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Edited Transcript of POL earnings conference call or presentation 17-Apr-19 12:00pm GMT

Q1 2019 PolyOne Corp Earnings Call

AVON LAKE Apr 19, 2019 (Thomson StreetEvents) -- Edited Transcript of PolyOne Corp earnings conference call or presentation Wednesday, April 17, 2019 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Bradley C. Richardson

PolyOne Corporation - Executive VP & CFO

* Giuseppe Di Salvo

PolyOne Corporation - VP of IR

* Robert M. Patterson

PolyOne Corporation - Chairman, President & CEO

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Conference Call Participants

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* Benjamin Joseph Kallo

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

* Dmitry Silversteyn

The Buckingham Research Group Incorporated - Director

* Frank Joseph Mitsch

Fermium Research - Senior MD

* Jason Andrew Rodgers

Great Lakes Review - VP

* Kristen E. Owen

Oppenheimer & Co. Inc., Research Division - Associate

* Laurence Alexander

Jefferies LLC, Research Division - VP & Equity Research Analyst

* Michael Joseph Harrison

Seaport Global Securities LLC, Research Division - MD & Senior Chemicals Analyst

* Michael Joseph Sison

KeyBanc Capital Markets Inc., Research Division - MD & Equity Research Analyst

* Peter Osterland

SunTrust Robinson Humphrey, Inc., Research Division - Associate

* Robert Andrew Koort

Goldman Sachs Group Inc., Research Division - MD

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen, and welcome to the PolyOne Corporation First Quarter 2019 Conference Call. My name is Brian, and I will be your 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 Joe Di Salvo, Vice President, Treasurer, Investor Relations. Please proceed.

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Giuseppe Di Salvo, PolyOne Corporation - VP of IR [2]

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Thank you, Brian. 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 expectations or forecasts of future events and are not guarantees of future performance. They are based on management's expectations and involve a number of business risks and uncertainties, any of which could cause actual results to differ materially from those expressed in or implied by the forward-looking statement. Some of these risks and uncertainties can be found in the company's filings with the Securities and Exchange Commission as well as in today's press release. During the discussion today, the company will use both GAAP and non-GAAP financial measures. Please refer to the earnings release posted on the PolyOne website, where the company describes the non-GAAP measures and provides a reconciliation from the most comparable GAAP financial measures. Operating results referenced during today's call will be comparing the first quarter of 2019 to the first quarter of 2018 unless otherwise stated.

Joining me today in our 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.

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Robert M. Patterson, PolyOne Corporation - Chairman, President & CEO [3]

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Thanks, Joe, and good morning, everyone. Today, we reported adjusted earnings per share of $0.64 for the first quarter, which compares to $0.68 for the first quarter of last year. This is only the second time in nearly 10 years since we've had a year-over-year decline in quarterly EPS. Like many companies in our space, our results for the first quarter were negatively impacted by weaker demand in certain end markets and regions and unfavorable foreign exchange. Most notably, a decline in automotive-related demand in China and Europe were the primary drivers in overall sales decline of 6% and 8%, respectively, in those regions, which impacted our Color and Engineered Materials segments.

In addition, construction and appliance-related sales in North America fell significantly, primarily impacting our Performance Products and Solutions segment. Weather likely played a role as customers believed the construction cycle was delayed due to colder-than-normal temperatures in the U.S. However, underlying our results in the challenging macro conditions are several encouraging proof points that the investments we have been making better position us to navigate these challenges, but more importantly, position us for long-term growth with expanding margins.

Since 2014, as you know, we have made investments to diversify our product portfolio with innovative and sustainable solutions, but we have also expanded our commercial resources by over 30%. These investments were primarily made as enablers to our growth strategy, and in challenging times like we experienced in the first quarter, these same investments also aided in offsetting the weaker demand. A clear case in point is our composites platform. We began our investment in this space back in 2012 with an acquisition of Glasforms. Since then, we have completed additional acquisitions and invested in commercial resources to drive growth and expand their reach into new markets.

For the quarter, organic sales on composites increased 10%. When combined with our recent acquisition of Fiber-Line, the composite business has added $3.5 million of operating income to Engineered Materials, more than offsetting the weakness previously cited in Europe and Asia. Composites win with new business in replacing metal, glass and wood or reinforcing existing structures. Certainly, it's a high-performing, more sustainable technology that is serving the emerging and unmet needs of our customers, especially in the outdoor high-performance industry where in 2018, we had our best year ever. This year also is promising as sales were up 24% in the first quarter, also our best ever.

Our recent success in this space is enabled by our composite technology and strong collaborative relationships with our customers. This past quarter alone, we closed multiple new business wins in wide-ranging high-performance applications, such as off-road vehicle seats and body components in archery and shooting sports accessories. The opportunities within these demanding applications are limitless. And this is all good, but what I really like are the translation opportunities. For example, our team successfully identified an application to improve performance of high-end ergonomic office chairs and did so using a similar composite technology to that which is used in the archery market. The same performance characteristics of strength, stiffness and fatigue resistance are needed for both.

Electrical is yet another end market where we have leveraged our composite investments and expertise, with recent win with insulator rods, essential composite components used for power transmission and distribution infrastructure around the world. And now with the addition of Fiber-Line, we have leapt into the fiberoptic space and are well positioned to benefit from the build-out of current infrastructure and soon-to-come 5G expansion. We've also increased our investments in other sustainable solutions. While I believe plastics are inherently sustainable, I'm specifically referring to the SEC definition. And if you read our annual report, you will see that we sold $480 million of these solutions last year alone.

A key application and growth area for us is in next-generation packaging for perishable food and beverages, such as yogurt, milk and juices. Our product portfolio of additives serve as oxygen scavengers and UV stabilizers, which allow customers to use thinner-gauge materials, which are also more easily recyclable. In addition, our solutions help to keep the food and beverages fresher, longer. Increasing shelf life not only adds value to our customers but provides a sustainable benefit to consumers and the environment by reducing food waste and spoilage. Sales for these products, albeit smaller, are growing fast, most notably in Asia, which was up 34% over the prior year in the first quarter and that primarily benefited our Color, Additives and Inks segment.

And lastly, as I reflect on the positives for the quarter, Color and distribution had good growth in health care and distribution operating income increased 7% on improved pricing and mix. This increase in operating income was driven by the margin expansion from both of these industries as well as the outdoor high-performance end market I previously mentioned. I'll have some additional comments and make some observations about our outlook for the balance of the year, but first I'll turn the call over to Brad for some further details on our first quarter results.

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Bradley C. Richardson, PolyOne Corporation - Executive VP & CFO [4]

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Well, thank you, Bob, and good morning, everyone. Now let me start first with our GAAP earnings. We reported $0.49 per share in the quarter. Special items in the quarter resulted in a net after-tax charge of $11.5 million and were primarily related to costs associated with recent acquisitions and environmental matters as well as recent targeted workforce reductions, which I'll cover in a few minutes. Adjusted earnings per share for the quarter was $0.64, a 6% decline in EPS. Excluding foreign exchange impact, our EPS was down 3%.

In terms of our segments, Engineered Materials delivered a solid performance, considering the challenging economic conditions. Soft demand in Europe and Asia transportation end markets were offset by strength in our composite business, as Bob previously discussed. Consumer and wire and cable end markets also expanded, resulting in organic top line growth in total of 1% for the SEM segment. Sales in consumer applications within SEM grew 8% in the first quarter driven by new business gains. One excellent example, not mentioned by Bob, is with a large multinational athletic apparel company. The application is an engineered material-based layer for shoes with demanding performance characteristics. PolyOne's ability to provide global support, technical development trials here in the U.S. and our ability to manufacture locally in China served as a differentiator to capture this $5 million new business win.

Wire and cable was another bright spot for Engineered Materials this quarter, as our team continues to capture new business in this end market. Overall, wire and cable business was up 33% year-over-year and the majority of that growth is from new business closes here in North America. Likewise, new wins enabled by our sustainable solutions for packaging applications are benefiting our Color segment. Last month, for example, we closed a light barrier solution with a leading multinational beverage company. They had experienced the success of our Lactra SX solution in the Asian market and PolyOne worked with them every step of the way to qualify the solution for their specific requirements in the Middle East region. Lactra SX light blocking additives for PET bottling provides a high-performance light blocking technology that enables a recyclable alternative to long-life dairy packaging and extends the shelf life to over 6 months. This fits perfectly with our commitment to developing sustainable solutions that positively impact global megatrends, customer needs and environmental issues like reducing the opportunity for plastic waste.

On a macro level, the Colors segment also battled the sluggish environment in Asia and Europe transportation, and on a constant-currency basis, both revenue and operating income were relatively flat. Performance Products and Solutions experienced the most significant end-market pressures of any segment this quarter. Building and construction, industrial and appliance, the segment's 3 largest end markets, were all down impacting revenue and operating income by 11% and 34%, respectively. The decline in this segment was greater than we anticipated at the start of the year due to the lack of seasonal pickup we typically experience in the first quarter. To put this in historical perspective, over the last 4 years, PP&S has averaged a 15% sales improvement sequentially from February to March. In 2019, however, that increase was only 3%. Our customers have cited that they did not see the typical demand increases that usually come in March as weather conditions delayed the construction cycle. In distribution, our team delivered a solid first quarter with 7% operating income expansion, driven by improved pricing and mix. Our team in distribution continues to leverage its leading line card and technically trained sales team to differentiate us in the market.

As we noted in our news release this morning, while we are encouraged and optimistic about a recovery in the second half of the year, we are not waiting for market improvement to unfold. In this past quarter, we made some targeted workforce reductions to adjust and improve the cost side of our business. These actions not only reduced general and administrative costs, but equally as important, have delayered some of our organizational structures. This improves efficiency and streamlines operational effectiveness, which is even more important during a slowing business cycle. In addition, we've identified opportunities to either eliminate or defer discretionary spend without impacting customer service or our key projects in motion. Our intervention actions have been measured and are prudent. It's another way we're adjusting for today while still protecting our goals and interests for tomorrow.

With that, I'll turn it over to Bob.

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Robert M. Patterson, PolyOne Corporation - Chairman, President & CEO [5]

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Well, thanks, Brad. We're certainly disappointed to report a decline in EPS for the quarter, but much of that was driven by macroeconomic factors that were outside of our control, as we discussed. And as I look back on the first quarter, it was certainly better than it could have been because of our prior investments and strategic focus on specialty and sustainable solutions. We're not going to sacrifice our long-term growth potential because of what we believe are these near-term challenges. We will continue to invest in innovation, acquisitions and in our people to ensure we deliver long term for our stakeholders. Leading indicator is our innovation pipeline as it reflects our research and development investment and activity and serves as a road map for our future growth. We've talked a lot about sustainable solutions today, and you'll hear more about that in the future. We've added more than $250 million of market potential associated with these solutions, some of which may sound familiar, such as the lack of barrier solution, Brad mentioned, and specifically for the dairy market in Asia. If you haven't been to China or haven't been there recently, you may not know that yogurt drinks are one of the most popular classes growing there, and our additives are an enabler making those possible. Our commercial team is generating new business with this growing part of our solutions portfolio. These initiatives, along with our focus on sustainability are leading to some other big wins.

Just this quarter, our Color team in Asia began production of color UV resistant materials for a floating solar panel application in Vietnam. This is really cool. The combination of color and UV, which we call our Smartbatch solution, very difficult to formulate, especially when serving the rapidly expanding and demanding field of renewable energy. Our team worked very hard on this and put us in a great position to secure the estimated $5 million opportunity in the coming months. And while we continue to invest significantly in these organic portfolio enhancements, as you know, we also recognize that sometimes transformational technologies are better achieved through acquisition and that's what led us to buy Fiber-Line earlier this quarter, and I'm pleased to report that the integration is going extremely well. Only 3 months after announcing the deal, we have completed our robust safety orientations at every facility, communicating our high, strict safety standards and setting the expectations. We've had no injuries to date, have retained all key associates and witnessed a high level of enthusiasm and engagement from our new team members. As we noted during diligence, this was a perfect cultural fit. We've also received great feedback from Fiber-Line's customers, confirming what we expected that our portfolios have a strong strategic alignment and will benefit from both customer bases.

I was in China a couple of weeks ago, and while I was there, I was able to first -- observe firsthand what the expansion of networks and initial rollout of 5G looks like. Historically, cell towers are large structures separated by miles, but now 5G towers look like lampposts or telephone poles that can be found on nearly every block, and PolyOne materials can be found on them in the materials that house the related equipment. And now that we have Fiber-Line, we will benefit from expansion of network infrastructure in the U.S. and Europe, and we're looking to better position ourselves in China. This is a perfect example of our strategy at work where we have invested organically to meet the needs of the future market, and we've also acquired a new company with technology that complements our own. And our world-class commercial team is now expanding our reach and growth opportunities in applications that we couldn't have pursued otherwise.

And also, while I was in China, I was very excited to reach an agreement to secure land in a new industrial park where we will build a new production facility to serve the region. Asia, as you know, has been a high-growth region for us over the last several years. So in the next couple of years, as demand increases for composites and sustainable solutions, we will need a facility to continue to drive growth in that region, particularly as we capture the westward expansion of manufacturers. Our commitment and investment in this area is another telling example of our confidence in the long term in China and in PolyOne.

Yes, the current market conditions are challenging, but we believe they're also temporary. In short, we're optimistic of a stronger second half of the year. And while we are reducing discretionary costs in the near term, we aren't curtailing our ability to deliver future performance. Our current expectation is that Europe and China will continue to put downward pressure on our sales and earnings in the second quarter as they did in the first. We believe we will see some sequential benefit from construction in the U.S., but in total, EPS will likely be around $0.68 or $0.03 below prior year in the second quarter. And that being said, we believe the current economic demand fluctuations will begin to improve and we will return to growth in the second half of the year. And when that happens, I believe it will be easier to see the positive contributions from composites and sustainable solutions and the overall impact of our investments and commercial resources. We are very well positioned to benefit from light-weighting trends as well as improved and increased use of our other sustainable materials. In addition, we are very excited about our recent acquisition of Fiber-Line and the ability to serve the quickly expanding fiber-optic infrastructure and future 5G network.

That concludes our prepared remarks. We will now open the discussion for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question will come from the line of Mike Sison with KeyBanc.

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Michael Joseph Sison, KeyBanc Capital Markets Inc., Research Division - MD & Equity Research Analyst [2]

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Just focusing a little bit on PP&S or Performance Products and Solutions. Sales down quite a bit in the first quarter. Where do you see that business in 2Q based on your guidance? And what do you think profitability should be? It has made really good progress and has kind of stepped back a little bit. Maybe give us a little bit of a longer-term view on that segment as well.

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Robert M. Patterson, PolyOne Corporation - Chairman, President & CEO [3]

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Yes, I think that's going to be the primary driver, Mike, of the EPS decline we're projecting for the second quarter, almost entirely driven by construction and appliance. Just to put things in perspective, Brad had made a comment or 2 about sequentially how that typically plays out through the course of the quarter, but March sales in the construction space were down 20% versus last year. So while I do expect orders will pick up some in April, I don't think we're going to get back to where we were last year. So my expectation right now, and again, driving that $0.03 down is probably $6 million or so of operating income below prior year for this segment as a whole. So that hopefully answers your question about what we see for PP&S here in the short term. Longer term, nothing has changed about this business. And it has still got one of the best brand names out there, very well respected, very well regarded and one of the best performing in its space. And the reality is, right now, it's just suffering from lower construction starts in the U.S.

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Michael Joseph Sison, KeyBanc Capital Markets Inc., Research Division - MD & Equity Research Analyst [4]

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Right. Okay. And then for the second half of the year, you noted there could be some recovery. Any thoughts of what you need to see to see some earnings growth in the second half? And then, given the tough start for the first half of the year, is it strong enough to have flat to up earnings for '19 in total?

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Robert M. Patterson, PolyOne Corporation - Chairman, President & CEO [5]

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First of all, let me just maybe start with some remarks about China. And when I was there a couple of weeks ago, obviously everyone was disappointed about the results in the first quarter and what we saw there, but customers and in general, I'd say the sentiment seems to be pretty positive with respect to potential stimulus actions that will be put in place by China and to see those begin to take effect in the second half of the year, and I think those could be very real. To what extent that filters into and helps export markets, I think, remains to be seen, but I really think there is some good traction there that could see some benefit in China in the second half. So I think that's a big driver for us, Mike. With respect to what that means for EPS for the year, I do believe we'll see EPS growth in the second half of the year and that could offset what we have gone backwards in the first half to deliver growth for the full year as a whole. I believe that's very real.

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Operator [6]

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Your second question comes from Frank Mitsch with Fermium Research.

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Frank Joseph Mitsch, Fermium Research - Senior MD [7]

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Obviously, a lot of discussion on the difficulties in PP&S. You did mention that weather was an impact in Q1 and you gave good guidance on Q2 and you gave good guidance in terms of what March was. What are we seeing so far in April in that business and frankly, for the company overall?

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Robert M. Patterson, PolyOne Corporation - Chairman, President & CEO [8]

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Yes, so the order rate right now for April just as it specifically relates to construction is up a bit and I'd say that not meaningfully over what we saw for the first quarter as a whole. So look, I have seen this in the past where at times whether delays can result in a very robust following quarter and that may possibly still be the case in the second quarter, but April order rates haven't suggested that, which is why we've given the guidance, Frank, that we did for the first quarter. So that's the best information we have right now. As you guys know, we've got orders that probably give us visibility for 3 to 4 weeks and try to make the best statements about the future we can with what we have.

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Frank Joseph Mitsch, Fermium Research - Senior MD [9]

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Understood. And obviously, you've taken some steps, your intervention actions. Can you provide some granularity in terms of order of magnitude of savings, et cetera?

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Robert M. Patterson, PolyOne Corporation - Chairman, President & CEO [10]

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Yes, I mean, look, we -- mostly, this is just about improving efficiency. And when you get into a -- we get into a year like this, I think it's just as you reflect on the layers in the organization and where you can take -- make moves to improve efficiency, as Brad described that. So it's about 50 to 60 people. I'd say, you probably saw half of those savings in the first quarter, with a little bit more to come in the second and third quarter. So by the third quarter, we should be at that full run rate, which is $1 million or $2 million of positive benefit.

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Frank Joseph Mitsch, Fermium Research - Senior MD [11]

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And this was primarily in the PP&S business?

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Robert M. Patterson, PolyOne Corporation - Chairman, President & CEO [12]

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Yes, I mean, it really was across all of our businesses as well as our corporate functions and perhaps the corporate functions being impacted the most.

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Operator [13]

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Your next question will come from the line of Mike Harrison with Seaport Global Securities.

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Michael Joseph Harrison, Seaport Global Securities LLC, Research Division - MD & Senior Chemicals Analyst [14]

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Bob, I was wondering if you could talk a little bit more about the composites business and in particular, the contribution from Fiber-Line. If I heard you correctly, you said that overall though the composites plus Fiber-Line contributed about $3.5 million of operating income. Just wondering if you can maybe help us understand what the trajectory of that operating income number looks like as we go through the rest of the year based on what you're seeing at this point.

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Robert M. Patterson, PolyOne Corporation - Chairman, President & CEO [15]

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Yes, I mean, I prefer not to give specific profitability numbers by product line. So that's why we referenced composites in total for the quarter and would like to keep the comments to that level, if I may. With respect to how that plays out for the balance of the year, I think it's going to continue. And what we have seen is a growth in operating income in Specialty Engineered Materials, which, as you know, has been something we have been focused on intently for the last couple of years where we've had some disappointing performance there. It's very exciting to see composites lead the way and the investments we've made pay off and you're going to continue to see that through the year in its entirety. The wins that we've had are exactly the kind of wins that you want with respect to specification and longer term, and so I don't see any reason why that wouldn't be the case for the balance of the year and beyond, Mike.

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Michael Joseph Harrison, Seaport Global Securities LLC, Research Division - MD & Senior Chemicals Analyst [16]

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All right. Great. And then I was also wondering if you could talk a little bit about what you're seeing in Europe. Obviously, you came into the quarter a little bit weaker than what you were hoping, but are things still slowing there? Are you seeing any signs that there is some recovery in Europe? And maybe give some color on specific countries or markets in Europe that you're seeing pockets of weakness or strength.

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Robert M. Patterson, PolyOne Corporation - Chairman, President & CEO [17]

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Actually, I think when I was commenting on Mike Sison's question, I just made an observation or 2 about China and seeing that as a positive in the second half of the year. I really should have commented on Europe at the same time because we are not seeing improvement in Europe from an order rate perspective and not aware of something that's going to make that better. So even though we believe we're going to see growth and improvement in earnings in the second half of the year, I don't believe that's going to come from Europe, look outside of potentially just lapping what was a really weak fourth quarter last year, but right now, conditions are not good. I think as you know, a lot of that is driven by automotive, which we're participating in and at present, I don't see that getting better in 2019.

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Operator [18]

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Your next question will come from the line of Ben Kallo with Baird.

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Benjamin Joseph Kallo, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [19]

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So first, and maybe this is for you, Brad. On the FX, you guys called that out. Can you quantify that for me because it was kind of a surprise to me?

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Bradley C. Richardson, PolyOne Corporation - Executive VP & CFO [20]

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Yes, Ben, it's about -- at the OI line, it was about $2.5 million OI hit, which equates to little over $0.02 a share on an after-tax basis. And I think that's relatively consistent with what we had kind of signaled when we started to talk about 2019. It's going to be another headwind as we look at the second quarter, probably of almost similar magnitude. And then as we get to the second half of the year, things normalize if the euro and dollar stays at the rates that it is today.

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Benjamin Joseph Kallo, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [21]

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And just on that front, could you just remind us on how we should think about the FX exposure? Because I know you're talking of growth in China and slowdown in Europe, and so what should we be watching for just as far as the headwinds?

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Bradley C. Richardson, PolyOne Corporation - Executive VP & CFO [22]

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Yes, I mean, I think it's really the RMB and the euro exchange rates. And again, like I said, if you get to the second half of the year, the exchange rates on both of those currencies are essentially flat at today's rates. So again, it's going to be a headwind here in Q1 and Q2 and then dissipates after that.

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Benjamin Joseph Kallo, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [23]

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Great. And then, as far as capital allocation, you talk about tightening the belt in what you've done in the Q1 and in some of the Q2. How do we think about -- I think you purchased 1 million shares in the first quarter or somewhere around there. How do we think about that and then potential tuck-ins in this environment?

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Robert M. Patterson, PolyOne Corporation - Chairman, President & CEO [24]

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We didn't acquire any shares in the first quarter and that was largely just due to the funding of Fiber-Line. Typically, we try to pace the share repurchases based on what is going on with respect to CapEx, overall level of borrowing and M&A activity. So we didn't have any share buybacks in Q1 and not making any projections for the balance of the year. We bought back a little over 2 million shares in the fourth quarter, which is obviously helping the year, but nothing in Q1, Ben.

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Benjamin Joseph Kallo, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [25]

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As far as the tuck-in acquisitions though and your capital allocation there?

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Robert M. Patterson, PolyOne Corporation - Chairman, President & CEO [26]

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Yes, I think that the view is unchanged, but with respect to looking at bolt-on acquisitions in technologies, another we're looking at in the composites space, albeit small, I still think we have plenty of capacity to do those as we go forward. You were right, as we looked at some of the belt-tightening, we did that around CapEx as well and I'd say, we're going to make the investments that we need to this year and some of the things that are nice-to-haves, but not must-haves can be deferred.

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Operator [27]

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And our next question will come from the line of Colin Rusch with Oppenheimer.

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Kristen E. Owen, Oppenheimer & Co. Inc., Research Division - Associate [28]

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This is Kristen on for Colin. Just as a follow up on the workforce reductions, as you go through some of these efforts and if the softness is more transitory, as you start to grow again, what do you anticipate incremental margins can look like?

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Bradley C. Richardson, PolyOne Corporation - Executive VP & CFO [29]

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I mean, look, we -- the first question started off around the headcount reductions, but we sort of already gave the order of magnitude on those and how that should play out through the course of the year. So I think you can factor that in from a margin standpoint. Look, the biggest upside opportunity that we have in margins is improving upon the recently acquired businesses that we had, which, as you know, usually come in around 8% to 10% of sales in Color and EM. And we believe we've got the opportunity to double those in 5 to 7 years. Making very good progress now in the composite side. And obviously, as you know, composites was a business that we were investing so heavily in that it even had an operating loss as recently as the first and second quarter of last year. So I think you're going to see really good improvement in margins, but you got to obviously see an uplift in the sales and the general market conditions for that to be the case.

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Kristen E. Owen, Oppenheimer & Co. Inc., Research Division - Associate [30]

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Okay. And I appreciate all the color that you gave on Europe. Specifically, I wanted to ask about your auto customers there. Are you getting any indications that, that weakness is due to some of the testing procedures that they have going on in that transition and is therefore maybe more temporary rather than a structural demand decline?

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Robert M. Patterson, PolyOne Corporation - Chairman, President & CEO [31]

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Well, a lot of that feedback is anecdotal from customers and we certainly hear that sometimes. My best estimate of what we're seeing right now is that we're not going to see any improvement in 2019. So how you define temporary, I guess, is open to discussion, but I don't think there's going to be an improvement this year.

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Kristen E. Owen, Oppenheimer & Co. Inc., Research Division - Associate [32]

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Great. And then if I could sneak one more in. Just on free cash flow expectations for the year, obviously there is some seasonality in Q1, but based on your CapEx outlook, what should we be looking for, for free cash flow?

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Bradley C. Richardson, PolyOne Corporation - Executive VP & CFO [33]

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Yes, I think we're on track to deliver about $200 million in free cash flow. And that again, just for clarity, Kristen, is after funding again our CapEx.

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Operator [34]

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Your next question will come from the line of Bob Koort with Goldman Sachs.

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Robert Andrew Koort, Goldman Sachs Group Inc., Research Division - MD [35]

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Bob, I was wondering if you could characterize how you feel the health is across your supply chain in light of volatility in pricing or demand trends. Do you feel like there has been some destocking and customers may be waiting for some price relief? Has that not been an issue? What's your general sense of that issue? And then secondly, should we expect to see any raw material relief in the gross margin line? Have you seen that? And then what's your expectation looking into the balance of the year?

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Robert M. Patterson, PolyOne Corporation - Chairman, President & CEO [36]

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So look, I do think that there has been some destocking. I think that started in the fourth quarter of last year and continued into Q1. I'm making this as a customer observation, where I just think in general everyone is very cautious given what is playing out from a macro standpoint in not wanting to sort of relive or build an inventory of what we saw in '06 and '07. So I think that could be easily playing a part in this. I am cautiously optimistic that we will see some benefit from raw materials going forward in the latter part of this year. But, as you know, for us, a lot of times when you look at headline numbers like what's going on with polyethylene or polypropylene, for example, those are base resins for us, carrier resins, and while we may see some relief in those, we're seeing increases in other places like pigments and dyes, which is impacting the Color segment. So I think there is a little bit of good news coming on the raw material side, but really just starting to see that now and hopefully that gets better in the second half of the year.

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Robert Andrew Koort, Goldman Sachs Group Inc., Research Division - MD [37]

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And then you noted organic sales erosion. I may have missed it. Did you give the break out between volume and price there? How much of it is underlying volume erosion?

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Robert M. Patterson, PolyOne Corporation - Chairman, President & CEO [38]

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We didn't give the specific on that. We usually try to put that into our Q. If we need more follow-up, we can. But in general, the volume was down most notably in PP&S where with the preponderance of the sales decline that we saw a little bit in price as well. But across the board, I would tell you, we did have good traction in pricing. As you know, last year, I felt like we were behind on that, but with the actions we took in the second half of the year, we're starting to some benefit. Distribution is a good example where volume was down slightly, but pricing was a positive and we got the freight surcharges in place, which were long overdue. So we're seeing some benefit there as well.

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Operator [39]

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Your next question will come from Dmitry Silversteyn with Buckingham Research.

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Dmitry Silversteyn, The Buckingham Research Group Incorporated - Director [40]

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A couple of things, if I may. Number one, you talked about raw material relief, so thank you for addressing that question. But you also mentioned that Fiber-Line is getting you into some of these kind of the power opportunities -- power distribution opportunities in the 4 and 5G expansions. Can you -- is it possible for you to sort of ballpark what that market opportunity for you could be over the coming 2 to 3 years? Have you thought about it that way?

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Robert M. Patterson, PolyOne Corporation - Chairman, President & CEO [41]

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Maybe the best way to describe that is what we see as the growth opportunity for that business, we had projected -- at that time we actually announced the deal, I believe we said we expected sales to be around $100 million in revenue. And I think with the expansion of existing infrastructure and then soon-to-come 5G, you could see double-digit sales growth as a result of that quite easily for the next 6, 7 years, Dmitry. I mean at some point there will be a plateau on the infrastructure expansion, but that's what we see right now.

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Dmitry Silversteyn, The Buckingham Research Group Incorporated - Director [42]

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Okay, so that's a very good framework. And then secondly, there is a lot more attention and you mentioned on a couple of times in your prepared remarks on sort of environmental sustainability and use of plastics. Obviously, we've all seen the straw bans in various parts of the world and in this country. How do you look at that trend? And how are you positioned to either benefit from it with your increased sales of additives that help minimize plastic use and help recycling? Or conversely, are you looking at this as a potential headwind going forward as these initiatives spread?

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Robert M. Patterson, PolyOne Corporation - Chairman, President & CEO [43]

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Well, I believe, as you know we probably have joined the Alliance to End Plastic Waste as a founding member. That was announced at the beginning of this year. The alliance is newly created and led by Dow, LyondellBasell, P&G and many others who really are very interested in helping us to clean up the planet as a starting point, but I'd also say that next generation of the activities are all about improving recyclability and providing better materials for all of us. And look, from my standpoint, that could ultimately mean that in some cases, for like, beverage and food packaging, less material is used and that's okay. For us, our solutions enable that when you look at what we offer for many of the additives that we provide. So I think this is only going to gain momentum. And I think PolyOne stands to benefit from our sustainable solutions. In some cases, you may see things go away or change and certainly, in some cases, see less material being used, but in the long run, I don't see anything but positives from that.

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Operator [44]

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Your next question will come from the line of Laurence Alexander with Jefferies.

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Laurence Alexander, Jefferies LLC, Research Division - VP & Equity Research Analyst [45]

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Could you peg a little bit sort of any cash outlays you have for restructuring or further you have cost cuts that you're doing and then also speak a little bit about how you're thinking about adding talent in this environment? I mean where you're still expanding the technical sales efforts.

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Robert M. Patterson, PolyOne Corporation - Chairman, President & CEO [46]

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Yes, I'll take the latter part of that and Brad can tell you a little bit more about the numbers, some of that restructuring was in the first quarter. Look, first of all, as you know, we have hired a lot of resources and the last 4 years in sales, marketing and technology, being up 30%. I think in light of the current circumstances, it's important for us to continue to invest in our people, but largely as replacement hires to keep things flat from a turnover perspective. And as we said sort of at the end of last year or maybe the middle of last year, really, it is important for us to drive more efficiency from those. So, for example, Laurence, if you went back to '14 and kind of followed our trajectory through '16 and '17, sales dollars per seller was actually down. That was okay, but we need to start to see that go in a positive direction and it is beginning to in 2018. So I think this year is about being more productive and being more efficient. We will not hire at the pace that we have in previous years. Brad, can you comment on the...

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Bradley C. Richardson, PolyOne Corporation - Executive VP & CFO [47]

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Yes, Laurence, on the restructuring actions that we've discussed, in our first quarter, we took a charge for our activity of about $4.5 million. There's probably a little bit more to come in the second quarter as people leave the organization, but that -- you should think about that as cash outlay.

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Laurence Alexander, Jefferies LLC, Research Division - VP & Equity Research Analyst [48]

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Okay. And then could you give us sort of a benchmark for the current run rate for composite sales and sales in China?

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Robert M. Patterson, PolyOne Corporation - Chairman, President & CEO [49]

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The first part was composite sales. What was the second, Laurence?

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Laurence Alexander, Jefferies LLC, Research Division - VP & Equity Research Analyst [50]

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Just sales in China, what the current run rate is?

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Robert M. Patterson, PolyOne Corporation - Chairman, President & CEO [51]

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Right. So composites in total is up to about, when you add in Fiber-Line, we should be right about $35 million, $40 million for the first quarter and then China is about 10% of sales in total.

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Laurence Alexander, Jefferies LLC, Research Division - VP & Equity Research Analyst [52]

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And then just lastly, can you speak a little bit about the M&A environment that you're seeing in this -- are either multiples starting to come down or do you think some additional assets could shake loose?

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Robert M. Patterson, PolyOne Corporation - Chairman, President & CEO [53]

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No change in multiples. That's actually been kind of an interesting discussion point really over the last few years. Whenever we see a little bit of contraction in macro activity, we think, well, maybe that would be the case, but certainly, hasn't been our experience. And at this point, I'm not seeing any real change in activity in terms of something coming to market that wasn't previously contemplated. If anything, it may delay some of that with numbers being down some this year. So there is a couple of things that we're looking at, but that really started last year. So at present, no change from our perspective.

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Operator [54]

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Your next question will come from the line of Jason Rodgers with Great Lakes Review.

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Jason Andrew Rodgers, Great Lakes Review - VP [55]

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Just a follow-up on Fiber-Line. I think the expectations were previously mid to high single-digit growth for 2019 and maybe $0.02 to $0.04 for the year contribution. Any update to those forecasts?

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Robert M. Patterson, PolyOne Corporation - Chairman, President & CEO [56]

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No. I think those are still good numbers.

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Jason Andrew Rodgers, Great Lakes Review - VP [57]

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And can you quantify what the impact was on raw material costs on gross profit for the quarter? I think you did that for the last few quarters.

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Robert M. Patterson, PolyOne Corporation - Chairman, President & CEO [58]

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In total, I'd have to -- off the top of my head, I couldn't give you the inflation/deflation impact. As you know, overall, volume was down, so total costs were down as well. What I would tell you is that if I just look at Color and Engineered Materials, for example, overall, raw materials were up. Even though we started to see things come down a little bit in a few pockets, it was some of the other Specialty Materials, as I mentioned, like pigments and dyes that led to overall inflation. PP&S was roughly flat. So that kind of puts things in perspective to where we were in the first quarter of last year.

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Jason Andrew Rodgers, Great Lakes Review - VP [59]

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Okay. That's helpful. And then Brad, do you have a forecast for the tax rate for 2019 and CapEx as well?

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Bradley C. Richardson, PolyOne Corporation - Executive VP & CFO [60]

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Yes, we did. As you saw in our release, our first quarter effective tax rate was about 24%. I think if I look at the rest of the year, we're going to be in the 24% to 25% range. So I think that's probably a good proxy. And our CapEx, we're thinking we're going to be in kind of the $75 million to $85 million range for CapEx.

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Operator [61]

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Your last question will come from the line of Jim Sheehan with SunTrust.

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Peter Osterland, SunTrust Robinson Humphrey, Inc., Research Division - Associate [62]

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This is Pete Osterland on for Jim. Given some of the demand headwinds, did the pace of freight and logistics cost inflation ease at all during the first quarter? And do you expect any further inflation as you look forward into the rest of the year?

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Robert M. Patterson, PolyOne Corporation - Chairman, President & CEO [63]

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I think freight really did start to flatten out in the first quarter in the U.S. We saw it tick up some in Europe. But for the most part, no real significant changes from what we saw. Obviously, last year, it went up rapidly at the beginning of the year. So it seems to have stabilized at the beginning of this year.

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Peter Osterland, SunTrust Robinson Humphrey, Inc., Research Division - Associate [64]

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Okay. And then, you called out a product mix improvement on the distribution segment. Could you just give a little bit of color about what is driving that positive mix impact?

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Robert M. Patterson, PolyOne Corporation - Chairman, President & CEO [65]

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Yes, just a little tilt towards, I'd say, health care as well as the outdoor high-performance industry, which we saw quite a bit into from distribution. And then obviously, as you know, we did put the freight surcharges in place, which is we did not have in place in the first half of last year. So those are the primary benefits of the -- or drivers of benefits this year.

Okay. Well, thanks, everybody, for joining us on the call today. We look forward to updating you on our progress on our next call following the conclusion of our second quarter. Bye for now.

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Bradley C. Richardson, PolyOne Corporation - Executive VP & CFO [66]

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Thank you.

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Operator [67]

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Ladies and gentlemen, thank you for your participation on today's conference. This does conclude your program and we may all disconnect. Everybody, have a wonderful day.