Avient Corp (AVNT) 2002 Q2 法說會逐字稿

Ladies and gentlemen, this is the operator. Today's conference is scheduled to begin momentarily. Until that time, your lines will again be placed on music hold. Thank you for your patience.

Good morning, my name is Judy and I will be your conference facilitator today. At this time I would like to welcome everyone to the PolyOne earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers remarks there will be a question and answer period. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad.

If you would like to withdraw your question, press the pound key. Thank you, you may begin your conference.

Thanks Judy and good morning everybody who's joining us this morning. A couple of things that I want to start with and then I'm going to ask Dave some comments before we open up the Q&A. First of all thanks for joining us. For those of you who may have been trying to look at our web site, you may be having some difficulty. It never fails, we found out late last night that some people are having difficulty accessing the PolyOne web site and we do apologize we've got all hands on deck trying to fix it this morning and hopefully we'll get it resumed.

Obviously I was gonna talk about being on web cast but it's probably not being accessed as well as we would have liked this morning. Secondly, you may be hearing some noise above us we're in a fairly new building but apparently there's someone moving in upstairs and we have a lot of noise and I apologize for that. on construction upstairs.

I want to point to the save harbor language that we put in the press release and it cautioned you that they are some things in there that talk about some forward looking statements which I suspect and probably expect to talk about today.

Relative to the Q & A section I would that ask if your a news reporter that you certainly more welcome, more than welcome to listen to this conference call but I would ask you to hold your calls until later in the day or give us a call later. I would like to keep the Q & A relatively short to just analyst's.

I've got a couple of comments that I'm going to make on the quarter and then I'll ask Dave to step in here also. I guess we're pleased at the progress we have made here in the second quarter, it is pretty close to where the consensus was on the street and obviously there's a lot of things that went into that.

I think the comments that we made at the end of the of the first quarter were pretty much in line with where we thought things might be going, some small changes from that but we're pleased that the progress we're making we're certainly not any way satisfied with results. We're a long ways from where we hope to be.

But as can tell from what we wrote there are a number of things still pending and it's a good news that we're in the right direction, it's a good news that our business demand has picked up as well as it did in the second quarter.

The one thing that particularly that we were very pleased to see is you know we announced it earlier this year that our distribution business was going to pick up distributing our vinyl compounds from a third party distributor and because of the way of the agreements read they had someone go into this blind.

We couldn't tell them who the third party obviously wasn't going to disclose to PolyOne. What distributor's were, who there accounts were but we, working with our PC & C division they work extremely well and I think obviously that the business picked up that we saw in the second quarter and that group was largely a result of the vinyl compound.

But not only that, they feel that they've captured well over 95 percent of the customers that were previously being, previously using another distributor for vinyl products from us.

The good news is that they've also picked up new business and as we've said from the very beginning of putting together of PolyOne that the synergy to these two companies should start to come through and I think this is a first good example of how the synergy of PolyOne distribution with their vinyl business is picking up other engineered material.

The one area that you guys always take a look at is our vinyl's business and of course our whole exposure. It is certainly been an area where a lot of discussion have taken place, as the industry seems to moving in right direction relative to returning to a much more consistent profitable trend.

The pricing was moved very strongly in the second quarter obviously because of a very strong industry demand. They do have, there are some things that they had to face, they had a little higher in natural gas costs for the quarter, as well as higher curing costs and costs, but they were able to overcome those with the price increases, Dave will talk a little bit more as we look forward. But the pricing continues to be strong here in July for PVC residents and we're pretty optimistic.

There is some, there is some cautions out there, we know that some of the folks, we've read, maybe you've heard that some of the PVC pipe producers are concern that the costs of PVC. A pipe is now approaching that of cast iron, although they seem to be making a reasonable return on their business as we gauge it.

One of the other things that I want to talk about was Triple Crown, this is the PCNC re, asset re-configuration project, that we are in the midst of, a project obviously that we spent a lot of time communicating with Geon. It is going extremely well and we are very pleased that the targets and the bench marks and so fourth are moving in that proper direction.

As you know, the big part of that project takes place here in the second half. One little change that we highlighted in the announcement, was Bethlehem. This is a plant that we had talked about last year closing by the end of this year. We've decided to delay that, we wanted to go back, since there was so much involved and so many changes in PCNC, relatives all plant shut down and all the product movements, that there was one area we wanted to be absolutely correct, we wanted to be sure about what we were doing, so we went back and done a reassessment of that plant on our business decision.

And we confirmed that we are going to shut it down, however it's because of the reassessment and the time involved, it is going to delay the shut down. The one thing, that was not in the release, but I wanted to point out, we've also made a decision to put some color concentrate products in business in Avon Lake.

In addition to moving a majority of the Bethlehem production, which is engineer material to Avon Lake is going to continue to grow an importance to PolyOne, it will have vinyl production, it will have engineer materials and color additives and one of the reasons we doing this, quite frankly is, it is our center for technology also.

We are going to be in addition to what exists there right now in vinyl technology development, we're moving into engineer technology development to that site, in addition to color tech, some of the color technology development. So in the synergies between manufacturing and our technology area, is going to be very evident in Avon Lake and that site will continue to be an important site as we grow forward here as PolyOne.

Now with those comments, I'm going to ask Dave to add his.

Thank you Denis and thank you everyone for your attention to PolyOne, thank you for listening in.

Second quarter, we hit the numbers, we demonstrated the sequential growth, the 13 percent increase in our top line was very gratify, I think also as you look and peel the onion back, taking a look at each of the businesses on a volume basis, on a pounds basis that is. Each of the businesses was in double-digit levels, our vinyl business was up over 20 percent and that's particularly satisfying for us.

The fact that we made seven cents is certainly a good sequential improvement as compared to the first quarter and really a couple of cents better then a year ago on slightly less sales. I would echo Denis's comments though that seven cents is no where near the level of earnings that we are driving this business towards.

In terms of cash flow, cash flow from operations through six months is a consumption of over a $100 million and that's on plan, it's consistent with where we've been telling people. Certainly consistent with the discussion that we had when we went out with our bond issuance. I would tell you though that as we look at our liquidity we had reserve liquidity if you will, capability to access up towards $100 million that we did not have and stay within compliance of our bank agreements and by the end of the year that number would be up around 150 million courting our projections which is right in line with the strategy we had when we went out with the bond issue.

Once to secure our liquidity through 2002 and 2003. We look at value capture, we make note that in the quarter we're up some $6 million from where we were in the first quarter. We are projecting that we will be up another $6 million in the third quarter and probably six or so in the fourth quarter from where we are. We're continuing to see improvements across a broad array of the initiatives.

If we look however at where we are today, which is a little over $25 million, $26 million, it would say that in the first 18 months of PolyOnes history we have brought $100 million on an annualized basis to the bottom line in terms of structural improvements and growth initiatives. However, we're five months away from 2003 and the commitment that we have to achieve a $200 million improvement stands.

As we look to where we are today verses hitting the 200 million in 2003, there's about a $95 million gap and that gap is simply derived by 200 less, 105 which is roughly 26 times four which is what we currently are. If we want to gap that, we can look and see the initiatives and the expected improvements in those initiatives for the balance of the year. We would expect to get another $12 million on a quarter basis and that would be split fairly equally between growth initiatives, the beginning of Triple Crown, some other unit initiatives and manufacturing's from work that we're doing at our Burlington films plant.

Chicago last summer plant and also some of the lean manufacturing initiatives and that also direct materials. We would be expecting as you'll notice in our announcement we talked about the fact that direct materials, the programs are on target but since our volumes are off for more we thought that it would be at the beginning of the year. The actual savings is down some but as our volumes come back we would expect to see the volume benefit in the direct material savings.

We've also kicked off an initiative called integrated supply where we in fact are acting as the break bulk distributor for small lot chemicals so that we can get freight efficiencies and also purchase efficiencies and that is started within our PCC business and as we go into the second half, the side will be heavily involved there.

So, between growth Triple Crown the business unit initiatives and direct materials is where we would expect to see that $12 million improvement. Taking that $12 million and analyzing it, we come up with roughly $150 million by the end of the year and then to bridge the 150 to 200 the vast majority 40 of that 50 would be found in triple crown where we're intending regardless of the Burlington announcement we are expecting to get the $50 million savings in 2003 compared to what we were in 2000 and then the balance can be found in growth initiatives with the success we're starting to see in some new applications and new technologies from our films business and custom business that we've talked about needing to transform also the fact that we will proceed with the acquisition of the transcolour business in the fourth quarter of that will certainly be adding to our value capture.

So as we look out we're very mindful of the commitment we've got a full board review on it next week but as we look to the programs that we have initiated we are confident that we will continue to hit that $200 million. So that's a key objective for us its a key commitment.

As we look to the third quarter, if I could, I think probably a discussion on the high leverage variables will fairly well frame what our expectations are. As Denis mentioned PVC pricing continued to be strong in July, its our understanding that the two cents that was announced have gone in and if the two cents go in and nothing else does then third quarter reverses second quarter of PVC resin pricing will be up some five cents.

Chlorine is $125 increase did go in the third quarter, so chlorine is up. Caustic is moving up on the stock market a lot of contracts are on a quarter delay basis so your going to see differences between sunbelt and oxy vinyl's and the implementation of the caustic increases, these will be seen in the third or fourth quarter, ah but clearly the good news there is that caustic is bouncing, has bounced off the bottom and is starting to go up.

Ephaline because there were some increases in the second quarter through the second quarter as we look to the third quarter its questionable whether or not if any will get into the market, if it does a quarter to quarter comparisons will be up a half to a full cent. When you wash all that together in terms of where PolyOne is in buying and selling those commodities, you come out with darn near wash, with the PVC offsetting the chlorine the caustic improvement offsetting the Ephaline and so we're looking at then improvements to earnings relative to how successful our compound price increases are particularly in the vinyl business and frankly our second half profitability is going weigh heavily on the success of getting the price increases in.

The increases in the second quarter of chlorine, PVC and Ephaline did compress our margins in PVC and so in the third quarter we've got to get our prices up in order to protect those margins. We have announced eight cents, three cents were announced for the middle of June, we expect to get that in July, there is another five cents that was announced for the middle of July and we'll see how successful we are in that but clearly Landy knows those price increases is essential and as our report indicated, a one penny improvement equates to $3 million for the quarter, so a lot of the earnings improvement we would expect to see will hinge on how successful the vinyl price increases are.

Value capture, we talked about four cents, I'm sorry, $6 million volume. We would expect to see some improvement, although I would tell you in this second half of June, volume softened. We have seen the markets come back fairly well in July, but July is always a transition month, so the exception would be for August to resume a pick-up. I think watching August, September, October, will really spill out if 2003 is going to start with strong growth or if 2003 is going to start fairly lackluster, you know, we're optimistic, but we are worried about certain clouds on the horizon. So those are the key drivers and the key elements in terms of our outlook, generally favorable, as Denis mentioned, the chloro-vinyl chain is going to show improved earnings over the second quarter, and depending on how well the PVC prices hold, that improvement could be fairly dramatic. It's good to see that end of our business to start to contribute positively as compared to where it's been over the last year and a half.

One other topic that I want to talk about is the required certification that the SCC has placed upon CEOs' and CFOs'. There's no question, Tom and I will be certifying the accuracy of our statements. We will do it after we submit the second quarter Q, so that the cover reports would be or that 2001 10K through the second quarter Q including all eight days in the middle. So what I want to emphasize for our shareholders, for our employees perspective shareholders, is that PolyOne is a value space company. Values drive our culture, and those values include integrity, excellence, respect for all people, innovation and teamwork. As we look at what we need to do to ensure the accuracy of our financial statements, we don't see a change, we will be some processes, we will enhancing some, but there is no material change into how we account. We believe we have always, and we have been accurate in how we've reported, and we hold ourselves to very high levels of integrity.

As far as the reporting transparency, like PolyOne does very well there. We've got four segments, and we have discussion in terms of sales at levels below the segments. We disclose all of our unconsolidated subsidiaries, both P and L and balance sheets, the oxy-vinyls by itself, and the others in aggregate, so there's nothing that isn't disclosed that you have access to. All of our off balance sheets, debt type activities are disclosed in terms of guarantees, or the clog-like debt nature of our receivable sale facility has always been fully disclosed. We have audit committee that is active and engaged and is - really works very closely with the management and our outside auditors go through a formal independence review with us and as we look at the and the areas in which outside auditors will be precluded in the future there are none there are no areas that would effect us we have maintained a good independence and we will continue to do so.

So, I wanted to put that into perspective and with that turn it back to and open questions.

At this time I would like to remind everyone in order to ask a question please press star then the number one on your telephone key pad. We'll pause for just a moment to compile the Q&A roster.

Your first question comes from with

Yes, good morning.

Good morning Fred.

Is compound businesses one of the toughest sectors of the chemical industry - I calculated the for the North America business it looks like in the second quarter your price - your average selling price in that business went down a nickel a pound and yet your raw material PVC is up seven cents.

I just don't understand why it takes so long to put the PVC compound price increases in effect here - you know you've suffered watching compression in the first quarter and it's only June and July before we're trying to get the compound prices up.

Other industries use a sur charge what's going on competitive wise you know you're a fairly low cost producer - I don't understand what pricing?

Remember one thing too is that we came off a fairly difficult forth quarter for demand - this first quarter also demands target will pick up and so you know there is a lot of competition for the volume that's out there and you know it is - I mean I can't speak to what our competitors want to do or not want to do but it is a competitive industry -remember there are two types of components of cost competitors in our industry and the compound - there are those who are integrated and there are number of non integrated players, OK, that have to purchase resin on the open markets.

So, it has always been this case I mean it has never been easy to move PVC compound prices in the market place.

Now, on the other side on engineer materials it is - we were - I think we're receipt - price movement or cross movement or especially in the taller additives - we're continuing to move those prices and we seem to do a little better job at doing that.

But, in this large business - relatively large business with a lot of - a lot of little competitors the area is always - there's always a lag and it takes us some time - but we always get it and so hopefully as we go forward - we're moving and we think we've got to three cents that we tried in the second quarter we'll get that in the forth - in the third quarter and we'll get more as we go forward.

Got my fingers crossed - thank you.

OK.

Your next question comes from with

Good morning guys.

Morning John - how you doing? - good to hear from you.

Thank you - could you give us a sense of how the months progressed through the quarter - there were some companies that talked about June being some what flat with May and early July being flat with June?

Alright. Give us a second as we feel back our numbers.

What we saw John was April being stronger than March and then we had May being somewhat stronger than April but then June softened up. June was on a pace to be better than May, unfortunately demand fell off probably close to $10 million in the last couple of weeks and as the consequence, June actually was below point for the quarter. We would expect to see July at June levels which you know, given the fact that it's July, that is typically a softer month, that's not a bad outcome.

But then we would be projecting that August and September would be picking up the track that we saw in April and May.

And secondly. In the international DCNC business, your text in your supplement talked about the normal seasonal cycle but you're up 19 percent year on year second quarter to second quarter. That seems particularly strong in Europe. I know a lot of companies saw their Asian business very strong but Europe was I think generally softer than the US in terms of year over year comps from many companies.

What we see in Europe, you know we were up on a volume basis from the first quarter about 17 percent and it was fairly standard across our color and engineered materials business. Asia was up about 25 percent and that was good to see that progression. I think particularly Asia verses last year too it's Asia who's come back to good levels of profitability where they were struggling last year.

Were Europe concentrated in any end markets cause hasn't been as strong over there as it's been here in the US for example.

I don't think so John. I think it's broad, we're seeing the weakness in telecom around the world. It's probably just the breath of our color business largely and then the nature of our interred materials business. I can't point at one market that really would have differentiated PolyOne from the rest of the competition.

OK, thank you.

The next question comes from with Leeman Brothers.

Morning guys. You have talked a lot in the past about compounding off sting de captivated from a lot of your customer base. I'm just curious how that actually played out over the past year and a half given the industrial recession? Did a lot of those companies choose to actually keep those operations active internally?

We're not, one, I think it's a little early to watch the shake out because the economies are just coming back now. We certainly saw them take it in house as we've been talking. As far as bringing it back out, we're not seeing a lot of that yet but we wouldn't expect to because basic demand isn't there. I think that one of the areas where we suffered fairly greatly was in the telecom and clearly that's still soft so we're not seeing the market come back there.

In terms of powder planned which is you know vinyl going largely to pipe or to windows, that markets come back for the most part and it's going at about 100 percent. So, those dynamics at the more commodity end of the vinyl chain for non-flexible applications seem to following a typical cycle.

In terms of our business we're just not seeing the signs yet. I mean there still essentially no tire tolling and so that key part of the business in '99, '00 is not showing anything for us now. Does that help?

Yes Sir and then also jog my memory on what percent of total PolyOne sales is ultimately tied in to Auto OEM and how does that break the U. S. versus non U. S.?

It's about 18 to 20 percent of our overall business Automotive and I don't know the split in, it's not a big part of Europe.

It's largely, largely big to with the exception of maybe wire harnessing and things in Europe, cable jacketing.

It's principally North America, I don't remember seeing a slip.

Our position with Japanese or German carmakers who've put up production facilities in North America is relatively small. That's a you know I would say it can't be more than 15 percent of our total business.

It's a strategy to increase our position there and we are getting on more platforms particularly with our film business. The business is at Japanese business group for several years and its seen pretty good success but working off of a small base.

So when you think PolyOne Automotive it is principally big three hopefully in a year or two we'll be able to change that mix in material way.

I'm just curious with the cysts of your fortunes tied ultimately to Auto OEM then how are you thinking about the Auto billed cycle in the second half and probably even more importantly looking into 2003 as you provide some rough guidance.

Yeah you know, it's been pretty steady you know we keep thinking you know we do get a little sweaty palms when we see what there're projecting for the second half because it seems like that inventories are up, there finished goods, there finished bills are up and you know there still being very optimistic, they clearly are for the second half.

But you know I think we're still looking at a bill at around 16 maybe 16 and a half million units for the year, which would be fairly somewhere to last year, if we're continuing this track. Certainly not where it was in 2000 which was over 17 so it's you know OK and seems to be pretty steady.

OK and then two final house keeping notes, one, your forward looking tax rate guidance please, and then secondarily if you'd just comment on current comfort level with consensus expectations '02, '03, of 35 cents and then a high step up of 94 cents for '03.

Well I'll handle the tax question. I would expect to see about 38 percent that are what we use for our modeling.

That's fair and then now I'll give the easy question to Denis?

Yes because I know he's not going to be able to answer it.

Well you know we've not given any times yet for '03 and you know I know the street, where the street is at, it's a little early for us and it is so on one big factor. You tell me what, we just don't know what the economic out look is yet for '03 and it's a lot of factors so obviously, certainly you folks have got to step up in earnings for next year and that's principal because what Dave talked about, our value captures are going to be there and I think we'll going to hopefully get some growth component into next year's earnings, but we are not ready to make a call on that.

I sweat just talking about the next quarter, trying to be as accurate as we can and give you some views, but you know, I think it's just really tough with these changing and moving economic factors and as you can tell, when we talk about the factors that affect PolyOne earnings, there are a number of moving pieces. Some move in different directions at the same time and it's really hard for us and we are just trying to educate you as best we can and hopefully, you use that brilliance that you have to come up with good numbers.

One, you must be talking about someone else there, but one final clarification point, for third quarter then much nearer term. Consensus looking for more then doubling subsequently from the second quarter earnings, is that something, where knowing what you know today, your comfortable with?

Yeah, you know, but you have to go I mean the numbers that are out there seem to be reasonable, if you assume a number of the things that we talked about relative to compound prices and some of the things going on in the chloral collectioning.

Fair enough.

We think those are the two cog units that we have to be honest about.

OK. I appreciate it.

Your next questions come from with Morgan Stanley.

Hi guys, a couple of questions, first, you referred to the second half June weakness, is that what your, is that the reference in the text in terms of reduction in earlier projections from slower then expected, recovery in the economy is that what you are referring to there?

Not really, I think that reference was had to do with the value capture, where we are now looking at a range of 45 to 50 million, where we were looking at 60 plus earlier in the year and one of the principal capture initiatives is in our raw materials and direct material purchasing and the fact that because our volumes are less then what we thought they would be towards the beginning of the year, the value captured benefit from those initiatives are just less.

The fall off in the second half of June was, I think, what I've been able to gather was fairly consistent across each of our business platforms and seems to be fairly consistent across industry. And I that was just a case properly of July being what it is as a somewhat softer month and processors not wanting to have inventory going into July, feeling confident, restock in July with the hope that August, gets us back on that type of growth projector that we were seeing in March, April, May.

: Can you give us a little bit more sense in terms of where the volume shortfalls are for you compared to what you were thinking at the beginning of the year when you came out with the higher capture numbers?

Yeah, I can do that. I think our color business is not showing the type of growth that we would have hoped, we're still under process of, of the apportioning fix, so we have not been able to introduce the type of standard lee times, that we will be able to do when Triple Crown is finished.

So perhaps, we were overly optimistic, knowing that we would not been in a position to really step up our service levels there. The business is softener, it did not come back as much as we would expect and we're assessing what that is. We've had some areas where our capex conversion initiatives have been very successful, but in some core industrial applications, we're not seeing as much growth as we would have expected.

The films business is off, some of that has to do with platforms that we do did not successfully get. Also in the custom area, there's been some deterioration in markets and the fact that there are places where we have just chosen not to continue to supply, because the profitability is simply not there, and we've talked about our custom film business and the action steps that we're taking there, and that would show up in our top-line overall, but you know we would trust that it would also show up more beneficially in the bottom-line. Those are the principle areas.

So it's kind of half in market and half-internal issues?

I don't know that I'm smart enough to cut it that way. I would say that, yeah, you know maybe, I don't know how to characterize..

Look but both were significant factors.

Both were significant factors but still I mean the demand level is not all that significantly off what we had expected. I mean we came into 2002, we did so with our eyes open in terms of low expectations for the economy giving us a substantial tail-width.

Yeah, let me add point that observation and demand are disappointedly off, are actually , you know when you look at some of the businesses that quite frankly the, we completed the re-configurations or asset re-configurations or what ever, they're already fixed. And I particularly point to Europe, Asia distribution. Both the businesses that we've basically said, you know what, we've got those in a direction that we want. We got the assets in the right direction, and they're starting to perform their growth and we're starting to see that, and so you know, both businesses we're still doing some work on, it's not quite there yet, and we're not going to get built more than our fair share on the market place, and that's somewhat disappointing, and so you know, I'm optimistic because where we know we've got it fixed, and where we've got the right people, and the right organization in place, we're seeing the business progress.

OK and second question on the distribution business, it looks like the growth there is pretty limited if you take out the transfer business. Can you give us maybe a sense in terms of what the actual volume growth was? I imagine there's a pricing effect.

The pound growth was sequentially about 17 percent.

OK, and does that include the transfer?

Yes that includes the transfer.

What would it be without the transfer?

Probably would have been up in the mid single digits. Five to seven percent. As we look year-to-year ...

Wouldn't that be disappointing? Just five to seven percent sequentially? I think most companies are seeing closer to 10 to 15 you know Q1 to Q2.

You know, I know we had a pretty reasonably good first quarter too. I think if you look at it over a longer period of time, it's been probably at a more steady business growth in that areas than we've got in almost anything Robert so, I don't think it's disappointing at all.

It's a, if you look at it year to date we're up 15 percent and of that, about half of it is the vinyl and half would be the rest. I think relative to the first half of 2001, which you know was per say a stronger average economy than what we're seeing now. The improvement redistribution business has been very good. It's shown good improvements. The quarter was a record earnings level and so no, I think the distribution business as it's operating today is up very well and we just got a correction that on a volume basis verses the first quarter, the non vinyl improvement.

For the second quarter '01, OK the non-vinyl business was up nine percent. So it's moving well.

So it's nine percent instead of that five to seven.

Yeah I think it's correct and it is going to get better as we continue to improve our ability to capture business as where vinyl counts observes so we just started that. I mean, first order of responsibility was to capture the vinyl business and make sure we got that. Our next order of business is not a capture, other businesses add those particular accounts and I think we're going to get more than our fair share.

I think quite frankly if you were to look at our competitors performance and distribution, I think we've done very very well.

OK and just one last question. You mention that you reassessed delaying the Bethlehem plant.

Yes.

What prompted that reassessment?

I guess it was the focus of Bethlehem themselves has brought up some ideas that maybe we hadn't really considered in the beginning. They had some ideas on what they could do to that particular facility maybe to improve it to its cost structure but when we went back and looked at it verses the alternative of moving most of that production to Avon lake and upgrading the equipment cause we still have to.

Regardless of what they do in Bethlehem we need an investment there in equipment. It just was more cost effective and long-term more viable to do at Avon lake. So, we wanted to be you know, when you look at each one of the analysis that we did, they're fairly complete. You've got customers to access, distribution distances to talk about, you've got other things and when you add in that last component which is the synergy of having that production at Avon lake, with our technology center there it just pushed it over the edge.

We thought that was going to be the case but we thought we also owed it to the people of Bethlehem to make sure that we did this right and so we decided to do a reassessment.

Great, thanks a lot guys.

Your welcome.

Your next question comes from of Addage Capital.

I have a question. When you shifted the production, shifted the third party stuff in house under distribution, do you know what kind of impact that had on the working capital line?

It's going to have relatively, lets see. We've got about $10 million of inventory in the distribution business that the third party otherwise would have had. But, receivables no real material change there. Payable would be down a little.

OK.

So, sorry. It had some, but when you think about working capital in the 300, 350 range, maybe three percent.

OK. Thanks a lot.

Thanks .

Your next question comes from with Goldman Sachs.

Yeah, good morning. This is . Good morning and .

Morning .

: Just a few questions here. First on the compound price increases. Is the issue here price reduction? Or are you still seeing resistance from your customers?

Let me - let me address that a couple of ways, OK? There is a component of our business that, you know, part of our vinyl compounding business that is tied to resin price movement, but it lags a quarter.

So, number one, some of the price increases that went in aren't going to be reflected in those customers until July. So that is part of the reason we didn't see a price increase in the second quarter, as you know, we've been trying to raise prices. It is, I think, you know, we feel very confident that we've got three cents. That we worked at it fairly diligently, and I think our customers expect that, they know what's going on in the PVC resin area. So, three cents is very reasonable.

It's always tough for our customers to pass prices through into their marketplace, in the vinyl area. Most of those folks are relatively smaller players, they set their prices earlier in the year, so when we start coming in with mid-price increases on products, it hurts their margins and they really struggle with it, so there's a lot of push back.

You know, and we've got some pretty good competitors out there. I mean we have one major integrated competitor that, you know, is, you know, has, you know, the very same desires that we do. So there's a lot of, it's been a very active, competitive environment that we've had to deal with.

: OK. If I can clarify then that three cents, that you say are in the bag, is that over and above the index price increases?

No that three cents is, and the index prices, they'll all end up about the same.

: OK. So this is kind of the weighted average increase?

Right.

: And the slippage here is just basically 15 days then? Because you're talking about a mid-June increase being implemented. Would July 1, or July mid-July?

what we said was that we've got three cents in the - at the end of, effectively as of mid-June.

: OK.

We've only got two weeks in the quarter that would have impacted, so you hardly, you wouldn't even see.

: OK.

And remember volume was down a little. So, in fact, it was July 1st, we've got another nickel on the table for July 15th.

: Right.

That we've announced and we'll have to see how that goes.

: OK. Any time frame, I mean, any base case time frame on when you expect that? Or is it too early?

July 15th.

: OK.

I mean, I don't know how else to take any other view at this point in time.

: Right. Right. OK.

Second, you know, you talked about the competitive environment in compounds and with prices where they are, especially on the input side, are you seeing any material come in from overseas, in the form of fabricated PVC products?

Well, I don't, I've not seen any commentary from any of our business units about that. I have heard as PVC resin prices are going up, I've heard of some imports of PVC resins coming into the US, which is, somewhat unusual, but I haven't heard of any people bringing in more finished goods and as a result market share being lost, I can't comment, I'm just not aware of any.

OK.

And we hear that some of the molding dates have moved from North America to Asia or Mexico from the US into Mexico, we try to quantify that, and we have a very difficult time but that's a general consensus, with some as, but that's not, you know, that's not so much a function, of current raw material prices, and price drives.

Any movement in calendering offers in this level, or is this primarily the...

Relative to our film business, you know, most of it, or half of it is approximately auto motive, and that's not, that's not a area we see a lot of raw materials coming in, a little, but not very much.

In the GP side, I don't think we've seen any more than normal, where there is always some being imported but nothing that we're aware of.

And you just mentioned that , was off a little bit because of some platform opportunities that you couldn't win, just a clarification on that, you haven't loss any of the platforms, have you?

No, No, in fact, there are some shifts where with our role in technology, we're able to be more competitive, what I was referring to, was the bidding back in 2000,2001 for platforms that would start this year, or next year, and you know, there was a gap in terms of success rate, in the late '90s and we're seeing that as we look at our auto motive sales, this year, as compared to where they were in 2000, we would expect that to pro-off to wash its way through, and we'll start seeing some of it coming back next year, but by '04, success rates in the last two years, or such as we are confident that we'll get our business back.

Yeah, I think in the automotive area, I think we're winning there. I guess I would characterize it more, platform of winds in that area.

Does this compare then, favorably to your outlook back in April of last year, during your invested day, when you kind of, painted a picture as to where you'd be in terms of platform, when?

I mean, I think, we were back in April, we were talking about the fact that we had not once in platforms in the late '90s and the early 2000s, and we're seeing that effect, last year and last year.

OK.

And so, but I think, we made a conscious effort in the last twelve months, to do some things and I think quite frankly our technology is proving up to be right spot on, with the elephant and in the vinyl area, so, we think we are on the right track.

OK, and one final question, on other im put costs, other than PVC, if you could talk a little bit about, nylon, CIO 2, plastics, what are you seeing in terms of trend?

I think, you know, characterizing in general, that we're seeing price increases, I mean.

Because nylon apparently, you know, at least on the resin side, the volumes are up, but having trouble getting price increases.

Yeah, they are challenged but you know, if you look at some of the other materials, AVS, Polythene, those available are going up, I know there are some attempts to move to a finer, I don't know if it will be a success or not, I mean.

Have you taken any of the ?

I can't, I can't tell you that because I don't know.

OK. Thank you.

OK.

Your next question comes from Bob Goldberg with .

Morning Bob.

Morning. Dave, you mentioned earlier that you thought the processors might be de-stocking inventory in late June, just wondering more generally where do you think, how can you tell where inventory levels are downstream? Is there a chance that maybe the strong volume, or some of the strong volume growth in Q2 was in pre-buy?

Oh, I think some of the volume was pre-buy particularly in the less differentiated areas. I don't discount that at all, but I think the price increases are coming in such a way that that kind of activity is going to somewhat wash through the system. Getting a good handle on inventories downstream is always a challenge for us. I think inventories are probably higher now than they were three or four months ago, just because business activity is up. I don't believe that from the order pattern that we've seen that there is, you know going back to inventory levels, we would have thought they would be more typical, you know we may be seeing a change in the level of inventories the processors need just because operations have become much more efficient, just as time is more prevalent to our capabilities, and our competitors are up, and so it will be interesting to watch as the cycle continues and to see where inventories level out if you will, relative to where they were two years ago.

Do you still think they're down from where they were?

Yes.

Up from the bottom?

Yes.

You inventories are up as well, and working capital is significant and use of cash as you mentioned, any thoughts on that going forward, and your ability to find..

I have some pretty strong feeling going on. Our inventories finished in June about $10 million higher than where our projections were, and that was the reference I made earlier, that sales trailed off at the last part of June, and the inventories that we had expected to sell stayed home. That will be corrected by the third quarter, will be corrected by August, and our expectation is for inventories at the end of 2002 to approximate the investment level they were in 2001, I think our last forecast had us $5 million up at the end of the year. On a daze in inventory, that would represent a fairly dramatic improvement in light of inflation under raw materials and what's strong for business activity.

So they bubble that you're seeing, we had expected to see inventories to build in the second quarter, and build in the third quarter somewhat artificially, and this is to maintain service levels for our triple crown operations, so we have expected inventories to grow a little more than typical through the mid part of the year, but those as I say will be out of the system by the end of the year, and frankly June was an extra bit, but I continue to be very, very pleased with the working capital management. Being able to hold the flat in this environment has been taken considerable effort by many members of our commercial and financial teams and the inventory improvements if you look at it verses 2000, early 2001, we've made market improvements.

Any thoughts Dave on when operating cash flow might turn positive? Will that not be until the first half of next year?

We expect to generate cash the second half of this year. The second quarter, you know first half at what we say 90 million from operations. We would expect to generate from operations 50 to 60 million in the second half of the year. Offsetting that would be a $11 million, $11.5 million of dividends and then the acquisition that we've talked about which is 20 to 25 million.

Also, recall you know, the big part of that cash generation is working capital liquidation towards the end of the year. Couple of other key factors that we have to consider are the restructuring spending that we note in our release and also an expected improvement or expected dividend, cash dividend coming back from as starts to generate cash, we would expect to see that come back to us.

So, we'll have cash earnings really for and in the second half of the year and it's reflected in the numbers I've talked about will have, will put 10 million into the pension fund.

And that 50 to 60 million of operating cash flow, that's also before capital spending needs?

No, that includes capital spending so.

That's free cash flow. OK.

Yeah, so when we look at you know where we are from operations well I guess it's 100 million consumption, we would expect that number by the end of the year to be you know, around 50 consumption and from that you take off dividends and the acquisition. But it does include Cap-X.

Thanks for the help.

Your next question comes from with CSSB.

Good morning and I'd like to thank you for the wonderful supplemental information that you always give out. Could you talk a little bit more about the strengths of the Euro? You mentioned that it impacted your, I think it was the PCC operation, did it have an impact on the bottom line and also, are you doing any foreign currency hedging?

OK. We calculate the Euro increase as about a $4.5 million favorable impact on our top line and about $400,000 favorable impact on our bottom line. So yes, we are seeing the benefit of a stronger Euro on a net basis. In terms of hedging, our, the European, well basically each of the geographies operates within its and use of the functional currency, geography is the principal currency that's used.

So, in Europe yes we will do hedging but as far as the rapid sense of the Euro, what we have done is taken out a forward contract for a portion of the European acquisition that we expect to make to protect that.

Very good, thank you.

We'll take one more question here.

OK, your final question is comes from with Merrill Lynch.

Good morning, just wanted to, when I look at your distribution margins they were up nicely sequentially and clearly this extra volume that you took in was a positive, just curious is the return on this extra on the PVC compounding business, is that generally a higher margin business per say or is it just that you have more volume?

No, its volume leverage across a cross space, our general manager drills into us that distribution is a volume business and we've got a fixed set of costs and so we put more margin over.

Another thing contributing to the margins in the distribution business that was the negative last year and the deflationary cycle, is as prices move the margin that you get moves up with that.

You know you make 8 percent, you know you make more money on 8 percent of the dollar versus 80 cents for example.

Last year we saw that was a negative $4 to $5 million impact to the distribution business this year we're seeing that reverse.

And then secondly, this extra business that came in was it all captured in the second quarter or might we see some more incremental Q3 versus Q2.

When did that actually come in during the quarter?

About the final piece Karen?

Yes

I think we've captured the majority of it in the second quarter, but it was captured during the quarter so we might, we still should see some sequential improvement in the third quarter.

And in addition to what ever pull through we gets through.

So there might be a little bit more there yet

OK, so a little bit more from that.

I can't, I have to look at it by month, but I'm pretty sure that it will still ramp up in the second quarter, so we should continue to operate, we should see a sequential improvement in the third quarter.

OK, and then my final question is you know you've been taking these special items or costs associated with re-structuring, you took a few million dollars in the first quarter and less than a million in the second quarter, I'm assuming those costs continue in Q3 and Q4, do they get larger, any help with that?

I think the income impact is more generally in line with what you saw in the second quarter, the cash impact goes up in the third and fourth quarters as we close the plant.

Right thank you very much.

Take care.

This concludes the question and answer portion of today's call, I will now turn it back over for closing remarks.

I don't know whether we took all the calls but I didn't want to keep this call going because I know other people have commitments but so those of you who I did get, we didn't get to we apologize.

But thank you very much for calling us this morning and joining us, again if you need any assistance give Dave and myself a call today and or if you need any help with the materials certainly feel free to give my assistant Darlene a call. With that everybody have a great and safe summer and we'll talk to you soon.

Thank you for your participation in today's conference, you may disconnect at this time.