is just on DSS. You made a comment about the infrastructure size supporting the business. Is there sort of any peers that could be folded into that infrastructure? I guess that's the first piece. But then separately, what are the synergies that DSS gives the rest of PolyOne? I mean, what's the benefit of having it in the portfolio at this point? And then lastly, just on general pricing trends. Are you seeing pockets of end market strength where it's possible to get pricing through? Or can you characterize the degree of demand strength in terms of is it broad or is it mixed?

Yes, certainly. So there's about 4 questions in there. I'm trying to get to them the best that I can. One is -- your first question was about PP&S and I think sort of a question around the investment resources and what's needed as that mix improves. There is no doubt that we have had to add resources to that segment. That's true for all of our segments. In fact, as you know, we probably added to our sales force about 15% from where we were in 2014. But our average sales territory size is actually down. And so what that means is that the capacity per seller has actually declined, and I think that's a direct result of getting more specialized. And that's true for all our segments. So I think that's the case within PP&S. So I wouldn't say that what we have experienced so far is greater seller efficiency in the sense that one seller is now selling more. But I think that where they're spending their time is more productive, and I think that that's going to help lead to new business gains, which is what we're seeing. So hopefully, that answers the first question on PP&S. And my expectation is, is that as we continue to grow in those specialty segments, we're going to have to continue to add resources to support that. Next, I think you shifted to DSS, and there was a question about the infrastructure and the underlying business. I'm not sure I'm going to remember everything that you asked in that regard, so help me out. But look, first of all, we know we have underutilized capacity. And as I said last year, we just flat out made a decision that we're going to run with a higher cost structure than what is ideal with the intention of just making sure that we get quality fixed and on-time delivery. So I view that as an opportunity going forward. I think your second question as part of that might be would somebody else view that as a synergy, and that's possible. I mean, it very well could be the case that somebody else is in the space could look at that capacity and review that as an upside to them that might be different to us. So hopefully, I'm answering that as well as I could.

Actually, what I'm just trying to -- if I may, what I was trying to get at there is, is there any way in which having DSS in the portfolio makes core PolyOne stronger and having it out of the portfolio now would be a net disadvantage? I'm more just trying to look at it from the rest of the business. I think -- just how it fits in the ecosystem.

Yes. And it's a fair question, and I think it's part of the analysis that we need to complete this year in understanding that. We have always believed that there's tremendous power in combining our additive technology with the sheet and packaging materials. I still believe that's the case. That is a long-term synergy and something that takes a lot of time to ultimately deliver into innovative solutions. That's probably one of the most compelling reasons. Number two would be around the combination of Color with those same products, which I view as an upside. So look, on balance, I still think there's a tremendous someone synergy between us. But clearly, with the challenges that we've had with that business, we just haven't been able to capitalize on that. So really, the evaluation of the business and the longer-term portfolio thinking comes down to really just those types of questions, which is how long will it take us to bring that to fruition and how much are we willing to invest to get there. And that's what we need to ascertain this year.

(Operator Instructions) Your next call comes from Dmitry Silversteyn with Longbow Research.

Can you talk a little bit about the sort of the progress on DSS? And following on Laurence's question, maybe asking you a little bit differently. You talked about you may possibly reevaluating some of the business as we get to the end of the year. What would be the milestones? Or what will be the characteristics that you need to see in the business that you believe that you're moving in the right direction? And what would be some of the things that you would see that will signal that either additional work needs to be done or a different strategic direction needs to be [fixed]?

Yes. I mean, the first thing I want to highlight, Dmitry, and I think Brad had included this in his remarks earlier is that DSS has gone 6 months without an injury. And as you know, PolyOne prides itself on improving our safety record and being far better than the industry norm. I have to recognize the team and their efforts, specifically, for improving safety because they have come light-years from where they were when I first joined the company. Why am I sharing that with you? Because I really believe that, that safety performance is a leading indicator of us getting our house in order. And so I feel very good about how well we're doing from a manufacturing standpoint, based on how well we're taking care of our associates and their taking care of each other. So I have to tell you, that was one of the things that we really wanted to check off our list to continue to get better on this year. We're making great progress. So that's first. But secondly, we've got to see improvement in quality, and I would say that we made some progress. Last year, we went backwards a little bit in the fourth quarter, and we saw returns tick up again in Q1. So there's something that's not going as well as we'd like it to. And then finally, it's really about how much are we building the sales funnel and do we see momentum going into 2018. And I guess I shouldn't say finally. That's probably three. But four, being -- as I was commenting to Laurence, how soon do we think we can get some of these new technologies out there, because that's a very important underlying investment thesis for having DSS in our portfolio. So those are the things you can expect us to continue to comment on, and we'll be as transparent as we possibly can as we go through the course of the year.

Fair enough. And then just sort of -- my follow-up question. You made a couple of small deals recently. But sort of how do you look at the M&A pipeline and your appetite for deals of some size, given the fact that you're still working through the DSS issue, and obviously right now, we're in the midst of raw material inflation spike that keeps you guys busy out there trying to raise prices? Where does M&A play a role in this year?

Yes, that's for sure. But we remain, I think, very actively seeking out new acquisition opportunities. I think that to the extent that something comes to fruition this year, in all likelihood, there'll be smaller bolt-ons. Candidly, the things that are out there that are larger in nature that we've always had an interest in, I just flat out know aren't for sale. So I don't see anything like that coming together, and maybe that's good timing for us as we get through the DSS stuff that you just mentioned, but really, I think continue to focus on these small bolt-ons. We did 5 and by a 14-, 15-month time period there. And I don't think we'll have about the same pace in '17, but I think we'll be able to pick up a couple of smaller deals.

Okay. And are those deals likely to be in the sort of a composites or engineered materials area? Or are you looking actually at the vinyls, given how strong your business is doing there?

We had -- I mean, right now, I know there's stuff that's primarily in the pipeline is in Color and EM. But look, we have looked at thing in the vinyl space in the past. Most recently -- I think we had 1 or 2 last year that we just didn't proceed with, and I -- candidly, I think we got outbid in that case, and maybe that's a good thing. But -- so anyway, that's a possibility. I don't rule that out. Certainly, as we look at trying to take vinyl into more specialized applications, that's -- there's opportunities there.

The last question is from Jason Rodgers with Great Lakes Review.

I just wanted to make sure I understand the comment that was made about the third quarter estimate number, the consensus forecast. If you're saying $0.63 right now, I believe you're saying you think that's too high or I misunderstood the comment.

Yes. Well, I just -- I would just point out that if you look at last year, for example, Jason, we had $0.63 in Q2, and that went to $0.56 in Q3. That's a pretty normal-looking seasonal pattern. I know you if you go back further in time, sometimes you're going to see Q3 being closer to Q2. But I think what you saw last year was probably a little closer to what is normal. And I think where consensus is right now, it's got Q3 pretty close to Q2. And so I think the Q3 is probably something that's -- warrants some adjustment. That was the balance of my observations on that.

Okay. And also just looking at the DSS loss in the quarter, the $3.3 million. Would you say that will be the low point for the year? Or can you not make that statement yet?

Well, I think that in the second quarter, it should seasonally be a stronger quarter than Q1. So in the short term here, I think we could see some better numbers. We may still have a loss here in the second quarter, in fact, that's -- of a decent chance of that. So I think things start to get better as we exit the year. The wild card, I might say, is the fourth quarter, just betting on where seasonality is. But the goal here is to try to get this business back to breakeven by the end of the year. So I look at this first quarter as having real potential to be the bottom for this business. But the only thing I'm kind of holding out there is just to see how things play out towards the end of the year.

All right. And then just finally, some number questions you have with the Polystrand loss in the quarter was as well as your estimate for the tax rate and interest expense for 2016 -- or '17 sorry.

Yes. So Polystrand, I think, is down about $1 million. That's about the run rate per quarter, and Brad can comment on where interest rates are. I know they're down just a touch from where we started the year with this most recent readjustments we made.

Yes. So Jason, the kind of the tax rate question, we came in at 29.3%. I think that's a good proxy of high-20s, low-30s, so roughly kind of a 30% range here for the year is a good proxy. As it relates to the interest rates and interest cost for the company, I'm really pleased, as I put in the comments, in terms of what we've been able to do in terms of adjusting our interest rates down. But we are -- we do have variable rate debt. And so as you look at what's going on with LIBOR right now, my thinking is that interest cost will be relatively flat year-over-year.

All right. So thanks, Jason.

Thanks everyone who joined us on the call today. Appreciate your continued interest and support for PolyOne and look forward to catching up with you after the conclusion of our second quarter. Take care.

This concludes today's conference. Thanks for joining the call, and have a nice day.