PolyOne's (POL) Bob Patterson on Q1 2015 Results - Earnings Call Transcript

| About: PolyOne Corporation (POL)

PolyOne Corporation (NYSE:POL)

Q1 2016 Earnings Conference Call

April 26, 2016 9:00 AM ET

Executives

Eric Swanson – Director-Investor Relations

Bob Patterson – President and Chief Executive Officer

Brad Richardson – Executive Vice President and Chief Financial Officer

Analysts

Mike Sison – KeyBanc

Frank Mitsch – Wells Fargo Securities

Jason Freuchtel – SunTrust

David Stratton – Great Lakes Review

Tyler Frank – Robert Baird

Mike Harrison – Seaport Global Securities

Dan Rizzo – Jefferies

Kevin Hocevar – Northcoast Research

Dmitry Silversteyn – Longbow Research

Rosemarie Morbelli – Gabelli and Company

Operator

Good morning, ladies and gentlemen, and welcome to the PolyOne Corporation First Quarter 2016 Conference Call. My name is Shenel and I will be your operator for today. At this time, all participants are in a listen-only mode. We will have a question-and-answer session at the end of the conference. As a reminder, this conference is being recorded for replay purposes.

At this time, I would like to turn the call over to Eric Swanson, Director of Investor Relations. Please proceed.

Eric Swanson

Thank you, Shenel, good morning and welcome to everyone joining us on the call today. Before beginning, we would like to remind you that statements made during this conference call may be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Forward-looking statements will give current expectations or forecasts of future events and are not guarantees of future performance. They're based on management's expectation and involve a number of business risks and uncertainties, any of which could cause actual results to differ materially from those expressed in or implied by the forward-looking statements. Some of these risks and uncertainties can be found in the company's filings with the Securities and Exchange Commission, as well as in today's press release.

During the discussion today, the company will use both GAAP and non-GAAP financial measures. Please refer to the earnings release posted on the PolyOne website, where the company describes the non-GAAP measures and provides a reconciliation of them to the most comparable GAAP financial measures. Operating results referenced during today's call will be comparing the first quarter of 2016 to the first quarter of 2015, unless otherwise stated.

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

Now, I will turn the call over to Bob.

Bob Patterson

Thanks, Eric, and good morning to everyone joining us today. For the first quarter, we delivered record adjusted earnings per share of $0.56, a 22% increase over last year. This marks our 26th consecutive quarter of year-over-year adjusted EPS growth, 24 of which have been 10% or better. This strong first quarter performance leads off what we expect to be a year of double-digit earnings expansion for PolyOne in 2016.

The top-line results for the quarter show a sales decline of 3% versus last year, however, price deflation related to lower hydrocarbon costs and weaker euro reduced sales by 8%. Thus, underlying growth for the quarter reached 5%: 4% organic and 1% from acquisitions. And what a powerful combination to have underlying sales growth and margin expansion as return on sales reached a new first quarter high of 10%.

I'm pleased we have momentum early after exiting 2015, a year in which we faced the number of headwinds, not the least of which was our DSS segment performance, which was below our expectations and yours. I know their performance is weighed most heavily on investors' minds. After our fourth quarter results were announced, investors rarely asked questions about anything else. I can appreciate that and I understand. I also appreciate your patience as we execute our plan to transform the former Spartech segment into a specialty business and that's such a transformation like PolyOne's early days will take time.

Today, I am pleased to report that we have made progress at DSS this quarter and we will discuss that in more detail. However, this is not the headline story today. The headline story today is how the investments, we made last year builds upon an increasingly strong specialty foundation established over several years before that are paying off now and we'll continue to do so in the future. It's a story about relentlessly pursuing and executing our four pillar strategy to deliver sustainable growth and that strategy is entirely underpinned by an unwavering commitment to our customers and helping them with new and innovative solutions.

Last year, we increased our sales force nearly 10%, few companies, if any can say that they did the same. Some may have challenged us on this as we fell just shy of reaching our double-digit EPS goal last year, what we invested for the future, and I am so proud of our team for doing so despite short-term pressures to do otherwise. These new sellers hit the ground running and they delivered. And we continued to invest in innovation, spending more on research and development and custom applications and formulas for our customers than in any other time in our history. And as I said, this led to a powerful combination of growth and margin expansion.

We have a long history of improving mix by shedding high volume, low margin commodity business, often times for specialty smaller more niche applications. This has become our sweet spot and we have no intentions of going back to being peddlers. But we are approaching an inflection point where underlying sales growth becomes a driving force behind our earnings per share expansion. Quite simply and in closed partnership with our customers, we have worked very hard to develop sustainable and innovative solutions and pruning has waned as overall portfolio has improved. And this is true for all our segments, not just specialty. Our investments in commercial resources had an immediate impact on distribution and performance products and solutions. They often have the shortest sales or specification cycles and both had outstanding quarters.

Price deflation related to lower hydrocarbon raws masked this underlying growth due to lower selling prices. Distribution, for example, grew volume an outstanding 12% in the first quarter, the sales dollars increased 1%, which is why we always come back to the bottom line. POD delivered an 11% increase in operating income versus last year and PP&S delivered a 71% increase in alloy and a new level of record profit margins of 12%. PP&S and POD are predominantly North American based and to some extent we believe their year-over-year comps are positively impacted by customer destocking that took place last year and we didn't see a repeat of that this year. In fact that was on the road a lot in the first quarter visiting customers in North America.

Although, I don't think customers are “restocking”, they are optimistic about their prospects for this year. And if I wasn't looking at the headlines in Yahoo Finance or Wall Street Journal, I would have told you that I think things are going pretty well in North America and I feel that way today. Europe and Asia didn't experience the same level of growth, and we see that in our Color and Engineered Materials segment results. Although, both segments delivered record levels of operating income and profitability for the first quarter, these results were muted by a weaker euro and the international dynamics ranging from geopolitical concerns in Europe to economic transitioning in Asia.

Like Distribution and PP&S, Color and EM also increased their sales forces by nearly 10% last year. However, because they have longer sales cycles, it will take more time for us to see the benefits from these additional associates. Remember, we're not just simply selling pounds. We're working on unique custom formulations for our customers, which take longer to close. I also expect Color and EM's results to gain momentum throughout the year as we integrate our two most recent specialty acquisition, TPE Assets from Kraton, and Magenta colorants.

From a Color standpoint, we are thrilled with the technologies and solutions portfolio Magenta brings to PolyOne as we now offer both solid and liquid coloring options for fiber applications. The Kraton TPE acquisition strengthened our Engineered Materials portfolio on markets such as personal care, medical and packaging. Equally important, it expanded our ability to work with some new multinational OEMs in reaching their design, development and performance goals, utilizing new technologies.

The integrations were going very well. And our early customer interactions are highlighting the many opportunities we have to better serve them with the full sweep of PolyOne solutions. We are executing our commercial excellence approach through integration with our global sales force. And as needed, we will be able to cost effectively expand capacity by utilizing our global footprint and infrastructure, which brings me back to our consolidated results. I'm extremely pleased with our overall performance for the first quarter. While the top-line looks like [Audio Gap] price deflation and a weaker euro, underlying sales growth reached 4% organically with acquisitions adding another percent. And that coupled with expanding margins in all segments except DSS, led to a 22% increase in EPS over last year. It's truly outstanding performance.

And now, I'd like to hand the call over to Brad to provide some more detail.

Brad Richardson

Well, thank you very much, Bob, and good morning everyone. And I'm very pleased to provide additional comments and perspective on our results for the quarter. On a consolidated basis, adjusted EPS increased 22% as Bob said on the strength of investments made last year, which fueled our organic growth and margin expansion. We continue to run our business with an invest-to-grow strategy, where cost cutting is not our prosperity. In fact, last year we hired over 50 additional sales associates and we also expanded in marketing and technology. This is what it takes to truly drive sustainable growth with a specialty focus.

A common theme across our remarks today will be the relative strength of North America versus Europe and Asia. As Bob mentioned, we delivered 5% sales growth, excluding price deflation and a weaker euro. This was entirely driven by North America as Europe and Asia were essentially flat. Our Color business established new first quarter records in operating profits and profitability. OI increased to $35 million, and operating margins hit 17%, an 80 basis points improvement over the prior year. On a constant dollar basis, sales were effectively flat versus the prior year as gains in healthcare, appliance and fibers was effectively offsets by weaker results in packaging and consumer.

As with our other businesses, Color increased its commercial resources in 2015, and SG&A increased by about $2 million in the quarter. Other factors impacting the quarter were a weaker euro, which reduced a lot by $1 million, which was effectively offset by the addition of Magenta.

Specialty Engineered Materials also reached new record levels of profitability in Q1. SEM grew operating income to $23.4 million with operating margin of 15.6%. From a top-line perspective, sales picked up slightly as the addition of Kraton's TPE business plus organic gains in wire and cable application and appliance were partially offset by weakness in consumer.

The weakness in consumer application primarily relates to a couple of products including mobile device covers and a children's toy product line that had strong demand in Q1 of last year and was down this year. This impacted the bottom line disproportionately and effectively offset the gains in other end markets and application. SEM also added to its commercial resources and SG&A increased a little over $1 million as a result.

Although EM and Color did not hit their normal 10% or better operating income growth we have every confidence that the additional resources we have added will return them to this level of performance or better for the balance of the year. At Designed Structures and Solutions, we continue to manage and be impacted by the customer losses in 2015. And as such, delivered relatively modest operating income in Q1.

While we are not satisfied with the results, I've personally visited multiple DSS locations in the quarter and I'm encouraged by the underlying operating improvements being made in the business. On-time delivery continues to improve and it averaged 91% in the first quarter, up from a low 46%. Our scrap rates and quality claims are decreasing, we continue to upgrade our facilities and have several LSS projects ongoing at DSS.

We're investing capital in our Royalite, PETG and Polycast product lines and are also investing in SAP as 9 of our 16 facilities are now live. By improving operational excellence and customer service, we are earning the right to have exceeded our customers' statement. We're discussing next generation products and innovation and that more than anything else we’ll drive long-term growth.

Fortunately, we have several outstanding internal models and a track record of successful transformation to follow at PolyOne. For example, PP&S has been the poster child for Lean Six Sigma, improving operational efficiencies and lowering input cost overall. So, we have also invested in commercial resources. These prior year investments combined drove underlying growth and a powerful margin expansion effect in the first quarter.

PP&S kicked off the year in a strong fashion, achieving impressive improvements in operating income and profit. For the quarter, operating income expanded over 70% from the prior year, as margins expanded over 500 basis points. Some of this growth is likely the result of destocking that took place in Q1 last year that did not repeat.

But we're also seeing good fundamentals in the North American economy. Demand in construction, industrial and transportation all picked up in this end markets, which is likely also benefiting our Distribution business. As for Distribution, the team expanded the top line through increased volume and mix improvement, which was partially offset by lower prices, due to lower hydrocarbon based resin prices.

Total volume in the quarter was up 12% and, as Bob mentioned, or due to our recent commercial hires and back to basic customer service we are outpacing the market through relentless focus on using service as they differentiate. On-time delivery in POD, for example, consistently meets or exceeds our goal of 95%. Another exciting development in POD is our growth initiatives in Mexico.

Distribution has been surging growth in our customer base in the regions, due to re-shoring of manufacturing back to North America and is increasing training, warehousing and supply chain management support. By making key resources available locally, we can help ease the transitions and fill gaps for both U.S. based manufacturers and processors establishing their operations in North Central Mexico. As well as Mexican molders and processors looking to streamline their operations and serve their customers more efficiently.

In addition to opening new warehouse facility in San Luis Potosí, POD has added experienced local Mexican sellers to its sales team. With more regional personnel PolyOne distribution can now offer local molders and processors more value-added services and technical support earlier in their products lifecycle. All of these actions at POD resulted in the first quarter operating income of $17.5 million, an 11% increase versus the prior year and an improvement in March operating margins of 60 basis points over the prior year to 6.5%. Truly world-class for a distribution business.

This first quarter reinforces the ongoing potential we have seen in PP&S and POD. These two businesses have very high returns on capital and generate tremendous cash for PolyOne. But this is a financial measure of their success made possible by relentlessly embracing and executing our four-pillar strategy just as all of our segments do. In short, they play to win and it showed.

In terms of results on a GAAP basis, EPS in the first quarter was $0.46 versus $0.34 in the first quarter of 2015. Special items in the quarter resulted in a net after-tax charge of $9 million or $0.10 per share and included the following: restructuring cost of $7 million, primarily associated with Designed Structures and Solutions. And acquisition related costs associated with Magenta and Kraton of $3 million.

Free cash flow for the quarter was used of $49 million reflecting normal seasonal working capital build, and we ended March with a cash balance of $155 million. We also drew down our cash balance to fund the acquisition of Kraton's TPE business for $72 million and $40 million of share repurchases purchases in the quarter at a weighted average purchase price of $26.38 per share.

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

Bob Patterson

Thanks, Brad. I love what you said about playing to win, I couldn't agree more. And playing to win as team is powerful. Everyone knows a phrase that a chain is only as strong as its weakest link. There are many examples where this is absolutely true, but it doesn't fit every situation and I don't believe it applies to PolyOne.

At PolyOne, we are a team and while one of our segments DSS has been struggling, it didn't weaken our chain. We have five segments, they don't always, all have perfect quarters or years but we've all played a win as a team and we find a way to win as a team.

In fact, I submit that our results last year galvanized us and strengthened our result. We invested in the phase of adversity and delivered double-digit EPS this quarter as a result. The increased commercial resources immediately benefited POD and PPS this quarter, and will soon benefit our other segments, which I've said have longer sales cycles and this includes DSS. During the quarter, I visited a number of DSS customers and I'm pleased to report that all viewed us as a critical and important supplier. Some but not all of them were impacted prior – by our prior year integration challenges, but for those that were, they were unanimous in saying that these problems were behind them and us. I tell you that these visits pump me up. We are overdue for some good news in DSS and getting it first hand from our customers made it all the better.

The conversations quickly turned to innovation and how we can help partner with these customers. We've held technical seminars, demonstrating our full range of capabilities, such as combining GLSTPs with sheet and packaging materials for vibration dampening and sound abatement. We've also highlighted how performance additives can improve scratch and marring resistance, provide UV protection and advanced colorants improve visual appeal.

Our Color Additives and Inks business recently added a research and development line to quickly trial new color applications with DSS sheet and roll stock materials. Our speed to market has improved considerably and we are gaining traction with some exciting new business opportunities as a result. And this really is just the beginning. I know that DSS ride has been a tough one for investors and I don't want to oversell our progress.

We still have a long way to go to improve profitability and drive growth. But to put things in perspective, investors should not view PolyOne's growth prospects is solely dependent on the turnaround of DSS. It certainly represents a significant upside opportunity from here however. We have four other segments, which are setting new records in driving growth for PolyOne.

For investors who have followed us for a long time, you know that each of our businesses have been implementing our four-pillar strategy, and improving the underlying mix of solutions we provide to the market and to the customers we serve.

Our portfolio has never been stronger, and although pruning never ends completely, we are now seeing growth as it diminishes and we capitalize on new business gains. But we're not going to go back to chasing pounds for pound sake.

I was very pleased with our results this quarter, as we achieved underlying organic growth of 4%, while also expanding margins. With an improving organic profile, we're also ramping up our efforts to identify specialty acquisitions and investments in innovation that will accelerate our growth. These will likely be smaller in nature but have a more specialized profile. We've had tremendous success with acquisitions like GLS, ColorMatrix and Glasforms, where we have been immediately able to drive growth by leveraging our commercial resources and global presence.

Innovation has always been our lifeblood, and now we’ll continue as we invent internally, customize at customers requests and acquire complimentary capabilities. We continue to live by our four-pillar strategy and remain focused on providing our customers with distinguished service and unique value-added offerings.

We have the right strategy and team in place, and we are confident in our ability to drive double-digit adjusted earnings per share growth in 2016 and beyond as we pursue our Platinum Vision for 2020.

Before I open the line for questions, I’d like to recognize and thank Steve Newlin who is retiring from our board as Executive Chairman next month. Steve is the architect of our specialty transformation. I feel very privileged that the board has appointed me to succeed Steve as Chairman and I feel a continued sense of gratitude for all he has done for me and our great company. Thank you, Steve.

With that, we have time for questions.

Question-and-Answer Session

Operator

The call lines are now open. [Operator Instructions] Our first call comes from the line of Mike Sison of KeyBanc. Your line is now open. Please go ahead.

Mike Sison

Hey guys, great start to the year.

Bob Patterson

Thanks, Mike.

Mike Sison

Bob, when you think about PP&S, your margins were impressive, I think, already at the high end of your new 2020 goals. How much of that improvement is sustainable maybe from your product mix strategy and maybe some of it might be little bit temporary given the maybe some restocking and demand from customers?

Bob Patterson

Yes, look when you look back on the first quarter of last year, I mean, clearly that was a disappointing beginning to the year, where we did experience destocking. And I do believe that to some extent, Mike, we have benefited from year-over-year comps and that didn't recur this year. So, some of that margin expansion may come from that. When you look at the underlying growth, I think it reminds us just how powerful a little bit of growth can be. And so, it remains to be same, I think as the second quarter plays out, which is typically one of our strongest, it really is our strongest for the company as a whole, we've a better sense for that. But I think most of its going to be – it's going to stay.

Mike Sison

Great. And you talked about, I think Global Color and Engineered Materials picking up in terms of earnings growth for the rest of the year. Can you just walk us through what's going to drive those businesses in the second quarter, third quarter and fourth quarter?

Bob Patterson

Yes, well look, one of the things that I really highlighted in my previous remarks was the investment that we've made in additional resources and I think that will gain traction as the year plays out. Look, to some extent, we – if nothing happens with the euro from here on out, it actually seizes to be a bad guy and had spent one now for about five quarters or six quarters in a row.

So, I think those are a couple of things moving in our direction, plus just the ongoing growth of both businesses. If I could put one thing on my wish list, it would be a little bit better growth in Europe as I think that would probably drive things faster than anything else.

Mike Sison

Great. Thank you.

Bob Patterson

Thanks, Mike.

Operator

Thank you. And our next question comes from the line of Frank Mitsch of Wells Fargo Securities. Your line is now open, please go ahead.

Frank Mitsch

All right. Good morning, gentlemen. And let me…

Bob Patterson

Hey, Frank.

Frank Mitsch

Let me add my congrats to Steve as well, as you know he’s not there. But I still need to follow-up on PP&S. I looked back and this was actually the best quarter since 2007, which is when the housing market was rocking and rolling. And Bobby just answered the question saying that you're thinking of these levels can continue. What do you think about the competitive environment out there, and again, the sustainability of this – the best levels in close to a decade?

Bob Patterson

I look from a competitive environment I don't really have any new news than probably what we've shared in the past that remains a competitive market and perhaps one of most so from a pricing challenge perspective. I think our team has done a really good job though when you could look back and compare us against 2007 in terms of improving the underlying mix of our business. And it’s so much less dependent on housing now than it ever has been before that gives me more confidence on the sustainability going forward.

Look, I also say last year was, really tough year for all aspects of that segment not just final, it also included the results of the operations we acquired from Spartech, which were down significantly, very much challenged by the underlying price changes last year. And so like I said, I know the margins looked high and you have to go back a long way to see them be comparable with that levels, but feel very confident about our ability to continue drive growth in here.

Frank Mitsch

All right that's certainly encouraging. And then and speaking about the volumes around the world, you said that North America is doing better then what the headlines would be indicating although you also said Europe and Asia weren't all that great. Any green shoots there or anything you can discuss in terms of the volume breakdown by geography and expectations?

Bob Patterson

Yes, I mean overall, if you look at consolidated organic numbers we talked about being up 4% and North America was up 5% or a little bit better than 5%. So you had a little bit of retraction in Europe and in Asia, which really is candidly a mixture of different end market affects plus just a couple of programs that lapped themselves in the EM. So from a green shoots perspective, nothing that I would really point to as saying hey this end market or that one is taking off. I have believed for period of time though that packaging should improve in Europe and I really think that’s going to drive margins and growth, particularly in Color as soon as that happens.

Frank Mitsch

Very helpful. Thank you.

Operator

Thank you. And our next question comes from the line of Bob Wood [ph]of Goldman Sachs. Your line is now open. Please go ahead.

Unidentified Analyst

Thank you. Good morning. The POD I seem to recall at the beginning of the quarter when you reported the end of the year numbers you had mentioned volumes were fairly strong, but substantially less than the double-digit you reported. So, whether there's something particular about March that floated for you and then what's the daily sales rate look like in April so far? I just wonder if there might be free buying at a lot of Polymer price base?

Bob Patterson

Yes when I – if I just think back to my comments after announcing the fourth quarter results, January, I think we would have commented – would have been up probably about 4% or so for POD. We had a very strong February in fact and not just a March effect. So, February was very strong and March was also very good. Bob those kinds of things do happen sometimes where people get anxious about price changes and may move purchasing ahead or back depending on which way they think it's going to happen. So, it's possible there were some impact from that in the first quarter and maybe that is also something that impacted PP&S. But I really couldn't quantify it for you.

Unidentified Analyst

And sales rates through the second quarter so far have been consistent with the first quarter?

Bob Patterson

So, in terms of what we're seeing in April these businesses are continuing to deliver growth that's not quite at a 11% or 12% as we talked about in distribution, but still up in April so far, but we don't have finalized April's numbers yet.

Unidentified Analyst

Can you talk, you mentioned 4% rightfully about a 4% volume growth through the quarter. What did the bigger Color business does and how varied was it geographically?

Bob Patterson

Yes. I mean, so EM was up slightly, Color was down slightly for almost a push. And when you look at things geographically, it actually will resonate just like really our earlier comments which was a strong performances in North America, effectively offset by some weaker performances in Europe and Asia and that really is true Bob for both of those segments.

Unidentified Analyst

Right. Thanks for the help.

Bob Patterson

Yes.

Operator

Thank you. And our next question comes from Jason Freuchtel of SunTrust. Your line is now open. Please go ahead.

Jason Freuchtel

Hey, good morning.

Bob Patterson

Good morning, Jason.

Brad Richardson

Good morning.

Jason Freuchtel

Going back to the established businesses, was the strength you experienced in [indiscernible] in distribution in line with your expectations coming into 2016? And so far have you seen any examples of contribution from your sales force additions in your Specialty segment at this point?

Brad Richardson

I mean, I would say that when we announced our fourth quarter results and to Bob’s earlier point, we had talked about January sales growth being up sort in the 4% type range for those two business. And so, with February and March results coming in being stronger than that that was better than I would have probably predicted if you'd ask me back on our call at the end of January. We are seeing traction with our new sellers in both Color and EM, but when I talked about traction it's often really measured in terms of how well are we proceeding with respect to getting new specifications and/or customizing applications for them. So that traction takes time and the sales cycle for EM can be 18 months or longer depending on the end market.

David Stratton

Okay, great. And it looked like your inventory position increased slightly relative to last year, is that primarily a function of having to hold more inventory you transition in the DSS business to new production lines or are there other factors there influencing your inventory position?

Bob Patterson

Well, we did acquire Kraton and Magenta and I think if you took out their numbers, we're probably pretty consistent, looked about the same as where we'd be last year, maybe down a little.

Brad Richardson

Yes. David, if you look at DSI, we're about flat year-over-year.

David Stratton

Okay, great. Thank you.

Bob Patterson

Welcome.

Operator

Thank you. And our next question comes from the line of Tyler Frank of Robert Baird. Your line is now open. Please go ahead.

Tyler Frank

Hey, guys. Nice quarter. Thanks for taking the questions. It looks like DSS performed better than expected, do you guys think that you've reached a bottom at this point and should we expect performance in that segment to ramp throughout the year?

Bob Patterson

Well, look I mean clearly that year-over-year decline in operating income is something that we had projected on our last call. We did a little bit better than probably some of the comments we've made then and I really give the credit to our team for doing that. But I don't know if it's appropriate time to say we are ramping up or whether or not we just need to move sideways here for the next quarter. I still believe that we'll start to show improvement here in the second half of the year. So my view on that really hasn't changed from the last time we spoke and I think that's probably a pretty accurate reflection of where I think things will play out this year.

Tyler Frank

Great. Thank you.

Operator

Thank you. And our next question comes from the line of Mike Harrison of Seaport Global Securities. Your line is now open. Please go ahead.

Mike Harrison

Hi, good morning.

Bob Patterson

Hi, good morning.

Brad Richardson

Good morning.

Mike Harrison

Bob, I was wondering if you could talk in a little more detail on DSS about the volume growth that's going to be happening going forward. It seems like now that you've bought some of these higher volume commodity type applications, you can start to attack that, that market in a little more PolyOne typical fashion that is lower volume, more specialty type product. And I was wondering how confident are you that you can start to get traction as you try to attack it that way? And are your operation, the former Spartech operation, and some of the changes you've made in the consolidation, are they equipped to make some of those lower volume runs or will it be a challenge as you shift from higher volume batches to lower volume batches?

Bob Patterson

Well, let me comment on the revenue side of the equation first and clearly the average customer size and profile for DSS has changed considerably from when we acquired Spartech, and now you look at DSS with having a $400 plus million run rate in revenue. And no one customer really accounts for more than probably $11 million or $12 million of that, so that profile is really starting to look a lot more like PolyOne. And so I think your spot on there, and when I look at recent wins in the last three months to four months, they have been in the $1 million to $2 million to $4 million range.

So my expectation is that is the path forward for us. And the challenge in front of us really is getting our plants capable of running smaller batches more efficiently, and that's really the exact same challenge that our Color and EM businesses faced 10 years ago. So, it's the same challenge we have in front of us to answer your question, are we prepared? I would say, we're not where we want to be yet, but we're making good progress.

Mike Harrison

And then, in terms of the Color business, you mentioned that packaging was lower. Is that just a market decline or was there some business that you had last year and you lost or can you just talk about some of the dynamics and maybe the path forward on packaging?

Bob Patterson

Yes. The comment that I was making was that what – it was really twofold. One was I just didn't see the level of growth that we thought we would in Europe. And then I try to turn that into an observation, if you will about what's on my wish list because if we did see growth there and I think we should to the balance of this year, that would help out Color from a margin standpoint, probably more than anything else. So hopefully that helps to clarify my comments. There's no real significant observation to make on packaging other than that.

Mike Harrison

All right. Thanks very much.

Bob Patterson

Sure. Thanks.

Operator

Thank you. And our next question comes from the line of Laurence Alexander of Jefferies. Your line is now open. Please go ahead.

Dan Rizzo

Good morning. This is Dan Rizzo on for Laurence. How are you?

Brad Richardson

Hi, Dan.

Bob Patterson

How are you, Dan?

Dan Rizzo

You talked about packaging, which is somewhat your other – you did break it down geographically, but just with some of your other end markets like – particularly like transportation, could you just provide some color on what you're seeing there?

Bob Patterson

Sure, Dan. I mean, in terms of North America, and I know that's a comment that’s rather than any growing marks today. We did see an uptick in transportation across the board, I was really more of a North America thing, it was not a big increase, but it's also a large part of our business. So, that does drive some of the growth. We also experienced growth in appliance and also in fibers as well as in industrial applications.

Dan Rizzo

Okay. And then one other question, in terms of pricing, I know there were some concessions but now that maybe shift a little what we expect going forward?

Bob Patterson

Well, look it varies by business, the reality is that, if you look at distribution for example, we've really don't set prices in that business, that's done by our suppliers. And to the extent that we have a little bit of inflation going forward, we would see pricing start to increase, that impacts different businesses in different ways, but on balance, I view a little bit of inflation is a good thing for us.

Dan Rizzo

Okay. All right. Thank you.

Bob Patterson

Yes.

Operator

Thank you. And our next question comes from the line of Kevin Hocevar of Northcoast Research. Your line is now open. Please go ahead.

Kevin Hocevar

Hey, good morning everybody and congrats on a great quarter.

Bob Patterson

Thanks, Kevin.

Kevin Hocevar

I’m wondering if you could – you mentioned in the press release and I think you mentioned on the call an expectation to grow adjusted earnings double-digit here in 2016. So, obviously that's a pretty wide range. So, wondering if you can help us narrow that down because wondering if this level of growth is sustainable for the full year because we'll have Hawaii growing double-digits in the specialty, global Color and Engineered Materials, it sounds like relative to sustainability of PP&S margin. So, wonder if you could help us narrow that down a little bit further?

Bob Patterson

Well, we expect double-digit EPS growth for the year, but just specifically answer your question about whether or not this first quarter growth rate will carry through for the future quarters, I don't think that's the case, I think you will see that double-digit growth rate moderate here in the second and third quarters. As I said, I think to some extent, we are benefiting from a low comp last year in the first quarter, I don't want to take anything away from our results, but that's a fact. And so that largely is what drives my statement about seeing some moderated growth here in the latter part of the year. But still very good growth – I think that's about as much as I can probably narrow that down for you, Kevin.

Kevin Hocevar

Sure. That's great. And then in terms of the additional commercial resource, is there any way to quantify that type of benefit you saw from that in the first quarter and what your expectations are for the full year. Is there any way you can break that down for us?

Bob Patterson

Not to the extent it would be really helpful. If we look at obviously seller performance and we certainly measure how well everyone does year-over-year, but I really don't want to say, hey, we hired a new seller, and that person did extra amount of growth and they are entirely responsible for that. I mean we have a very powerful coaching and managing network of sales managers, directors and leaders. And I think, they're the ones that really deserves the credit for bringing new resources and making them immediately productive, but I don't know one statistic, I can give you Kevin I would hey, per seller, we generated extra amount of revenue and have that really be a meaningful, because it just vary so much by business.

Kevin Hocevar

Got you, okay. Thank you very much.

Bob Patterson

Yes.

Operator

Thank you. And our next question comes from the line of Dmitry Silversteyn of Longbow Research. Your line is now open. Please go ahead.

Dmitry Silversteyn

All right. Good morning and thank you for taking my call.

Bob Patterson

Hi, Dmitry.

Dmitry Silversteyn

How are you? A couple of questions. First of all, on the PP&S margin obviously a very strong expansion constantly year-over-year and how you look at it. How much of that is sort of your pivoting away from the construction into more medical [indiscernible] and other market applications. How much of that was the raw material benefit versus volume growth benefit. I'm just trying to understand sort of the sustainability of this new level of profitability and as I look at sort of end market performance expectations for the balance of the year. And as well as from material expectation of the balance of the year how should I think about modeling that, that business going forward?

Bob Patterson

Yes, I mean it's difficult to breakdown to a specific, let's say three or four step numbers of where that growth is taken taking place from. I mean, look everybody has been really asking some very similar questions, and I think rightfully so. I look at, there is no doubt that we're benefiting this quarter from an uptick in volume growth there, at a time when I think we've got underlying good dynamics from a raw material standpoint.

I think that going forward that as we get into the second quarter, you could see some of that pullback because I don't think we'll have the same year-over-year underlying comps, but I really couldn't give you more specifics on where that's going to land in the second quarter. Typically the second quarter is a better quarter for us in that business. So, I really hope that helps us to continue to improve, and I know that was a very general response to your question, that's probably the best I can do.

Dmitry Silversteyn

That's fine, that's fine. Maybe I can ask this a little bit differently. Do you need the strong construction market in North America in 2016 to maintain this level of performance or if you moved enough away from it where these other markets grow and we have another, lets say, okay year in construction, if that business will still perform for you?

Bob Patterson

Now look, I think that we have absolutely improved our mix over the years, as youve followed us and you know that, but construction is still a big market for us and that business is doing well in North America is helpful, its not as helpful as it was, but look I think if it went backwards or went flat, we would still be able to grow, but Id also say that construction is a good guy for us this year, so thats helping.

Dmitry Silversteyn

Got you. Okay. And then final question on Engineered Materials and you know sort of need to depth a little bit, but Im just looking at operating profit, I think year-over-year and theyve been sort of flattish, but your gross margin improved. So, is this what Im seeing basically is the expansion in your sales organization and higher SG&A thats causing operating profitability to flatten out and we should expect that to pick up over the next year, lets say, as some of these sales cycles start bringing in the new business.

Bob Patterson

I think I follow you on that, I mean, you made a good point. Look, the additional resources that we added in both Color and EM have no doubt increased at SG&A. And so, until those new sellers and resources start to deliver, I think, we see a little bit more muted growth.

Margins have improved in these new sellers, are absolutely focused on winning the right business, and new business that allows us to do that. I hope it does answer your question, because they are focused on more than just top line number, it is also by improving margins as well.

Dmitry Silversteyn

Got it. Okay. I was just looking at your gross margins and your gross profit, specifically EM improved significantly more so than operating profit, so I just want to make sure that this – that this not a mixed issue, this is really just extra cost that you put in at the end of last year to drive growth going forward.

Bob Patterson

Yes. Yes. Thank you.

Dmitry Silversteyn

Thank you.

Bob Patterson

Yes.

Operator

Thank you. And our next question comes from the line of David Stratton of Great Lakes Review. Your line is now open. Please go ahead.

David Stratton

Yes. The number of new projects opportunities in Color and Engineered Materials, Im wondering if thats inconsistent with prior quarters, is that – maybe being impacted by economic conditions overseas or are you seeing those opportunities accelerate with the new sales force addition?

Bob Patterson

Well, keep in mind, that our average transaction size is $24,000. So, its hard to put an exact number on how many new projects were working on. I mean, look, I can tell you that with respect to the consolidated results for our segments we have our momentum. When I look at our sales funnel, its better and has more in it particularly in the best view opportunities than we have had before.

A great example that is and as I look at this first quarter results, our distribution business had more new business gains last year than in any year before that. So momentum is all going in the right direction there from a new business gain standpoint.

David Stratton

And then the impact on the sales EPS on the euro, do you have that for the quarter?

Bob Patterson

It was about $1 million, but my sales number was – I remember $12…

Brad Richardson

Sales number was about $9 million.

Bob Patterson

Thats right.

David Stratton

And finally, are there any further plan consolidations planned in DSS or is the focus is more on executing with existing operations?

Bob Patterson

Yes. Ill just, if I – just Ill go back to some comments I made at our call in January, which was – we are in the process of closing our Wichita, Kansas facility. We dont have plans to close any other facilities. Candidly at this time as I look at DSS, theres no doubt that we have capacity, but our first priority is to improve on-time delivery, quality and operational efficiency and have happy customers. And I dont want to take anymore cost out, thats not going to be how we do that. So at the moment, were really focused on is that front end part of our business and dont have any additional cost actions at this time.

David Stratton

Thank you.

Bob Patterson

Thank you. Theres time for one more question, if we can.

Operator

And our next question comes from the line of Rosemarie Morbelli of Gabelli and Company. Your line is now open. Please go ahead.

Rosemarie Morbelli

Thank you for taking my questions and congratulations on the first quarter to Steve and you Bob as well for stepping into the Chairmans shoes.

Bob Patterson

Thank you.

Rosemarie Morbelli

I was – you increased your sales force by 10% last year. What is the game plan for this year? Do you feel that you need to add another 10% or 5% in spite of those added to the longest cycle operations have not yet contributed?

Bob Patterson

Our stated goal this year, we will increase our sales force, it will not be at the 10% level that we did last year. And look, I expect that every year we have some level of attrition and turnover. And so, probably be able to give you a better sense for that at the end of the second quarter. But we have every expectation of continuing to invest in sellers, as well as marketing and technology.

Rosemarie Morbelli

Okay. And then looking at PP&S, I mean you have to be and I think you said that you were benefited from the housing in spite of its smaller exposure. Could you talk about different – other markets where you saw a better than anticipated type of growth rate?

Bob Patterson

Yes. And hopefully Im not overstating the comment about housing, I was trying to comment that its still a significant market for us and construction helps us. But we did see, like I said, a good quarter in appliances, as well as in industrial applications, and again, this is really sort of a North America observations because thats really where PPS is.

Rosemarie Morbelli

Any specific area in industrial as we keep reading about the fact that industrial is actually slowing in North America or in the U.S.?

Brad Richardson

Yes. And look, I mean, when we make these comments about our own segments, I can appreciate that at times there maybe disconnects between our performance and an underlying macro story out of an end market, but I think its a good example of winning new business. And for us, a couple of points extra new business really offsets what could be a macro headline around industrial being down. From my own experiences, I visited with customers in the first quarter, like I said in North America, I think they are largely positive. I think they really believe that weve got good prospects for this year.

Rosemarie Morbelli

And one last if I may, could you talk about the trends for raw material versus pricing?

Bob Patterson

Yes. I think that, obviously last year was very volatile year with prices coming down and oil moving as much as it did. I think that, we probably will see some level of inflation this year, I hesitate to predict to what that is, but coming out of their first quarter I think thats going to be the case.

Like weve always said that a little bit of that is actually a good day, lower raw on balance are good for us, but a little inflation over time is also helpful. So, my sense is thats what were looking at right now, but I really hate to prognosticate on that at length.

Rosemarie Morbelli

Okay. Thank you very much.

Bob Patterson

Thanks, Rosemarie. And thanks to everybody else who was able to join us on the call today. It was a pleasure to share our first quarter results with you and look forward to doing so after our second quarter. Thank you.

Operator

Ladies and gentlemen, thank you for participating in todays conference. This concludes todays program. You may all disconnect. Everyone have a great day.

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