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Edited Transcript of POL earnings conference call or presentation 29-Jan-19 1:00pm GMT

Q4 2018 PolyOne Corp Earnings Call

AVON LAKE Jan 31, 2019 (Thomson StreetEvents) -- Edited Transcript of PolyOne Corp earnings conference call or presentation Tuesday, January 29, 2019 at 1:00:00pm 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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* Colin William Rusch

Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst

* David Francis Katter

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

* Dmitry Silversteyn

The Buckingham Research Group Incorporated - Director

* Dylan Scott Carter Campbell

Goldman Sachs Group Inc., Research Division - Research Analyst

* Frank Joseph Mitsch

Fermium Research - Senior MD

* James Michael Sheehan

SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst

* Jason Andrew Rodgers

Great Lakes Review - VP

* 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

* Rosemarie Jeanne Pitras-Morbelli

G. Research, LLC - Research Analyst

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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 Fourth Quarter 2018 Conference Call. My name is Crystal, and I will be your operator for today. (Operator Instructions)

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

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

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Thank you, Crystal. Good morning, and welcome to everyone joining us on the call today.

Before beginning, we'd 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 forecast of future events and are not guarantees of future performance. They are based on management's expectation and involve a number of business risks and uncertainties, any of which could cause 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 for the most comparable GAAP financial measures. Operating results referenced during today's call will be comparing the fourth quarter of 2018 to the fourth quarter of 2017 or the full fiscal year of 2018 to the full fiscal year of 2017, unless otherwise stated.

Joining me today on the call is our Chairman, President and Chief Executive Officer, Bob Patterson; and Executive Vice President and Chief Financial Officer, Brad Richardson.

Now I will turn the call over to Bob.

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

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Well, thanks, Joe. Good morning to everyone joining us on the call today. I am pleased to report full year record adjusted earnings per share of $2.43 for 2018, and that's a 10% increase over last year and it marks our ninth consecutive year of adjusted EPS growth.

Investments in our commercial team since 2014 have made performance like this possible. Excluding acquisitions this year, we increased our sales, marketing, R&D resources again by an additional 6%, which helped to fuel our organic revenue growth. In addition to leveraging these new hires, we also continued to pursue complementary technologies and businesses through acquisition, closing 2 deals in 2018 IQAP and PlastiComp, and we are excited to kick off 2019 by welcoming yet another specialty company to our family.

Fiber-Line is a global leader in custom-engineered fibers and composite materials that serves the fiber and optic cable, oil and gas, industrial and consumer industries. Its Customer First, specialty culture and innovative product portfolio make it a perfect fit with PolyOne. I'll talk about this and Fiber-Line a bit more later.

And as many of you know at our Investor Day last May, I discussed our historic past and inspired future with a goal of creating a world-class sustainable organization. I emphasized the 4 cornerstones of our sustainability endeavors: people, products, planet and performance, the 4 Ps. And as we reflect back on last year, it is clear we made some great contributions in each of these areas. We started the year with the announcement of becoming an American Chemistry Council, Responsible Care company, and that is a direct reflection of our safety-first culture. And in 2018, we achieved the safest year in PolyOne's history with 19% fewer injuries than in 2017, in fact, nearly 80% of our facilities were completely injury-free.

Our focus on people also requires that we build a high-performing, diverse and inclusive company. LEAD by Women is one associate resource group that sponsored numerous leadership development training sessions in 2018.

Further, we expanded our leadership development and training, and these are rotational programs where new associates collaborate and contribute in various roles within the company. The breadth of global experience they receive forms highly effective and diverse skill sets, bolstering our talent pipeline from the bottom up. And we also continue to invest in our in-house leadership with over 250 of our associates graduating from NextGen and PolyMasters, helping us to truly build tomorrow's leaders today.

And as a result of these and many other efforts and for the first time in our history, we were honored to be recognized as a Great Place to Work in the U.S. by the Great Place To Work Institute. It is a significant milestone in our ongoing journey to become a top workplace. Great places to work not only take care of their associates, but also advance all 4 cornerstones of sustainability. 2 weeks ago, we announced that we joined the Alliance to End Plastic Waste as a founding member and appointed Walter Ripple, the Vice President of Sustainability. Walter joined PolyOne in 2008 with the GLS acquisition and he has won our General Manager of the year award twice. He's a trusted technical and customer-focused leader, who will advance our sustainability initiatives, while coordinating our efforts with the Alliance to take better care of our planet.

And performance is the fourth cornerstone in our sustainability commitment, and we view it as both an enabler and a result of the other 3. As I said, 2018 marked the ninth consecutive year of adjusted EPS growth at PolyOne with record EPS of $2.43. That's an impressive accomplishment that we work tirelessly to achieve and build upon each year. And we overcame some significant industry dynamics last year, including raw material inflation, rapidly increasing logistics costs, and more recently, a slowdown in demand in certain end markets and geographies in the second half of the year, with the fourth quarter being the most challenging of all.

Recall from our third quarter statements, that we said in September, we saw weakening foreign currencies, demand slowdown in Asia, and softening in certain North America end markets, namely building and construction, and in appliance. And we projected that if we continue to see these same trends, adjusted EPS will be flat in the fourth quarter and that's where we ended at $0.41 a share. You know, if we go back to our comments in October, we expected the fourth quarter to be difficult for our Performance Products and Solutions segment, in particular, due to the weakness in demand for appliance and building and construction, and that really played out as we thought. But we also experienced a decline in demand in Europe, and Asia growth slowed as well, particularly in the consumer market space. And these 2 factors specifically impacted our Specialty Engineered Materials segment, which reported a year-over-year decline in operating income.

To put the European impact into perspective, in Q1 and Q2 of this year, sales were up 23% and 13%, respectively, third quarter growth slowed to 5%, and in the fourth quarter European sales actually contracted by 5%. Now some of this was certainly currency related as the dollar strengthened over the course of the year, but even so we did see European weakness towards the second half and this weighed on Color and Engineered Materials.

Now again, as we go back to our comments in the fourth -- in October, we did have some things play out to the upside where we had better-than-expected performance. Distribution finished the year very strong as we got traction on freight surcharges and related pricing, and operating income increased 13% for the fourth quarter. Composites had a very strong quarter and did very well, and so did markets such as health care and packaging, which held up well despite the previously mentioned geographic weakness.

Now I've some more comments in a moment about what we think all this means as we head into 2019, but for now I'll turn the call over to Brad for some more specific comments on the fourth quarter and full year.

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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. You know, as I kind of reflect on 2018, it really was a story of 2 different halves, the tale of 2 halves, so strong growth in the beginning that tailed off at the end of the year, as Bob just described. But with this reflection, let me first start with our GAAP results.

GAAP earnings of $0.15 per share were reported. Special items in the quarter resulted in a net after-tax charge of $21 million and were primarily related to mark-to-market pension adjustment and environmental-related costs. Adjusted EPS from continuing operations for the quarter was $0.41, flat with the fourth quarter of 2017.

Color, Additives and Inks finished the year with another quarter of growth, expanding sales 8% and improving operating income 5% in the fourth quarter, despite weakness in Europe. Ultimately, Color had an awesome year, reaching $1 billion in sales for the first time in our history. This represents a 17% increase in revenue and operating income also expanded by 14% to $150 million, resulting in over $200 million of EBITDA. We continue to see strong demand for our barrier technologies for beverage packaging in Europe and Asia. Color sales in this end-market grew double digit.

The Europe Color business did experience some slowing in the fourth quarter, particularly in the transportation and wire and cable end markets, which were down year-over-year.

Engineered Materials also experienced weakness in Europe during the fourth quarter, primarily in the transportation end markets, as well as some impact from the economic and political instability in Turkey.

In Asia, SEM saw softening demand in the consumer end market as Chinese consumers appeared to be more cautious in discretionary spending in light of a slowing economy and other influencers affecting consumer sentiments. End markets in SEM North America were more stable comparatively, including wire and cable, which steadied in the fourth quarter as we are winning new business. This is a key milestone for this end-market following 2 years of weakening conditions for these applications.

Our Composite business with SEM is performing extremely well. Our investments in commercial resources and technological developments are paying off and drove the platform's first ever year of positive operating income, expanding over $3 million for the year. And as we continue to win new business with our Composite Solutions, we expect this business to be even more impactful to PolyOne's performance in the future.

And I'm happy to report that our integration of PlastiComp, which we acquired in June of 2018 is off to a fantastic start. Our invest-to-grow strategy is underway, and we've more than doubled their sales funnel. Additionally, the material expertise we gained from the acquisition is helping us close previously identified opportunities, where we couldn't fully meet the material requirements but now we do.

So, for example, we're winning new business with a customer in the outdoor high-performance industry to replace metal with a long fiber technology that offers design flexibility, enhanced strength and impact resistance. PolyOne's track record of commercial excellence with this customer opened the door and PlastiComp's technical know-how was key to locking down this win. In short, our enthusiasm for composites continues to grow. It's performing well now, and the value and upside is only going to increase.

And as Bob said, Performance Products and Solutions had a very difficult quarter. Overall, sales were flat, and margins were compressed due to unfavorable mix and higher raw material costs. PolyOne Distribution finished the year strong, increasing fourth quarter revenue 6% and operating income 13% as freight surcharges and other actions gained traction.

All of our segments combined to generate tremendous cash flow, and we finished the year with over $400 million of adjusted EBITDA. We will remain centered on deploying cash in organic growth initiatives and accretive bolt-on acquisitions, the investments that have and will generate growth in the future. We will also continue returning cash to shareholders, as evidenced by our announced quarterly dividend increase of more than 11% this year and share repurchases of 3.4 million shares, including 2.1 million shares in the fourth quarter.

While we are cautious about the near-term outlook for select end markets, we certainly are optimistic about our future, and Bob will make some statements about our outlook. So Bob?

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

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Yes. Thanks, Brad. Again, as we look back on last year, it was a year of many accomplishments that are helping us to create a world-class sustainable organization. It was our safest year on record, we were recognized as an ACC Responsible Care company and certified as a Great Place to Work in the U.S., and we delivered our ninth year in a row of adjusted EPS growth. We hope this isn't overshadowed by current events, which unfortunately suggests weaker demand conditions to continue in the near term. Our rate for January suggests that organic sales for the first quarter will be up only slightly over the prior year, and if you include the Fiber-Line acquisition, sales will be up about 3%.

We think this translates to roughly flat EPS in the first quarter. Like a lot of companies seeing some weakness in the first half of the year, we think that the weaker foreign exchange itself is about a $0.03 headwind in the first quarter, and we do see some lower sales out of Europe. But we also see, again, continuing strength in composites, in health care as well as other applications in packaging, which gives us a lot of encouragement for the upcoming year.

And for all the attention the economy is getting right now, I do think we should highlight that many markets and applications that are actually doing quite well. Health care was up 8% last year, 25% of our Distribution is in health care accounts. We have specifically invested in this end-market over the course of many years, and I think as we mentioned with the results that we had in the fourth quarter, we're seeing some traction there with OI and Distribution being up 13%.

Another highlight for us was in India, where our team celebrated our 10th anniversary this year. We started with just a small Color masterbatch operation in the region and have now expanded to produce, sell and innovate Color and Engineered Materials as well as TPEs. And since our 2013 investment to build a new plant there, we've nearly tripled our revenues, with operating margins at 20%. It really is a remarkable story.

And as you heard Brad talk earlier about our Packaging business that was up 16% in 2018, largely in part to our Color offerings and design expertise.

And lastly, our Composites business is growing. It offers light-weighting options, replacing traditional materials with equal-strength-or-better composites. And these trends aren't going away, they're gaining momentum and so are we. This includes engineered and coated fibers, which is an expertise of our latest acquisition, Fiber-Line. It will be immediately accretive to EPS and is expected to add approximately $100 million revenue to our EM segment in 2019. Fiber-Line is an innovative and specialty company that is doing incredible work in customized engineered fibers and composites. They primarily serve the fiber optic cable industry and they are a leading supplier being called upon to support the build-out for the 5G network infrastructure. Fiber-Line products also serve oil and gas, industrial and consumer end markets. The leadership team is exceptional and the upside potential to help accelerate the great things that our employees are doing for customers is huge. This acquisition is a yet another example of how we're investing in composites as a sustainable and high-growth technology for our future.

And to help us drive this growth, we hired a composites expert in Chris Pederson to lead the SEM segment. Chris was most recently with Hexcel where he joined it following 15 years with Cytec. He began his career with Boeing in aerospace where he spent 10 years after receiving a bachelor and master's degree in chemical engineering, emphasizing in composites. Innovation is at the heart of what we do, and we are not too proud to go out and acquire technology or new leaders to help us achieve the success. And when we do, we get the best.

At PolyOne, we view building a world-class, sustainable organization as both a challenge and an opportunity. For years, we have been investing in and building our portfolio of sustainable solutions, such as barrier technologies that preserve shelf life and help to provide food and beverage in thinner gauge designs that use less plastic or light-weighting solutions that replace traditional, heavier materials. Right through fiber colorant technology that minimizes the amount of wastewater generated during the customers' production processes. And we measure the health of our innovation capabilities and portfolio through our Vitality Index, which again in 2018 was over 35%. It's a testament to our innovation, capability and a sign of confidence to our customers. Add Fiber-Line to prior year investments we have made to upgrade our portfolio, and we've never been in a better position to navigate the short-term dynamics that I just described. In doing so, we can and will continue to deliver for our customers and shareholders for the long term.

That concludes our prepared remarks, we'd be happy to open the discussion for any questions you have on the phone.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question will come from Mike Sison from KeyBanc.

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

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Bob, in terms of your outlook for 2019, acquisition momentum is increasing here. How much earnings growth can you get from acquisitions this year? And then how much growth can you get on an organic basis?

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

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I think with the start of the year, obviously, being as uncertain as it is, it's really challenging to predict that for the full year. We are excited about Fiber-Line, which we think can add $0.02 to $0.04 to the bottom line, and of course, we bought back 2 million shares in the fourth quarter of last year, which helps us as well. The real unknown here, I think, is just some of the weakness we see in these end markets in geographies like Europe.

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

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Okay. And then just a quick follow-up on Performance Products and Solutions, margins have improved well over the last couple of years. And when you think about the decline you saw in the fourth quarter, how much of that do you think is structural versus just you can overcome that as 2019 and beyond unfolds?

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

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Yes. I mean, look as we start the year, we do so, first to fall, looking back on the fourth quarter and say, hey, really mix hurt us quite a bit was appliance being down as much as it was, as well as building and construction being weak, sales were roughly flat as we offset that with some lower-margin contract manufacturing business. But going into 2019, I think, there's an opportunity for margin expansion here, Mike. And I think we can do that with a little bit of a recovery in 1 or 2 of those end markets as well as hopefully a better traction on pricing.

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Operator [6]

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And our next question comes from Frank Mitsch from Fermium.

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

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Hey Bob, if I can get a little bit more granular with respect to the 3% organic sales growth in the fourth quarter. Can you talk about how the pace progressed through the quarter? And you're forecasting 0 organic growth in Q1. I mean, are you expecting -- I'm just trying to get a picture of the shape in my mind as to how that is progressing in terms of how we did in fourth quarter and what your expectations are here in January?

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

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With respect to the progression question, are you asking that about the fourth quarter?

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

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Yes, sir.

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

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Probably and then go into the first, sure. Look, as you know, coming out of September, September was very weak and sales were down, October was a little bit better than September, but up probably only 1% or 2%, if you will, versus where we were in 2017. So the months effectively played out kind of like we thought, which was roughly flat with what we saw in October. The only thing that I'd say kind of weighed on fourth quarter results more than we expected was the decline in Europe, which we all -- we believe really was primarily associated with the auto industry, which made the December weaker than October and November. So as we stand here today and we look at the order rate for January, organically sales were up about 1%. If we add acquisitions, they're up about 3%. And that's inclusive of that currency headwind that we said, which is about $0.03 in the first quarter. Little early to say what March looks like, as you know, in our quarters, March has a tendency to be a strong month, but right now we got visibility probably into January and February.

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

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Got you, got you. And as I -- you look at the year-over-year 2018 as a full year versus 2017, obviously margins off a bit. You've obviously been making some progress in terms of price for the higher raws earlier in the year. Where do we stand on that interplay between your ability to raise prices versus raws and expectations for margins?

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

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So obviously, we saw some really good progress on the Distribution side, and I think that gives us momentum going into 2019. We've had really a very good year, all the year long with respect to Color. There is some weakness in PP&S that we project to continue here in the near term. Look, as I kind of shape things up, it's -- look, as you know, it's challenging to try to forecast what we see beyond our current order rate. I think with strength in Composites, with strength in health care like we're seeing and if packaging holds up, there is an opportunity to meet or beat last year's EPS in the first quarter. We've just got some big challenges to overcome on currency in Europe.

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Operator [13]

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And our next question comes from Colin Rusch from Oppenheimer.

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Colin William Rusch, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [14]

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As you think about the European auto opportunity in the Composites business, how big an opportunity is there for replacement? And how soon we might start to see those products roll through?

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

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Look, for the most part, the investments that we have made in Composites have been North American based. These were the businesses that we have acquired and where we've innovated. And so as part of our strategic plan, we have a huge opportunity to expand that outside the U.S., which includes European auto. Presently, we're not doing very much at all with respect to Composites in European auto or Asia, for that matter. So I kind of view that market as wide open, Colin.

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Colin William Rusch, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [16]

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Okay. And then from a talent perspective that kind of a 12-month, 24-, 36-month opportunity or is it beyond that?

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

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No. I mean, I think that's a pretty long sales cycle if you think about getting into our next-generation plans and platforms for the automotive industry. Where we have had outstanding traction in Composites to date has been in outdoor applications as well as in industrial and now growing in some of these fibers for wire and cable applications. So fortunately, there is a huge growth opportunity that exist outside of automotive, and that's where we've been capitalizing on for last year or 2.

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Colin William Rusch, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [18]

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Okay, that's super helpful. And then just with the new sustainability role, can you talk a little bit about how much of that time is going to be focused on operations and how much of the time is going to be really focused on business development opportunities and since the sustainability -- leveraging the technology platform that you guys have?

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Robert M. Patterson, PolyOne Corporation - Chairman, President & CEO [19]

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Yes. So most of Walter's time is going to be focused on the portfolio of sustainable solutions that we have and leveraging that to help drive growth and support our customers, who are all looking for ways to take material out of packaging, for example, is probably the best area where Walter can be of help, as well as beyond the initiatives to participating programs like Alliance to End Plastic Waste. So we've got a team of folks that are dedicated, as you know, to improving operations here, great Lean Six Sigma program, awesome safety culture and all those things, which are being run by them. So I really view Walter's focus being on, again, sort of the portfolio of the products we sell and these alliances we're creating in the industries.

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Operator [20]

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Our next question comes from Mike Harrison from Seaport Global Securities.

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Michael Joseph Harrison, Seaport Global Securities LLC, Research Division - MD & Senior Chemicals Analyst [21]

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Bob, I was wondering if you could talk in a little bit more detail about the PP&S business, the sales were flat. What was the volume and pricing breakout? And can you maybe talk about, how the destocking is progressing in building and construction and maybe are there areas that were offsetting the weakness that you're seeing there?

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Robert M. Patterson, PolyOne Corporation - Chairman, President & CEO [22]

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Yes. From an end-market standpoint, appliance was down significantly, it was down about 16% in the fourth quarter for us. Building and construction was down about 2% or 3%. But building and construction is a bigger end-market that we serve there, so that has kind of a larger effect. Now some of that business was offset, as I mentioned, by lower-margin contract manufacturing that kind of put almost volume into a push, if you will. But margins were impacted by that being, again, deleterious to the fourth quarter. So that's kind of how that played out, Mike, with respect to that, plus we had some raw material inflation in the fourth quarter.

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Michael Joseph Harrison, Seaport Global Securities LLC, Research Division - MD & Senior Chemicals Analyst [23]

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All right. Then on the Composites business, can you give us an update on where we are in terms of profitability? And maybe what your expectations are for OI contribution in 2019?

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

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Yes. So overall, we -- I think, we generated $3 million of additional operating income this year from Composites, which puts us into positive territory. I think, we really crossed over that in towards the end of the second quarter of this year. We've been there ever since. And with the growth rates that we have and projects in place, I see that continuing into 2019. I know that those sound like small numbers than they have, but with all the investments that we make, I think, there's a huge leverage equation here and a really good opportunity for us in '19.

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Operator [25]

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And our next question comes from Bob Koort from Goldman Sachs.

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Dylan Scott Carter Campbell, Goldman Sachs Group Inc., Research Division - Research Analyst [26]

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This is Dylan Campbell on for Bob. I just want to go a little bit deeper on kind of margin and raw material discussion. We've seen a couple of the -- your key raw materials such as polyethylene, polypropylene or TiO2 pricing start to come in. Can you maybe talk a little bit about your ability to hold on to price when raw materials are declining?

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Robert M. Patterson, PolyOne Corporation - Chairman, President & CEO [27]

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I mean, historically if you look back over time, we've done very well in that environment. As you know, we've had some frustrating times as well with respect to, in some cases, pricing not keeping pace with inflation. But I think that if raw materials do pull back and we see some easing there, there's a real opportunity for margin expansion. And so I think, that's an opportunity for '19.

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Dylan Scott Carter Campbell, Goldman Sachs Group Inc., Research Division - Research Analyst [28]

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That's helpful. And you mentioned earlier that your freight charges in Distribution is starting to gain traction. Can you give a little bit of color in terms of heading into 1Q '19, how much benefit is left over to gain from freight charges or passing through to freight charges?

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Robert M. Patterson, PolyOne Corporation - Chairman, President & CEO [29]

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I think if you look at sort of how the fourth quarter played out against itself last year that probably gives you a good indication. The kind of momentum we have going into 2019 -- again, in terms of benefit on pricing, I think, that will hold in the first part of the year. Those price increases really went into effect in the middle of August of this last year. So I got every expectation that's a good guy for us in the first quarter, except for the fact that we continue to see logistic costs be a challenge for us so. To the extent, they go up, we may have to increase those surcharges.

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Operator [30]

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Our next question comes from David Katter from Baird.

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David Francis Katter, Robert W. Baird & Co. Incorporated, Research Division - Junior Analyst [31]

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One more here on raws. You talked a little bit about the trend heading into next year. Which ones are your focused on specifically that may come in more than others? Or which are you particularly constructive on?

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Robert M. Patterson, PolyOne Corporation - Chairman, President & CEO [32]

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I mean, for us, if I look back on the last couple of years, there is no doubt that nylon pricing has probably been one of the biggest challenges we've had, particularly inside of our Engineered Materials platform. So we will be watching that closely, maybe with some of the -- with auto slowing down a touch, there is a little less demand for that and that brings some ease to that one, say that's at the top of the list. But obviously, if you look across the board -- look, we are a formulator and we formulate around base resins, we don't make those, but they're a big part of the input costs on the carrier side. So polyethylene, polypropylene, et cetera, are still big factors too.

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Operator [33]

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Our next question comes from Laurence Alexander from Jefferies.

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Laurence Alexander, Jefferies LLC, Research Division - VP & Equity Research Analyst [34]

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First one is on the Engineered Materials business. How do you think about lapping -- the timing of lapping margins on a year-over-year basis before the impact of acquisitions, and what the impacts for the acquisition on the margins -- on the segment margins for 2019?

And then secondly, you mentioned the pace of new hires and training in 2018. What are your targets for 2019? I don't know if you have it yet for 2020, but how are you thinking about expanding the technical sales force?

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Robert M. Patterson, PolyOne Corporation - Chairman, President & CEO [35]

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Yes. So with respect to margins for Engineered Materials, I would say that with what we see right now, they'll be down in the first half of the year, a lot of that actually being driven by this weakness that we're seeing in Europe right now. On our underlying business, I do think we're making -- our underlying business and markets outside that, I do think we're making traction with pricing and seeing opportunity there, but it's probably in the middle of the year before you see that on a stated basis increasing.

Next, with respect to those investments, look, we have -- I think, we have invested a lot over the last 4 years in sales, marketing and technology, and as we've said every chance we had the opportunity too last year, we also want to do a better job of becoming more efficient with the resources that we have. And given the challenges with the economy that are here in near term, that's going to be a primary focus for us. I expect that we'll continue to invest in those resources over the course of '19, but probably with a heavier focus on technology and sales than the other areas.

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Operator [36]

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Our next question comes from Rosemarie Morbelli from G. Research.

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Rosemarie Jeanne Pitras-Morbelli, G. Research, LLC - Research Analyst [37]

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Bob, I was wondering if you could give us a feel regarding building and construction. Is this slowdown mostly weather-related or you actually see a longer type of secular issue?

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

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I mean, obviously, there is a lot going on right now with respect to interest rates and concern about people having access to cash in the same way that they once did to buy homes. So that's probably playing a factor there. I wouldn't cite the weather. I don't think that we saw that in particular. Others have mentioned it. And there may have been some destocking that took place in the fourth quarter just with respect to -- on an inventory level. So that really remains to be seen. Usually the first half of the year is the strongest. And right now, it's starting out weak. So we'll see how that plays out here in the next few months.

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Rosemarie Jeanne Pitras-Morbelli, G. Research, LLC - Research Analyst [39]

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Okay. And when you are talking about destocking, in your mind, was -- in the fourth quarter, was it larger than usual or more or less in line, and is it continuing in January? I mean, some companies and especially in Europe have taken long vacations, I'm not too sure they are back in January quite yet.

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Robert M. Patterson, PolyOne Corporation - Chairman, President & CEO [40]

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I mean, look, when we saw the results in September, I would say that was probably the steepest decline of what we saw in the year. And then things never really picked back up in the fourth quarter. So I don't know that I would say that Q4 was like -- that the pace of it increased as the quarter went along, but I just think, flat out, all of our customers are really aware of how much working capital they have and why and everyone is being very cautious as they start this year. So I don't see January as a further reduction, but perhaps an absence of an increase for a better explanation.

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Rosemarie Jeanne Pitras-Morbelli, G. Research, LLC - Research Analyst [41]

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And if I may ask one other question, regarding -- maybe you could share a little bit more details on the Alliance working on ending plastic waste. I am assuming that translates also into selling less plastic in addition to recycling. Could you give us a feel for the impact, the potential impact on PolyOne?

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Robert M. Patterson, PolyOne Corporation - Chairman, President & CEO [42]

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Yes, look, I think, it's all of the above. And look, we're really excited to be a founding member of this Alliance. There are obviously some really big name companies that are in there as part of that, that have helped to create the organization, and we're proud to be a member organization with them. I kind of view the Alliance mission as having a couple of different missions. One, of course, is just to simply help expedite an outreach program to clean the waters around us and the land in which we live. I mean, we -- I think can lend a helping hand to help do that cleanup. And so there's going to be infrastructure projects that are invested in to do that. But then the next level, of course, is being more innovative with respect to how we get perishable, beverages, food, et cetera, to people in this world with less material, and candidly, that's been a sustainable solution of ours for years, right, which as I look at what our ColorMatrix offerings has with respect to oxygen, carbon scavenging, additives, use of lighter weight materials that plays right into what we do. And it's a big reason why we've never been obsessed about the volume gain. We're obsessed about revenue and margins. And I think there's an opportunity here with respect to the portfolio of sustainability solutions to do just that even if it is less pounds.

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Operator [43]

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And our next question comes from Dmitry Silversteyn from Buckingham Research.

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Dmitry Silversteyn, The Buckingham Research Group Incorporated - Director [44]

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Just trying to understand a little bit as sort of your comments on inventory and customer potential destocking. You talked about the possibility of raw materials declining in the back end of the year. If you have not seen destocking in the fourth quarter or not seeing it in the first quarter, do you expect your customers at some point to start letting out their inventories in preparation for lower prices maybe towards the back end of 2019 or 2020? Or is this sort of -- it's the risk that you take every quarter and for every year and you're not really that concerned about it for 2019?

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Robert M. Patterson, PolyOne Corporation - Chairman, President & CEO [45]

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Yes. I don't know that it's going to play out any different than it has in the past. And the customers -- look, it depends on what they're buying from us, if it's a Distribution customer and the pricing really is a pass-through from what our supplier's set, you can sometimes see those types of moves where people are trying to buy ahead or delay. I don't see that impacting Color or Engineered Materials really at all. I think what's going into these markets is being bought as it's needed, when it's needed, and I don't think that there was such a move or a change in inventories related to those that it makes '19 appreciably different than what we've seen in past years, Dmitry. And candidly, what we see with Distribution right now is pretty good momentum. So I think that's a positive sign.

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Dmitry Silversteyn, The Buckingham Research Group Incorporated - Director [46]

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Yes, absolutely. So we just say that to the extent that I think the, sort of, destocking or slowdown has happened that that's more in a preparation for a slower-growth environment expectation rather than lower pricing expectation?

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Robert M. Patterson, PolyOne Corporation - Chairman, President & CEO [47]

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I think that's fair. Yes.

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Dmitry Silversteyn, The Buckingham Research Group Incorporated - Director [48]

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Okay, okay. And then just trying to understand your comments around the Composites' profitability. So it was -- Composites did $3 million more EBIT this year than last year or in 2018 than 2017, which put them in a slightly positive EBIT for the year and you expect that pace to continue. So if I read this sort of it sounds to me like you're kind of expecting mid- to high-single digit millions of EBIT from this business in 2019. Is that the right way to think about that?

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

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If I were using terms like low, medium and high, I would probably use low to medium, low to mid, if you will, on their profitability level, having just sort of gotten past that break-even point. But look we got $100 million of Composites business today, and I think, the leverage is really big on that. So even if we get to medium, that's still a good increase in '19 over '18.

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Dmitry Silversteyn, The Buckingham Research Group Incorporated - Director [50]

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Sure, sure. Okay. And then...

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

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And the last thing that I was just going to say is I mean we're really excited about Composites, and I think there's really a good revenue growth opportunity in '19 despite what's going on with the economy.

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Dmitry Silversteyn, The Buckingham Research Group Incorporated - Director [52]

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Got it. So that could actually help you with the overall growth. So that's great. And the final question, both that Engineered Materials and the Colors and Additives saw what would I call a widening of the year-over-year negative delta on margins. Is that just the case of demand in Europe falling of basically in some of these end markets you mentioned not necessarily a reaction of raw material doing something different?

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

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Almost entirely about what happened in Europe, it really was. And like I said, I mean, Europe was down 5% for us in the fourth quarter, and that's our most profitable region. So that really is the story on margins for those 2 businesses in that quarter.

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Operator [54]

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Our next question comes from Jason Rodgers from Great Lakes Review.

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

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Yes. I wonder if you could discuss any change in the competitive environment you might be seeing given the current end-market weakness.

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

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I'm not sure that I have seen anything out of the ordinary or unusual. If I look back on '18, I mean, it was a year of such sort of significant inflation and freight costs increasing that felt like everybody was experiencing the same type of things. If I went back to 2017, I probably had some more frustrations around the competitive dynamics and not seeing competitors trying to go out aggressively as we were, but I really felt like '18 was a better year for that. And right now, I think it's probably the same. I think with the year behind us candidly and seeing all this inflation, people realize that's here to stay. And what we're really trying to get our arms around is this demand side of the equation.

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

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And are you planning on maintaining the same level of investment in sales and marketing resources this year that you did in 2018?

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

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Well, one of things when we got was Fiber-Line brought in a new set of folks. And so we'll think about incorporating them into our commercial resources first. And as a result of having them on board, we may not have to hire at the same organic pace that we have. And also, as I mentioned, maybe a few moments ago, we're really driving hard towards increasing efficiencies for the resources that we have added, where it's not so much about just adding people for the sake of adding people, but candidly driving more sales dollars per associate. So it's a balance there. I think, the headcount will go up this year, but it may not be at that 6% pace.

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

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And I know you don't give full forecast for the year. But just given the comments around the first quarter, is double-digit EPS growth off the table for 2019?

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Robert M. Patterson, PolyOne Corporation - Chairman, President & CEO [60]

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I think that there is a lot to be seen with respect to what happens from a demand perspective as the year plays out, and it's really too early to answer that question. That's one of the reasons why we don't try to. Look, as I was answering questions about the first quarter or even giving some preliminary comments on that, there are certainly things that are weaknesses from a demand standpoint and foreign currency is a headwind, while we got some really great traction in health care, in Composites, we bought back 2 million shares in the fourth quarter and there's an opportunity to meet or beat last year's EPS number as early as the first quarter, and I think if we can get there, that's a good sign for us get to double digits this year.

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Jason Andrew Rodgers, Great Lakes Review - VP [61]

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All right. That sounds good. Just a numbers question, CapEx and tax rate estimate for '19 that you might have?

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Robert M. Patterson, PolyOne Corporation - Chairman, President & CEO [62]

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Sure thing.

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Bradley C. Richardson, PolyOne Corporation - Executive VP & CFO [63]

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Yes, Jason, I mean, I think, the tax rate was at 24% in 2018. I think that's a good placeholder for 2019. As we look at CapEx, certainly, if you look at historically last few years, we've been spending about $75 million a year. We certainly have good long-term growth and we're looking at some additional capacity in order to be able to support that growth, in particular, in Asia. So I would think next year -- excuse me, 2019 would be maybe more in the neighborhood of $85 million.

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Robert M. Patterson, PolyOne Corporation - Chairman, President & CEO [64]

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All right. We've got time for one more question.

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Operator [65]

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Our final question will come from Jim Sheehan from SunTrust.

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James Michael Sheehan, SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst [66]

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So you clearly bought some more shares in the fourth quarter than usual, probably given the share price weakness. Can you talk about how you view the share buyback opportunity going forward? Would you tend to be more aggressive with valuation where it is right now? Or would you try to space that out more evenly throughout the year?

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Robert M. Patterson, PolyOne Corporation - Chairman, President & CEO [67]

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Yes, I think, it's -- we never give any specific guidance on how we're going to be buying back shares. You are correct with what you said about the number of shares we bought back in the fourth quarter and why. I mean that's spot on with respect to where the share price was. Obviously, with the acquisition that we just completed with Fiber-Line consuming $120 million in cash, we always try to take that into consideration as well. So we'll see how the year plays out with respect to M&A opportunities and, candidly, probably just have more to say about that when we get to the end of the first quarter.

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James Michael Sheehan, SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst [68]

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Great. And you highlighted weakness in your transportation end market. Could you just parse out how much of that was automotive versus RV and outdoor type of transportation?

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Robert M. Patterson, PolyOne Corporation - Chairman, President & CEO [69]

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Yes. For most part, that was automotive. So we really were commenting on that when we said -- if we said probably transportation, we really meant auto.

Okay, thanks to everyone for joining us on the call today. We appreciate your time and attention, look forward to updating you following our next call after the first quarter earnings release. Take care and bye for now.

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Operator [70]

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Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect. Everyone, have a wonderful day.