Avient Corp (AVNT) 2002 Q1 法說會逐字稿

Earnings conference call. All participants listen only to the formal question and answer session. At that time -- this conference the recorded at the request of the PolyOne. If you have any objections, you may disconnect. I would like to introduce the hosts, Dennis Cocoa, chief financial officer and Mr. David Wilson, chief financial officer. Gentlemen, you may begin.

Thanks, Jennifer. Well, good morning, everyone. Thank those who are joining us. I'm assuming that those on the call have received all the information that we have sent out last night. If for some reason, you didn't receive it or it is obviously on our web site and also you can contact Darlene 216-589-7642, to get a copy sent to you.

A couple of housekeeping items. We are web casting on the web site. All those of you participating understand that. I'm not going to repeat the safe harbor language and read it to you. I'm going to assume you have read it or have a copy and invoking that today.

The relative to questions, we're going to hopefully address all your questions today but like to restrict it to analysts and at this point in time, if there are media, you can listen to the conference call this morning. If you would like, call me after the call. I'd be happy to answer your particular questions.

I've got a few opening remarks as does Dave. And then we'll open it up for questions from those participating. Let me just talk about the PVC resin market a little bit. Dave will talk about the high leverage variables. I will talk about what we see going on in that marketplace.

The -- it has been an interesting quarter for the PVC industry as you -- most of you may know. Those especially following the industry and some of our competitors. It's been a period in the first quarter where there's been an effort to raise prices and looks like successfully in February and March.

And, there has been some -- it has been enough for April and May and it's still real early to see how that's going to occur. Chlorines following the PVC prices increases and the chlorine going up like wise and expect good reason for that. When you look at where the ecu value is in the first quarter, there is certainly an economic reason for moving chlorine and sure part of the reason pushing the PVC price up.

And (inaudible) been participating in the cost -- and really soft. The cost for cost desoto not rebounded. In fact, not just pricing coming down but demand for cost desoto is soft and going into the second quarter and very similar conditions. And prices will probably continue to fall off.

I wanted to make a point on the PVC demand outlook. Particularly in the first quarter. We went back and looked at the last three or four years of PVC demand in the first quarter. I went back to 1999. It's interesting when you look at PVC demand in the first quarter, it has not been as an industry -- it has not been significantly changed.

In fact, the shipments in the first quarter on a just a domestic basis excluding exports, only about a percent higher than 1999, and only in fact, they're behind where they were in the year 2000. So it's speaking that the industry is still not fully recovered but looks like it is a good sign, especially considering how well an industry shipment rate we saw in the fourth quarter.

I want to also talk about Triple Crown for just a moment. The Triple Crown for those of you who recall is our PCC North American asset reconfiguration program and where we're going to create some centers of manufacturing excellence. And, at the same time, reduce some of our operating sites.

In the -- the team is active and busy. We have a significant program in place for this year. They have set up a team that now has 8,000 activities organized around the movement of products, the installation of equipment, the expansion of sites and the closing of sites. And it's a pretty extensive checklist they have put together that they're ten field transfer teams in place, moving -- working with the operating sites and the sales organizations to ensure that we complete this program efficiently and without any disruption with your customers and I think it's a well thought out, well organized and moving quite well program from everything we have got going.

As you know, we're creating CME's for color, 9 CME's for vinyl and 4 CME's for engineered materials. We did close one plant here in the first quarter, and we have a number of other plants scheduled for closure throughout the balance of this year. Most of that occurring -- the biggest part occurring in the fourth quarter. I think we have six plants scheduled for shut down at this time in the fourth quarter.

I want to just talk about project one, which is our I.T. program. And where we're trying to bring most of the company on to a common I.T. system. I mentioned this in the press release. That project, as well, is progressing quite well.

The elastomers group completed installation of their new sap system and business practices in January and have been operating on that platform since then. The formulated group has been in the training process and they are creating a fairly large transformation for that business because as some of you may recall, the formulators is small acquisitions that were occurred in the last three years and those companies certainly did not have the I.T. strength or experiences that's going to be required and upgrading and training and preparing them for June launch on the new I.T. system.

I think overall we're very pleased where the whole program has gone so far. I think the first phase which is really installation of the hardware and the systems and also, the training, is going well. I think the operating of the system and the using of the system is sort of the next phase, and we're in the process of doing training to garnish benefits of the system as we move forward.

With those comments, ask Dave to add his comments.

Thank you, Dennis. Thank you everyone for interest in PolyOne. First quarter even though better than consensus, a loss is never satisfactory, so a penny losses were reporting is a disappointment. However, as we look at the quarter, I think here, too, we can continue to see the improvements we're making in restructuring the company as we've discussed in the second half of 2001. The first quarter on a year over year basis shows good strength in terms of our ability to structurally improve our cost position. When you look at the first quarter last year, we sold nearly $100 million more products. And, that would have an adverse affect on the first quarter this year, in excess of $25 million and yet for performance businesses, we more than make that up through improvements in our margins and improvements in our cost structure. So that our performance businesses on a year over year basis despite being down $100 million in sales, earnings are up $3 million we also got a bit of tail wind from the r and i on a year over year basis, you'll recall first quarter last year is when natural gas was through the roof, and frankly, the bulk of the $9 million improvement in r and i is attributable to lower energy prices, and some flow-on in terms of lower ethylene, as well. When we look into the value capture initiatives, we did show that an improvement versus the fourth quarter so we're continuing to build them we reported around 22, $23 million. The value capture in the first quarter. That's up 3 to $4 million as compared to the fourth quarter and largely it's in two places. It's in continued benefits as we put in place strategic sourcing initiatives. As well as, getting more benefit from the films restructuring that were announced last year. As we go through the course of the year, we would expect to see continued improvements on the direct materials side and this would be through the various strategic initiatives that we have there in terms of reformulating products. Some basically break bulk capabilities that we're developing in house. That will reduce logistics in raw material costs.

We also start to expect to see towards the second half of the year a pick up in improvements in terms of logistics costs as we complete our network assessment. And we also would continue to expect to see the benefits from some of the manufacturing restructuring that were announced last year as we have talked, the big step up in value capture associated with Triple Crown really won't happen as Dennis was mentioning in the back end of this year, and really, it's first quarter 2003 when we would expect to see the roughly $50 million improvement. One aspect of the quarter that -- actually happened a little bit into the second quarter, you would have seen that we went to the capital markets and issued $200 million of debt. Our reasons for that were very simple. We wanted to assure our liquidity through a period of economic uncertainty and we did just that. We wanted to take advantage of our access to the market. At this point in time, in order that we could basically eliminate or take off the table potential refinancing risk associated with $128 million of debt that would be maturing the end of the third quarter, beginning of fourth quarter next year.

By being able to go into the market this past month, we have been able to assure the liquidity through the cycle and frankly, have taken the refinancing off the table as we intended. The proceeds were used to pay down debt of various types and frankly, we don't expect to need our short term revolver banking facility for the next 12 months.

As we look at the second quarter, which probably is the principle question that everybody has, I would tell you that as we watched the business develop in the first three months of this year, there's clearly more optimism in terms of where the economy is going. I don't think we'll be the only people -- in fact, we're probably singing much the same tune in terms of the cautious optimism but what we are seeing is progressively strengthening of the order banks.

The first couple -- first two and a half weeks or so of the month, the orders are strong and then as customers don't want to be caught in the situation of building their inventories, the order books tail back. But then the next month starts and from a little bit higher level.

So as we look into the second quarter, I will be disappointed if we don't show good sequentially top-line growth, as well as profitability. Whether or not we can achieve the level of sales that we achieved in the second quarter of last year is problematic but I would tell you if we're not approaching double digit sales growth in the second quarter, that would be a disappointment to me and with the earnings pulled along with that.

So, we're not seeing the economy take off. I think that -- I do think, though, that we are seeing signs of improvement. I believe that they will start to sustain, but there are certainly in terms of auto bills and markets like that some question marks that we really need to go forward in the future to get a better view of what's going to happen there. As I say that, though, I do believe that the first quarter will be our low point in terms of sales bottom lines, certainly, for the year, and that we would expect to see progressive improvements.

As we look forward to the high leverage variables out into the year, the question mark is going to be how much of the PVC resin increases are going to take. In the first half of the year, 12 cents were put on the table as Dennis mentioned, looked like four were taken in the February/March period. Resin demand remains strong.

The improvements that we'll see in oxy vinyls will in large part insure that the margin squeeze that we don't see compound prices moving up, that our profitability would be holding more or less neutral.

And so, oxy vinyls would tend to be serving its purpose in that respect. I will say, though, when you look at sequentially fourth quarter last year to first quarter this year, you see a very large improvement in vinyl volume and as we do volume vary answers, somewhere in the neighborhood of 200 million pounds for oxy vinyls. That benefit which is around $20 million on a variable margin basis was fully offset by the decline in costic volumes and costic pricing. A lot of -- again, we would expect the costic pricing will continue to fall in the second and third quarters, fourth quarter there maybe a recovery. There may not. I'm not that smart.

Chlorine, on the other hand, if vinyl is strong, will continue to pace up second quarter. I think it's fairly widely known that $50 a ton has been put on the table. I did read that another supplier was looking for a little more for noncontract. I think it's indicative of where pricing will be going. Ethylene appears to be moving up with feed stock costs and I think we'll see that in the second quarter. I think we'll also see the impact of natural gas being somewhat higher in the second quarter versus the first quarter.

And then, PVC resin of course is going to be showing a strong gain in the second quarter versus the first quarter. Having said all of that, we do expect oxy vinyls to show a sequential improvement second quarter as compared to the first.

And then, as we look as I said into the third and fourth quarter, the high leverage variables with lots of puts and takes are largely going to be a push unless PVC resin truly does break out.

My forecast, if you will, or my assumptions are not based upon getting the full measure of second quarter PVC price increases. Certainly, there maybe some upside there.

With that, turn it back over to Dennis for question and answer.

All right. Jennifer?

Thank you. If you'd like to ask a question, press star 1. You will be announced prior to asking a question. To withdraw your question, please press star 2. Once again, if you'd like to ask a question, press star 1 now. The first question comes from John Roberts.

Good to have you back.

Good morning, guys. Thank you. I want to check if I understand right, you expect trends in your automotive and construction end markets to sequentially improve as the year progresses or are you expecting some offset to sort of flattening to -- you decline later this year in those two key end markets?

John, on the construction side we have optimism. I would say a question mark in terms of auto with the strength of sales and inventory growth particularly with the big three. So that's the auto going into the second and third quarter probably is the potential dark cloud. If we can get through that, that would be good. I read that people are getting more bullish. Certainly, GM has announced that there's -- their plants are on overtime but nevertheless, there is a question mark as to whether or not North American demand really needs that level of auto production.

Okay. I was just checking your assumptions. But secondly, the spreads in compounds are compressing a bit here and again, you're planning the oxy vinyl equity income comes up to -- could you provide quantify case in terms of how spread the resins progressed from fourth quarter to first quarter and then to second quarter?

First is second quarter roughly the same. PVC resin even though increases by and large flat quarter to quarter. Going into the second quarter, we would be -- well, just do it. If PVC quarter to quarter on average goes up 4 to 5 cents which is certainly conceivable in light of what's already been accepted and the strength of the April/May demand pattern in the vinyl side, then you'd expect to see compound margins be affected by roughly 70% of the PVC price increase. Some of that will be mitigated and PolyOne's cost perspective because of the cost and nature of pricing with oxy vinyls. If you're looking at basically half of the PVC resin increase, that may be a fair number.

Thank you.

Our next question comes from Fred Chimer.

I guess that's Fred Seamer. Picking up on the spread question because it is important. I mean, you folks restructuring for about three years now and I would assume that business is getting right sized to the level of industry demand.

When PVC goes up something 13, 14%, why can want you tack 13 or 14% price increase on the compounds? Is it your operating rate is too late? Industry operating rate too low or customers aren't used to thinking that way?

Well, you know, a couple of things, Fred. Number one, and I -- there is a component of our compound business that is tied to PVC pricing, and is indexed. Relatively small component. Those materials, compound prices lag a little but relatively quickly follow resin price movement. Fred, I think if you look at the compound business over the last ten or 20 years, it is -- the pricing has been fairly consistent. Those people in the compound business do not have as much opportunity or capability I should probably say to move their prices and so forth. They've always been very reluctant to accept price increases.

And consequently, though, as even when compound prices follow or go up -- I mean, resin prices go up or down, those prices fairly stable and you can see that. However, we have historically improved and raised compound prices when -- and during periods of resin moving up and does lag. Could lag from six months to 18 months historically. We have announced a price increase on flexible PVC compounds.

And, so we at least are beginning to try to recover some of the cost coming forward.

Keep pushing. This is our time in the sun. Can't make money when the demand is like this, it's tough. Thank you.

I think -- don't confuse compound demand and resin demand. Compound demand is not quite as strong as PVC resin demand which is principally in the pipe and siding. Compound -- the area in compound that is still not very robust is in the wiring, cable and electrical applications. It goes directly to what we're seeing in the telecom market. That market is very soft. Has been for 18 months. That is a big part of the PVC compound market.

Thank you.

I was re-enforce Dennis' point there at the end. The challenge for our compound team, obviously maintaining margins is important but volume is the key. Volume is down as Dennis said in certain key markets and it's being able to recover our volume as the economy improves that's crucial in terms of being able to leverage the cost structure that we have in place for the business.

What is the operating rate for your system?

Oh, almost impossible to say.

I know.

You go up and down with lines depending upon the product. It's -- there's lots of -- we have capacity that we can do. Whether the industry is operating at 70 to 80%, it's tough to say.

Okay. Thanks.

Thank you. The next question comes from Fred Goldberg.

Good morning.

Good morning, bob.

Just wanted to follow up on that question. It seems like that there is some PVC resin going into inventory given the strength and demand that we saw in the first quarter.

And I know you've addressed this to some degree, Dave. Wondering about your customers building inventory at this point, whether you're seeing that in any of the different sectors in the market, and again, just maybe comment on demand in various sectors in the market.

Okay. I would say that for the most part, our customers are not building inventories and that's where the demand pattern through the month would show. I would also say that in terms of those pockets of particularly the dry blend PVC compound business that are indexed, there's probably a bit of prebuy going on. And so, we didn't see that so much in the first quarter, but in the second quarter, there will probably be a bit of that as people try to buy ahead of what they know will be a price increase.

But by and large, that's not a large part of our business. Demand overall, if we go down the businesses, our distribution business has shown month over month improvements in real demand. The conversion on vinyl is contributing that. Even the non-vinyl side showed good strength. In fact, only be in the second quarter that we would expect to see the vinyl conversion from distribution kick in.

Specialty resin business, flooring, carpeting, good demand. Formulators had been weak for most of the first quarter in April. They've started to show some improvements. Vinyl compound picked up some momentum towards the back end of the first quarter and April was sequentially stronger.

Looking at the color business, it has been largely, largely stable. But then again, it didn't fall off last year like many of our other businesses. The engineered materials business is really quite strong. Both from a proprietary and producer standpoint. The Asian and European businesses sustained strength. In fact, that's a -- thinking about 2002. That's a real bright side for our concern coming into 2002 on how the European economy may go up or down and it seems to have turned the corner and demand for both color, engineered materials in both geographies is really quite good.

The area where we're not seeing the strengthening in demand and material way is in the elastomer business and there, we're still washing through some of the historical tolling that was done going into the second quarter most of that's been washed out.

So we would expect to see not robust by historical standards, but certainly a good pick up in demand even there. As I say, overall, if we're not approaching double digit sales growth in the second quarters compared to the first, I'll be disappointed.

And what we've seen in April would tend to support that.

Your assessment overall, Dave, improved demand on an overall basis is not primarily tied to customers trying to beat price increases but more tied to improving demand they're seeing downstream from their customers.

Right, right. I think the nature of our end markets doesn't have a lot of historical prebuy in the commodity end of the PVC compound, of course, that's not true. There's a fair amount of prebuy there. But overall, the indications would be that what we're seeing in terms of sequential improvement is reflective of the economy as compared to inventory build.

Okay. Thank you.

Thank you. The next question comes from Nancy Trupp.

Good morning.

Good morning, Nancy.

I was hoping you could comment a little about your comment that said compounders were taking business in house in the elastomers as well as the PCC business, and what percent of your volumes are -- have switched out and when do you think -- do you think it will come back and when, etcetera?

This is a continuation of the issue we saw last year. When we look at the -- say the elastomer business, first quarter year over year volume itself was down, say, 20 plus million pounds. Half of that had to do with tolling for tire or roofing.

And that's largely a situation where the tire manufacturers of 5% decline in tire demand would presumably free up twice as much capacity as PolyOne has. So it doesn't take a lot of decline in demand in the overall market for the large tire mixers to bring all their business in house, and we saw that occur and so that the only tire business that we have now is more of a specialized business with a specific customer.

But, the general purpose mixing is essentially all gone. In terms of the PCC, that is really solely the vinyl compound business, and here, too, and frankly, in this period of vinyl demand, something we ought to be watching for is that as vinyl is tight as it had been, we would find ourselves mixing for people who are having difficulty getting vinyl.

Vinyl resin. As we look, this would be in the windows and siding markets and some pipe, and also in wire and cable with wire and cable down as far as it is, our customers who ordinarily would be buying compound find themselves with sufficient internal capacity that they have taken that business in. And that, too, will frankly, slow down the recovery of our business. So as telecom market comes back, there's going to be first a level of improvement that's necessary for the in house compounding to be absorbed and then, really on a second stage of the recovery will they be back out in the marketplace.

As a percentage, in the first quarter for PCC it's relatively small. And, going forward, in the elastomer side, I could expect it to be relatively small on a year over year comparison basis, as well.

Thanks.

Thank you. The next question comes from Timothy Gurdamer. Good morning. I came on late so I apologize if I'm asking redundant questions.

In your press release, one area you mentioned at the beginning of a cycle and curious how you net that out in your mind. Is that a positive or negative? Because as a whole, because on one point, oxy vinyl should be a beneficiary and then again, a net buyer in your core businesses of commodities. How do you net that out in your mind as relating to forecasting earnings?

Okay. As we look at what's happening, the increases in PVC are good. We're net sellers of PVC and so for penny increase, we get. 5 million on an annual basis. That does put pressure on the performance businesses. The vinyl compound business. And we know how to improve our margins there to offset that.

But net-net, vinyl increases add to the bottom line of PolyOne. What we're seeing, as well, though, and it was a large offset to the volume benefit that we saw on vinyl in the first quarter is the tanking, frankly, of costic. And the significant impact that the costic price declines have had on profitability.

And I think if you look at vinyl chain, chloro vinyl producers, it's important to remember even though the ecu may look like it's holding its own because chlorine is going up as costic is going down, chloro vinyl producers get no benefit of that unless they get the prices through resin or compound, depending upon the level of integration.

Chlorine increases were net buyers so, the increase in chlorine puts pressure on us in terms of oxy vinyls as well as our performance businesses. Modest increase in ethylene will do the same thing.

Overall, it's odd because three months ago we were talking about high leverage variables not having a large impact on PolyOne as compared to 2001. Things have changed but the net-net of that is we would expect to see some benefit from the high-leverage variables from '02 to '01 but the very significant benefit from higher resin is in fact eaten up by worse costic and worst chlorine prices moving relative to whether or not we're buyers or sellers.

If PVC does break out, then the high leverage variables stand to be a significant positive benefit from us in 2002. I think as I look at where chlorine is likely to go and costic gone and natural gas seems to be with the strip and ethylene relative to natural gas, my viewpoint probably takes most of the downside and not all of the upside into it.

So as we position ourselves with net-net little benefit from the high leverage variable compared to '01, probably upside to that and we'll see that in the second quarter if a significant portion of the 8 cents that are on the table, in fact, get into the marketplace and can be sustained through the third quarter.

And you referenced a penny increase in the PCC's 5 million amortized. Not oxy vinyl, right?

Corporate p and l, right. 8 million for oxy vinyl and minus 3 for performance businesses.

That having said, follow-up question, as well. I've been struck over the past year knowing that the whole industry faced such difficulty from an external per suspect given that we haven't seen consolidation on the polymer and polymer compounding industry side. Any thoughts there? Anything you're hearing?

Yeah. Are you talking about particularly the PVC compounding industry?

Focusing on resin compounding. The traditional -- or traditional MA Hannah side of the house.

As you know, general electric the past quarter did by lmp so I'd say there might be consolidation going on as we speak. It is still when you look at who compounds in North America, at least, it's a pretty diverse market. You are correct.

We still are -- when you look at all the compounds, all polymers, PolyOne is still the largest followed by GE. I can't comment on whether we think there would be more consolidation but obviously an opportunity to do that and still pretty fragmented industry. One of the consulting houses, I want to frost and Sullivan on the tape a couple of days with a study out that I don't know if it's got credibility or not but strongly suggested that resin distribution will continue to be favored by e-commerce versus traditional sales mechanisms and curious if you're seeing that in your business.

Somebody else asked me that question this past week, and I have not seen the study, but I can tell you, you have to go to the psychology of the people that are buying distributive products. And, as you may recall, we have a e-commerce capability within your distribution system not, quite frankly, very actively being utilized. Most of the distribution customers tend to be very small operations. Could be shops anywhere from five to 50 people. That's the bulk of it. That's the reason distribution exists is because they usually buy small quantities in a very diverse portfolio of products.

Historically, and in the last few years, they have not shown a tendency to go to electronic purchasing or electronic ordering. But we all know things change and I think if we look at where we thought the internet was going to be in the early '90s and see where it is today, we've all been adapted. These people are slow adapters. I think you're going to find they're going to want the benefits of electronic communications with their suppliers. I'm not too sure what the mechanism going forward is but I can tell you that at least currently, our distribution folks tell us that our customers like to talk to a person, they like to feel comfortable that they -- when they have an order especially since short -- want it ordered the next day, make sure the order is delivered on time in the particular products and so they like to talk to people.

And so, from our perspective at least in the distribution business, that PolyOne deals with, we have that capability. We have very strong and good about what we have but our customers like to talk to human beings and continue to service them that way.

We think that's a advantage. We are responsive to the needs and that's a key.

In closing, the comment on GE, do you consider GE a net competitor or net customer for PolyOne?

They are not a customer. Although I should say we do sell GE in their appliance business, and would I consider them a competitor? Yeah, sure. We sell different products to some extent but, sure. They're a comb pet or the. Are you distributing any of their products?

We are not.

Okay. Thanks, guy.

The next question comes from Alan Cohen.

Good morning. This is Eric sitting in for Alan.

You can't come in there misrepresenting yourself. Good morning.

Thank you. Just a couple of quick financial questions. Sales SA&G line is looks like trending about 80 million this quarter.

Yes.

Whereas last quarter about 70 million. 70.9 is what I have in my records.

Yep. And gross margin is up I have 17.8%. Versus 15.7% last quarter. Is there some change in the distribution of those costs there? What's going on there?

The gross margin up largely because of volume leverage over the fixed cost basis. The SA&G in the fourth quarter last year was more abnormal and the 80 million is probably a better run rate. Fourth quarter last year and also first quarter this year some of the differences were truing up certain benefit accruals. We also trued up centralization on project one. That created some lower than normal SA&G in the fourth quarter.

This year, we're seeing as we have said, higher pension costs reflected in SA&G. We're also -- we've also kicked off what would be increasing our SA&G a million to a million and a half a quarter strategic initiatives in terms of the logistic study that I referenced earlier. The solution selling initiative that we talked about as well as technology.

So, basically, what I would tell you is Q. 4 lower than you'd expect on the trend line. First quarter this year we should be able to hold this range.

Okay. So, modeling going forward, we should expect things to trend the way they did in the first quarter opposed the way they did in the fourth quarter?

Yes.

And then, in the press release, you mentioned cap ex. You expect it to be in the range of 75 to 80. I think that's a little lower than numbers we heard before. Is that right?

Yeah. We had been talking 80-ish before.

Right.

But we've taken a look at what we're doing and we think we can keep the clamps down. The economy is not robust. What we have said is that we'll continue to keep a lid on spending both capital and expense until it's clear that the economy's recovering.

And so, first quarter with a loss we kept firm controls on our cap ex, and we would expect to take some of those savings through the balance of the year.

Okay. Thanks a lot.

The next question comes from Sankta Al.

Two call ins a row you got through.

If I was trying to pretend to be somebody, it wouldn't be Alan Cohen.

I have a question. On the 14% sales decline, I don't know if you can break it down but how much was volume and how much might be contractually to the business-wise following raw materials prices down in pass through sort of mechanisms?

Volume on 14% decline off 9 to 10% so there is part of that in terms of price mix. Pricing -- price mix on the vinyl side was down first quarter versus fourth quarter. That's more -- more mix than price pressure, although, we've talked about how intense the competition is in that market.

The elastomer business is more -- frankly it's more mix so overall, principle was volume and there was a bit of price mix. Clearly, there's price erosion as raw materials have come down over the course of 2001, but that hasn't been a significant issue for us.

I was trying to figure out the incremental margin you talk about. I choose only to apply that to the volume, not the other stuff. I don't know if that's fair or not but figuring out the kick or how much you're covering but running yourselves better. And that was 25 to 35%? Is that still the incremental margin?

Yeah. I'd say probably 25 to 30.

Okay.

And as we -- our challenge, frankly -- that's what we saw going down.

Right.

Better see it going up.

Okay.

The challenge is clearly going to be holding our cost structure, particularly the discretionary cuts we took, the belt tightening type things, keeping those in line as volume and profits come back. But that's the challenge we've been discussing for about six months now.

Okay. As you switch over to the one I.T. system, is there a period of time where you're going to be running two I.T. systems and how much will that -- if there is, how much will that cost you and when does that stop?

Frank, the -- right now we're going to leave the engineered films and distribution systems on different I.T.

Right.

We haven't -- at least distribution, we haven't quite clearly decided when we do, if we make the switch. It's working quite well.

Right.

Engineered films, I think talking about next year.

Okay. And I guess your triple v minus now? Or the rating agencies?

Yep.

Does your distribution business have a significant problem or any larger problem if you go down below that level of credit rating?

No.

Okay. That's it. Thanks.

Good morning, Robert.

Hi. Can you talk a little bit about your -- what's going on with working capital? What your working capital strategy is given the different displacements with plant shut downs, and how you deal with the various risks involved in that in terms of pricing of your inventories?

Yep. Overall, we're expecting to end the 2002 inventory roughly the same as 2001. That would be the -- that would be reflective of a continued tightening in our management. The pick up in inventory that we saw in the first quarter combination of business coming back, but also, we're starting to build a bubble for our inventory for the PCC business as we transition through Triple Crown and that bubble's going to be 5 to $10 million over the course of the next six months and then we would expect it to be extinguished in the fourth quarter.

So as I say, we'll get back to where we were at the beginning of the year by the end of the year. Receivables -- they've gone up with sales. The receivable number that we show -- be careful to net against that a $24 million reduction in our receivable facilities.

So, trade receivables per se went up closer to 45 than the 70 that we show. And so, that's in line. And frankly, there, too, we've had a good success in terms of maintaining our dso's. Our dso's on ship days in the first quarter tracking under 40, which is within a half a day of the best quarter we had last year so that's good continued -- and particularly in light of the fact we continue to get pressure on our us to extend our terms. Overall, working capital as a percentage of sales we're expecting to see a modest decline year over year, but when we look at point to point and where we'd be going into 2003, we would expect to be a percentage point less than where we were tracking in 2001. Key point that we should put out is that working capital and maintaining improvement year over year is part of the short term incentive plan for everybody in PolyOne. So maintaining very strong working capital management is a key objective for the whole team.

Okay. Can you refresh us in terms of what your goals are for working capital once the restructuring is done?

On a percent to sales basis in 2003, we're looking to be in the neighborhood of 14 and a half as compared to 2001. That's down a full percentage point as I say in '02 because of the inventory build we're probably not going to show on a year average a material improvement. A couple two or three tenths of a percent improvement but that's -- but going into '03 we should be down a full percentage point.

Okay. Is there any particular goals beyond that or you think that's where you need to be?

Well, there aren't goals beyond that. That is a significant improvement on where we've been. We have certain businesses that are around 10% working capital percentage of sales. And so, for the more general purpose oriented of our businesses, I think there's a real challenge as to why they all can't be closer to 10%.

And that's a longer term structural challenge that we have to the business teams.

Thank you very much.

Thank you. The next question comes from Cornell Benergys.

Good morning.

Good morning Dave and Dennis. Just three quick questions here. First, just to push one of the earlier questions a little further, what percentage of your vinyl compound customers have internal compounding capabilities?

That's a great question. I don't think I have that metric to answer that. I could take a stab at it. There's no point in doing that. I don't know.

The reason I ask is because there's some other producers out there reporting a much more robust recovery in compound volumes and obviously, I understand that the base level in 4q could have something to do with it but even that -- that notwithstanding, there seems to be a little bit of a difference and trying to rationalize whether your mix has more internal compounding capacity, and that's what's kind of holding you back.

Yeah. I mean, I'm going to take a little stab at this. I mean, without sitting down and doing a -- I know what you're talking about. We certainly have more powder compound capacity than others.

And, I would suspect that higher percentage of our powder customers have internal capabilities than those that have pellet compounding capabilities. That may be one of the indicators. I can't give you a definite answer.

Is that in the more wire and cable markets?

You don't produce flexible products via powder compounding.

Okay.

Just resins.

So this is kind of an across the board?

Yeah. And I will tell you that in wire and cable there are -- I don't know the answer, again, a lot of the larger wire and cable producers do have internal capability. In some cases, they've outsourced it and returned it back. I can give you -- there are customers that can do that.

But I can't tell you exactly how many of them or percentage of them have internal capability.

Okay. Could you estimate roughly where the internal compounding operating rates would be right now? And, just trying to figure out as next quarter or the quarter after that you can see some overflow back into your compounding businesses.

I think -- let's take a step back for a second. First of all, this is about -- we're in about -- if you look at -- we're talking about particularly vinyl compounds here. If you look at when vinyl compounds started to slow down, it was about mid 2000. Almost 24 months into this period.

And, there have been periods where we've seen fluctuation. This started about mid last year, mid 2000 and got really underway although first part of last year, vinyl compound demand was quite good.

Was better. It's really hard for us to give you a sense of where the capacity utilization level is. When you look at our competitors, I suspect based on what I think their capacity is and their sales are, they are not running at full capacity. We certainly are not.

But this industry doesn't run up against capacity constraints. First of all, you have some flexibility in your capacity to augment and produce extra pounds when you need them. Nobody running at full capacity. Capacity utilization is not an issue in the vinyl compound market for quite sometime.

Okay.

Easy to add capacity quickly.

Right. Okay. The second of the little more of a strategic question on your gb stake now with oxy poised on the cusp of a recovery. Has that caused a rethink or influenced your decision on the best timing for the vest and of that stake? I think what we've said is that if we have the ability to exit in a fair price.

Still remains the strategic priority. Having said that, as a business comes on the cusp of a recovery, obviously, the fair price becomes more important.

Right.

And, we have gone through seven quarters of pretty challenged earnings on that part of our income statement and as it starts to get better, we're going to as a company enjoy that cash flow step up and earnings step up. If something happens in the interim, something will have happened in the interim. At this juncture, I couldn't comment on at it anyway. But there's nothing there.

Right. Fair enough. Lastly, just a small point. Where do your receivables or your receivable facility, where does that stand today? Balance on that.

It's in 195 range.

195. Okay. Thank you.

We'll take one more question.

Next question from Mary Holland.

My question is answered. Thank you.

All right. We'll take one more.

Great. A follow-up from Timothy Gerland.

I'm the lucky recipient of the last question, Dennis.

Lord.

Given the caveat I came on late, as I look out on first call, there's an incredibly broad range particularly looking at 2003 of nearly 50% swing to the high and low of the consensus level. Letting you off the hook on '03. Looking at '02, 30 to 44 cent range, can you give us color of the first quarter under the belt and the trends of Q. 2, please.

You know, Tim, as you know, we have been very, very reluctant to look out beyond one quarter. It has proved challenging for us in the past with the uncertainty of the business right now to give you a good clear look at where we think we'll be in the second half.

All I can color is the fact that we feel like a lot of other folks that there is a business momentum moving in the right direction. I's not robust by any sense of description, but it is improving.

And I suspect that even internally we could probably have a fairly wide range of estimates for the year if we polled the room here. So I'm not going to -- I can't and really don't want to because I know I'm going to be wrong.

All I can point to is the things we're taking. Taking cost out. Restructuring going on. Those benefits are going to continue to come to the bottom line as we move forward. If the economy continues to move in the right direction, we're going to have reasonable earnings for the year in going forward. But I'm not ready and I don't think anybody is ready to -- you have to make a call on the top line here and that's our challenge. I cannot make a call on the top line. I can tell you in the next quarter doing better than the first quarter, and we're going to -- we think we're going to have positive earnings. Just a separate, somewhat similar question, for Dave, how are you thinking about cash flow and free flow after the cap ex and other initiatives you talked about today? What are you thinking?

We're looking at cash flow, Tim, as over 2001 and 2002 for a period when our earnings in aggregate regardless of where you want to put them this year aren't very strong. We're looking at generating a small amount of cash over that 24-month period, but having done that, we'll have of spent $150 million or more restructuring businesses, spent roughly $50 million per dividends, 20 to $25 million for acquisition in the fourth quarter of this year. Last year, cash flow was in the $100 million range. This year, it's going to be consuming not as quite at that level but pushing that level. 2002 is a year when the cash is going to be spent. We've got $35 million of non-capital restructuring cash charges associated with severance and plant closures. We have got the -- what we hope to be working capital increases drawn from improved sales levels and that number could be as high as 50, $60 million.

We've talked about cap ex being in the range roughly with depreciation. So this is the year when we do spend the cash to restructure the company and then going into 2003, we would expect precash flow to return to be a fair piece positive. A net cash user in '02 somewhat in the order of below tens of millions.

Net cash user in '02 somewhat less than we were a net cash provider in '01.

That's fair. Thanks, guys.

Thanks, Tim. Thank you, everyone for calling in this morning and good questions. We appreciate that. Dave and I will be available through the balance of today if you have additional questions. And once again, thank you for your interest in PolyOne and everyone have a great day. Take care.

Thank you. This concludes today's conference call. All participants may now disconnect.