Avient Corp (AVNT) 2003 Q3 法說會逐字稿

At this time, I would like to welcome everyone to the PolyOne earnings conference call. (OPERATOR INSTRUCTIONS). Mr. Cocco, you may begin your conference.

Good morning everybody. We are here in sunny Avon Lake (ph) today, and joined here to meet with me is Tom Waltermire and Dave Wilson, which will both have some remarks for you. So you all know, we are webcasting this conference call, as we have been doing in the past. Again also, I would ask that -- we would like to restrict questions to analysts at this point in time. I'm certain there are some media folks on this conference call, and you are certainly welcome to listen in today. But if you would like to ask some of your questions, I would appreciate you getting to me a little later today. If for some reason those of you who would normally get the information sent to them did not receive either the earnings release or the supplement, please let my assistant Darlene know. I think there might have been some problems on e-mail, and I apologize for that. There may have been a few folks that did not receive the information last night, and she's at 440-930-1522, just in case you need to contact her.

I would ask you to please consider looking at our forward-looking statements that talks about business risks and uncertainties. This particular forward-looking statement -- we do update it almost every time we put out a press release. It contains a number of new risks or factors that could cause our results to be materially different from what we may discuss today, and it's important that you take those into consideration. We're going to open this for Q&A in a few minutes after (inaudible) have some remarks from Tom and Dave, but I would like to make one point relative to the divestitures. Certainly, we want to talk about that today and we want to give you some insight and answer your questions as to the backgrounds of why we have decided to consider those businesses for divestiture. I want to make sure that everyone understands clearly though, that we're not going to comment on the process that we are about to take on the divestitures, and we're not going to be commenting as we move through that process. It's something that we will certainly give everybody an update when we are ready to make an announcement, but as we've we decided (indiscernible) at this point forward, we're not going to give updates as to the progress we're making or how we're going about taking a look at divesting these particular businesses.

So with that, I would like to turn it over to Tom for his comments.

Thank you, and good morning everyone. I'm going to rely on Dave and Dennis to talk specifically about our third quarter and outlook. But I want to talk a little bit about where I see the Company today and what our priorities are that I am focusing on and I'm seeing that our organization focuses on. I think first of all, thoughts on why is PolyOne a good investment for the future. I would highlight three things. One is, as you know, and those of you who have followed us for a long time, we have done a tremendous amount of work over the last few years to streamline the organization, make it more cost-effective in a very very tough economy. As David and Dennis have spoken to you a number of times, we can see in our cost structures well in excess of $200 million that we have extracted over the last few years. That better cost base gives us a lot of upside as the economy recovers. We've got a lot of built-in potential. Secondly, we're far from done. We're very aggressively going after additional cost efficiency improvements that we see with -- that can add materially to the bases that we've already created. From an economic and a portfolio standpoint, our resident intermediate investments look to be positive, certainly good positive cash generators over the coming year or more. Supply demand balances in PVC resin and core alkali continue to look favorable, and that's going to be positive to us. (indiscernible) a fourth point, which I will comment more on in a little bit more, that we are committed to getting our debt reduced, so that we've got more flexibility and we'll just be getting our interest expense down. Those are all reasons that I believe we are going to be a -- that we are a very positive investment going forward and a good buy, certainly, at today's prices.

The priorities that we have and that we are driving the organization today are four, and I give talks almost daily in our organization to keep people focused on these four things. One is debt reduction, and it comes from two sources -- the portfolio change or divestments that we've announced and we have been working on, and secondly it's working capital improvement. Compared to our peers, I think we are very reasonable in our current level of working capital, but we still see that as an important source of cash and operating cash improvement going forward. (technical difficulty) first priority from portfolio and working capital improvement.

Number two is turning around two operations that we're putting extra emphasis on, and that's our North American color and additives (indiscernible) business and our North American engineered materials compound businesses. These are two businesses that we actually have good potential operating on a global basis, but our U.S. operations do need to be improved. And to focus even more effort on that, two weeks ago or so I asked our number one operating executive, Lance Mitchell -- who previously had responsibility for all of our global plastics compounding businesses -- to focus himself full-time on getting our color and additives masterbatch and engineered material compound businesses in the U.S. turned around. That's very important for us to do from a financial standpoint. It's also important strategically, because these two businesses do have good potential. And as I say, we are operating successfully in those two businesses outside the U.S., and we are very much committed to creating a strong global capability in both those areas. So number two, turning around U.S. color and EM -- engineered materials.

Number three is getting our cost structure further in line with where it needs to be, from a competitive standpoint and just from a current level of demand. You've seen in the material that we sent out last night -- in the highlights you can see continued significant steps being taken from both an overhead and capacity standpoint. Those are going to continue. And the portfolio change announcement that we made was done in large part so that we could provide clarity internally to our people inside PolyOne, to understand what our business portfolio was going to be going forward so that we can get on with making sure that our overhead structure is in line with the portfolio that we're going to be driving for the long-term. And until we can be clear with our people that what we are going to be, it was obviously going to hold us back in achieving the full cost structure that we wanted. So number three is getting the cost structure in line, both from an overhead standpoint as well as a capacity utilization standpoint.

Number four is pursuing our growth opportunities that come in two areas -- certainly, you've seen our announcement about a further expansion in China. We continue to have a lot of opportunities in Asia. We've got a good position there and it's a high-priority for us. Another major focus I know Dennis has spoken with you about is our marketplace effectiveness initiatives, where we are improving our customer segmentation so we are realigning and focusing our marketing resources on the customers and marketplaces that give us the best opportunities for growth -- even in a flat economy -- improved pricing skills and a variety of things we're doing -- tuning up key account management, so we're more effective in how we work with our largest multi-product, multi-technology customers. So growth opportunities at number four, for marketplace effectiveness, as well as international expansion. Those are the four priorities that we are focused on -- debt reduction, turning around two key businesses, cost structure and growth opportunities.

Let me comment a little bit further on portfolio change. As I said, a key goal here is to get our debt down so we have better financial flexibility. I also believe strongly that we're going to get the benefit of greater focus. The businesses that we've announced that we are going to be concentrating on have the greatest synergies, both in the U.S. and on a global scale. And that's going to pay off for us. The third comment about it is that while we have not set -- and we've told you that we have not set a specific deadline and we're not facing some kind of deadline that we need to complete these divestments -- they remain a very high-priority, and it's been encouraging since we made the announcement a week or so ago that we've had some people come forward and express some interest that wasn't even necessarily on our original thinking. So that has been another positive from having made that announcement. Fourthly, with respect to the portfolio announcement, you are going to see us continue to take steps to improve the performance of those businesses. We announced also yesterday the closing of and consolidation of two plants within the our elastomers and performance additives business. This is something that we believe we can execute effectively within the next couple of months. And that's going to improve the performance of that business and enhance its value for a future owner. We also have recently changed the leadership, the management, the top management of our engineered films business. All as part of continuing to drive to improve the performance of those businesses and enhance their value in a transaction.

A final comment, before I turn things over to Dave to talk about the quarter and the financials, are that we are encouraged by what we are seeing in the way of improved demand. It finally started to show up in September, and we've seen some good order rates in a number of our businesses in October. But I want to assure everybody, and I have repeated these a number of times, that our focus for the fourth quarter and going into next year are these four priorities -- debt reduction, turning around two key businesses, cost structure and the growth opportunities. And as we continue to execute on those on an urgent and dedicated basis, I think we will continue to see improvement in our performance, and have a much better looking 2004 than what we've had as a 2003. Dave?

Thanks Tom. I'm going to go over a couple of areas. First off, I would like to talk about the cash flow. On our last quarterly call, you will recall that we were not pleased with the level of inventories that we were holding, that we were holding inventories in the 54 day level, and we said that that was unsatisfactory. In the third quarter, we worked diligently, and each of the businesses made a significant improvement in their inventory management. And so as a result of that, at the end of September -- and in fact we saw this also in August -- our DSIs are closer to 46 days, and that is close to the target that we were shooting for. So we have made marked progress on inventory management this quarter, and that paced positive cash generation. Working capital overall was down about $25 million, and our cash flow from operations in the third quarter was about $25 million. During the quarter, we also made a $15 million contribution to our pension fund. We also received roughly $10 million from our equity affiliates. But by and large, the improvement that we saw in working capital, much-needed but very satisfying and gratifying. And the challenge, of course, is to maintain the level of control that we currently have. And that is certainly what our management is committed to doing.

I would also say that in terms of liquidity, we finished the quarter with about $135 million of available liquidity. And you would also notice in our supplement that we have amended our revolver and our receivable facility through the balance of 2004. What those amendments do is provide us the financial flexibility to continue the restructuring, much of which Tom has talked about already. In the quarter itself, as you saw, we have, before special items, earnings loss of four cents -- flat with the second quarter. Although our sales were down about three percent from the second quarter and the third quarter. Also gratifying is the fact that our operating income, and this would have been from all our operating businesses, was in fact up quarter to quarter on the lower sales level. And so we're starting to be able to document the cost savings that we have been working on through the balance of the year, and having those start showing up in the bottom line, which is encouraging, too.

Resin and intermediates was flat quarter to quarter. We have some commentary on that in our supplement and the earnings release. High points there, fundamentally, volume was up from the second quarter; however, PVC pricing was down, and that brought with it lower resin spreads as ethylene fell, but not sufficient to offset the resin decline. You will see in the earnings release we talk about change in our treatment of income taxes. We do provide in both the supplement and the earnings release a fairly detailed explanation, and I would refer listeners to those. But I would say the long and the short of it is that we have, according to GAAP, had to stop tax-benefiting our domestic losses. But I would also say that this change does not affect our cash flow, nor does it affect our liquidity. It is a technical change that we've made, and as I say, we go through a pretty good detail, the specifics of why and how this change will affect us.

As we look to the fourth quarter, we do talk about the fact that we're targeting to be down sequentially in earnings, although up over last year. As we look at the hybrid quarter, we'll call it, of August to October, it compares very favorably, particularly when comparing to last year. We have seen sequential improvement in each of August, September and October from our sales pattern. We would anticipate that we will see the same pattern on the bottom line. We were profitable in the month of September, and those are all very encouraging. We are seeing, certainly, momentum building towards the end of this year that was going the opposite direction when we were sitting here a year ago.

Having said that and looking at the past three years, the period between Thanksgiving and Christmas still remains a wild-card. And how much inventory de-stocking will occur is anyone's guess. By our customers -- right, it's our customer inventory de-stocking -- we would anticipate that there will be some, and the projections that we are basing our earnings estimates really reflects similar sales levels for our domestic operations in the fourth quarter as compared to last year. International would be up -- a combination of Transcolor, which is the primary driver, as well as some FX. We do not anticipate in the fourth quarter that there will be a significant move in our margins. They should remain relatively flat. We are anticipating that our resin and intermediates business will be down several million dollars. And this is more attributable to volume declines. As we sit here right now, the high leverage variables -- natural gas, PVC, chlorine, (indiscernible) ethylene -- are generally flat with where we saw them in the third quarter. But as you all know, it only takes one cold storm to go over Canada, and natural gas could go up $1 or so. So that remains a wild-card, although I would say that with natural gas trading where it is right now at 4.50 or less, that certainly would be a positive benefit relative to the third quarter.

So with those comments, I will turn it back to Dennis and we will be open for questions.

Thank you Dave. Certainly, all three of us are available for questions, and we would like to try to take as many as we can. So try to keep your question to a single or two questions so we can get as many people in on the call as we can today. So I'll just go ahead and take the first call.

(OPERATOR INSTRUCTIONS). Allen Cohen, First Analysis.

It's actually Dan Leonard. Dennis, given the caveat you gave at the beginning of the call, I'm not sure how much of my question you will even be able to answer, but I will give it a shot anyway. Each of the businesses you are planning on divesting eventually, how do you position each of these to a potential buyer? How, for instance, would you describe your elastomers and performance additives to a potential buyer?

I suppose we could comment on that a little bit. We present it as having the -- as being the leading -- by a considerable way, by a factor of a couple of multiples -- the leading compounder of elastomers in North America. I think the market cheerleader, the technology leader, I think, with the strongest supply relationships. So there are some real strengths that that operation has.

And for your engineered films and specialty resins businesses?

Actually, in each of their particular areas, all three of them have leading market positions. We see ourselves, at least on a North American basis, as the leading producer of dispersion grade PVC resin. That's our specialty resin business. It is a well-run operation. It is generally, again, recognized as a service and quality leader. And through efficient plants that have been -- we've put a reasonable amount of investment in over the last five to ten years. And good strong customer relationships. With respect to the film business, I think in terms of automotive film, which is -- represents about half of the business -- again, it's a leadership position, a market leadership position. Very strong relationships with -- principally with tier one suppliers. And I think our people are well-recognized for their expertise there. In the customs side of the business is really where we've been doing a lot of consolidating of operations to get the cost structure right. Our custom film business also has some new technology that they've been commercializing over the last year. So I think there's some opportunities there, as well.

If you can comment, what might a potential buyer look like? Do you feel there are strategic buyers out there, or what can you say about that for each of the businesses?

That's probably going farther than would be appropriate for us.

Also if you could comment, what might a potential buyer do with each of the businesses that you guys haven't already done?

That's a question you would have to ask them. There is no way we could possibly address that.

That obviously depends on who the buyer is. There are certainly people out there in all three of those cases where there are synergies involved, but I think we'll just have to leave that more general.

Philip Ferera (ph), Goldman Sachs.

I've got, like, 17 calls today. I will give him a call.

(multiple speakers)

Frank Donough (ph), Adage Capital.

A few questions. So the tax rate thing doesn't matter if you make money, right?

When we make money, we will basically use the same treatment until the allowance is depleted, and then we will start booking taxes as you would expect. We still have a significant NOL. So on a cash basis, we are looking at not paying taxes domestically for some time.

But there's a period of time, though, (indiscernible) you actually start making money in the United States, you will not book -- at least for book purposes -- book a tax rate against it?

That is correct. To the extent that the allowance is built on the losses, that has to reverse before we would start booking tax (indiscernible) --

How large a number is that?

Right now, it is $45 million.

So if I look at your -- trying to figure out the 8 to 14 cents, and trying to compare it to another period where you were paying taxes, would that be safe to say that that would be comparable to a loss of 5 to 9 cents if we were allowed to tax things? Something like that? Or book a credit -- I just did the 35 percent tax rate is all I did.

If you look at the third quarter, you would be looking at the four cents. If you are looking at the fourth quarter, the guidance that we gave presumed a tax rate.

It did assume a tax rate.

Yes.

So when do we not use a tax rate?

Because we want to portray our operations, as we have in the past, (inaudible) comparability.

Okay. Now let me make sure I am not completely confused. So the 8 to 14 cents assumes a tax rate, but whenever you report it you won't have a tax rate. So the number would actually be higher?

Correct. What we're also showing in that 8 to 14 is really our income before special items, and as we portray our income before special items, we will always assume a tax. And that will be the same for losses or for earnings.

Okay, because I was just trying to figure out why. I am looking at your momentum coming out of September and looking at October, and I know PVC is seasonally slow, but the margins seem to have widened? I don't know, the guidance looks a little conservative to me.

I hope that it is.

Nancy Traub, Credit Suisse First Boston.

I wondered if you could comment on your expansions in Asia-Pacific? Is there any possibility of you taking some of the excess capacity here in the states and moving it over there, or are you building from scratch?

We are looking at that currently. There is the opportunity to take some of our idled equipment from North America to really any of our international operations. We are looking at that. There are some opportunities to really come up with fairly low cost equipment in China, so that the trade-off, in terms of redoing some of the mechanics, the electricals and shipping the equipment from the U.S., may not be cost effective. But that certainly -- we certainly look at that and make those decisions one over one.

In what areas would that be more appropriate?

It's difficult to say. We have spare equipment for compounding, as well as for color operations. It's really across the board. I wouldn't say either or. It's the specifics of the circumstance.

It gets very detailed on that. The new plant in South China will be both a color and a (indiscernible) compound plant. And we've got an opportunity to supply some very good equipment for both of those.

Could you talk about voluntary pension contributions going forward, and your CAPEX?

CAPEX next year we're targeting to be about $40 million. About half of that is likely to be for international expansion. The voluntary pension contributions -- you will note that as a result of performance this year, the mandatory pension contribution, which we were talking about being somewhat less than 5, now appears to be relatively close to zero. So the voluntary pension contribution really will be a function of the asset performance between now and September. At this point, I really can't mention it. We had talked about a fairly significant contribution in 2004, in order to avoid participant notification and avoid the (indiscernible) variable premium. That number is north of $50 million. I suspect it's come down, as well, I just don't have that number. But in our financial planning, that's the magnitude of the type of contribution that we would expect to make.

Robert Ottenstein, Morgan Stanley.

Last year, I think it was probably about last year this time, you made some comments to the effect that there had been service issues and problems in a number of areas that you had lost market share. I was wondering if you could revisit that issue in light of recent results? And again, you're very cautious forecast for the fourth quarter. You've got a lot of stuff going on. Can you go through some of the major businesses and give your assessment, in terms of whether you are gaining, losing or kind of holding steady in the market share? I understand some of the businesses you want to get out of, because you aren't making any money. But in terms of where you want to be, how you're doing?

(indiscernible) take a look at the final business. I would say we are holding or gaining. We have seen improvement in the wire and cable segment and we have been able to take advantage of that. In distribution, I would say we are gaining, not at a great pace, but we but we are gaining share there. In the color business, we're probably holding flat. I think versus the large competitors that we have, the Clarions or (indiscernible), we are certainly holding. There may be pockets where the regionals may be taking share. The comments in terms of service that were made a year ago were largely directed towards the color business. And we've made marked improvement. There are still some improvements that we have yet to make. As Tom commented, we still need to continue to improve the profitability of our color business. But key areas like color match and production order turnaround -- we've brought those in line with industry norms, if not in fact better. So the service issues that we were facing coming out of 2002 are largely behind us. Still, improvement needs to be made. On the formulator business, I would say we're holding share in it. I wouldn't say we are gaining much. On the elastomer, I think that's probably a fair statement, as well. The challenge there is the overall market declines that we're seeing in the industrial side, which generally is a true statement across all of our product lines, in terms of business that has apparently gone offshore to China. Unfortunately, we're seeing our Chinese business grow, but certainly not at -- to the magnitude that we've seen our North American business shrink. Going around the wheel, specialty resins holding position, and engineered materials, probably holding position. Our international operations continue to grow. We're picking up share. We're just simply taking advantage of market growth. We had the acquisition of Transcolor, and that acquisition is exceeding all the numbers that we had hoped that it would. And obviously, the announcement in terms of putting the third plant in China is reflective of our expectations to be able to grow and grow aggressively in that part of the world.

Let me add a couple of points to what Dave said. Each of the businesses are going through a very detailed quantitative new account program. They're clearly tracking target accounts, measuring their performance against them. And we are measuring the performance against how well they are doing. At the same time, they're looking at the (indiscernible) part of the business. And that's the more difficult one, is why a particular application goes away. (multiple speakers). It's more churn than in anything else. And each of the businesses are clearly now, especially with the systems that we have in place, measuring their performance against that. And we are watching that on a monthly basis, and quite frankly, we are actually encouraged now. We have very specific processes for tracking and closing new business and new accounts, going forward.

This is Tom. I would sum it up -- and it's an excellent question -- to say that our bigger concerns over the course of this year had been the track of the industrial economy in general. And as we look at our business trend relative to overall industrial production so far, it continues to -- our trend this year has been pretty similar. So that's more of our concern about our customers, our North American customers position than our position at those customers. Where we've seen some attrition this year, it's been much more on a customer's loss position or a customer has moved, or whatever kind of basis. As Dave said, service levels, particularly where we were targeting improvement, truly have improved markedly. Our people have nothing to shy away from in selling our service capability at this point. I guess to reemphasize Dennis' point, we are doing a lot better job at identifying and tracking key account closes, and we are going after that rigorously. I think we've made some real headway in that this year.

Am I all out of questions now?

Go ahead. Do you have another one?

To get back to Frank's question. I'm having a hard time understanding the Q4 guidance. Maybe I am wrong, I thought I had recalled in the last conference call, a real commitment to get to breakeven -- if not in the second half, in the fourth quarter -- before special items. And I just -- again, with this celebration in business, with the lower natural gas -- I have a hard time understanding why you wouldn't be making some money in the fourth quarter unless there were some issues along the lines I talked about. I don't know if there is something else that I am missing, in terms of what's going out in the business or in the guidance, but maybe -- is there anything else that you can help us with that, just to understand why things would be worse in the fourth quarter?

The challenge is calling November and December. We made money in September, we expect to make money in October. But the last three years, we have seen such declines in November and December in our North American business, it's just hard -- it's just hard for us to be sitting here today and have any confidence that we're not going to see the same thing. If that doesn't happen and if momentum continues, then as Frank suggested, we may be a little conservative on our estimate. But at this point, there is nothing that would indicate that we wouldn't say a tailoff in that period.

Let's say that October is a little better than September, and that November is as good as October and December trails off, but it doesn't collapse. Do you think you could be positive five, ten cents?

No. But I think we might be positive on that scenario, as long as December doesn't tailoff like it did last year.

Last year was unusual.

I hope.

Mark Kaufman, Lazard Freres.

My question is you're battling certainly -- over the last couple of years battling both the (indiscernible) decline in demand in your business. I was wondering in the businesses that you have remaining, what type of capacity takedowns here in North America, say, that you want to target to get your business in line with -- you've got a balance and forecast what demand is going to be going forward here domestically?

Fair question, and we took actions to that very question in the third quarter, where we took our vinyl plants from 7 day to 5 day operations but for the powder side of the business. Our engineered materials, we closed one plant that had been anticipated to be closed and closed other lines. At color we closed a plant. So on the businesses that we are -- our core businesses, we are continuously assessing balancing our expected demand with our capacity. At this point, we would say, and looking at the balance of the fourth quarter and into the first part of next year, that we are by and large balanced. We were able to get some fairly significant cost savings as a result of that balancing in the third quarter, which will start showing up in the fourth and first half of next year.

As a follow-on, do you see any type of opportunities or growth opportunities in North America, or does it appear that the growth is going to be offshore?

I think we do see opportunities in North America. Customer taking -- targeting customers where we may not have as much share as we can. That's by and large the challenge of the segmentation and the key accounts strategies we put in place, is to go after that. We are in no way conceding North America. We may be growing and putting most of our growth investments internationally, but still, the North American base is by far our largest position. We will defend it and we will grow, and we are seeing success. One earlier question -- I didn't reiterate the fact that on the color business, we had a significant win, in terms of P&G moving from metal to plastic coffee cans. And it's going to be our color that's going to be making those plastic containers colorful. And that is significant, in terms of a large opportunity. It's also significant, as we mentioned last quarter, in the fact it's an endorsement by P&G on our capabilities. So we are battling, and the business teams are targeting North American account growth. But it is -- with the general trend, it is a battle. And we continue to see erosion in the North American market, but that doesn't mean we are going to allow ourselves to have our topline continue to erode.

I would really reemphasize the point -- it is -- we've talked about customer segmentation. It is principally about being very clear about who's got the best opportunities out there for us. We also have -- a segment of that, a portion of that is particularly devoted at larger customers that have a variety of different opportunities that we can do business with. Where we have a good position in one part of the organization, we believe we can do more in extending that to other parts. We have had those, we've worked at those, but we are putting a lot more resource behind those kinds of opportunities. So our marketplace effectiveness work that we're doing is very much based on growth and deepening our position with customers who really have big opportunities for us. I think there is a lot of belief, confidence, excitement within our business units on the potential for that to pay off. And clearly, in an environment where there is not a lot of tailwind going for us, that's the secret is continuing to develop growth in this market.

Bob Goldberg, New Vernon Associates.

I would imagine that your sales in North America were up in September. Is that a fair comment?

Yes.

Is it also fair that in October, from what you can see, it looks like you will have another up month in North America -- sales-wise I mean?

Yes.

As we talked about earlier, you were going into last year's fourth quarter in a decelerating mode. This year you're going into the fourth quarter with an accelerating mode. Any thoughts or insights as to the customer inventory levels that would bring about a similar type de-stocking that you saw last year, when business was slowing down?

How many times do we get that question and how many times do we say it's really difficult for us to answer? No, we don't know the answer to that. But we're certainly going to be looking at it a little closer here in the next couple of months, and we will try to get as much (indiscernible) information as we can.

But it's nothing to indicate that inventory levels are high. Probably it's true that there were not especially indicators that they were high a year ago. So that it -- we have -- this time of year, you start to hear -- when you start to hear about customers talking about year-end shut downs. And I don't think we are hearing as much of that, but we are hearing some of it, and probably particularly in the auto sector. So we have some encouragement out of that, but as we go over the next few weeks, we will hear a lot more about that with customers.

I know everyone is struggling with our outlook here, but I will tell you that as we look forward into the early part of next year, which we think as we get closer to that period we'll be able to quantify it, but we are feeling better about 2004. Certainly, the economic things are good. We are more concerned about, at this point time, an inventory correction that customers are going to take in the fourth quarter. And if we are wrong, we will be very happy to tell you.

We will be delighted. But it is -- the last three years, 2000, 2001 and 2002, the economy has been decelerating in the latter part of the year. And we saw sharp declines late in the year in the fourth quarter relative to the third quarter all three of those years. And it's getting a little hard to say what's normal and what isn't when you've done that for three years. But we remember the factors, as you are pointing out to us -- in all three of those years the economy actually was going down while that was happening. That certainly exacerbated some degree of seasonality that's inherently there anyway.

Part of the guidance, of course, has to do with R&I coming down. And on that subject, I believe that PVC resin got 2 cents in September. I hear that is still holding, I hope it is. And on the cost side, I think you got some break on ethylene in September, which would imply that you're starting off October at a higher margin level than the third quarter average. Is that fair? It sounds like you're assuming that you are going to get back all of that and then some over the course of the next two months.

As Dave pointed out, the real issue here on ethylene is where natural gas goes. And (inaudible) the last two weeks, natural gas has gone further south than I think we would have thought (indiscernible) ago.

I am just asking you, Dennis, where are the margins today -- right here, October 30 -- versus the third quarter average margin?

They're up a little bit. Then it's a question of what happens in November and December, in terms of resin pricing. And I am sure you're following the activities in the PVC resin market as closely as we are, and are aware of where the trends usually go. But if demand holds, prices could hold in the fourth quarter. In which case there would certainly be upside to our expectations for resin intermediates.

And if that's true, it actually would even speak more strongly to strength early in '04. If you've got -- if you finish the fourth quarter in pretty good shape, you know that there is going to be seasonal pickup going into next year. And that's usually a scenario for strong pricing environment.

I think we did comment, too, that our perspective on oxyvinyl demand in the fourth quarter is going to be well ahead of where they were a year ago.

My last question was for Dave. On the cash-flow statement, I think you mentioned cash flow from operations of 25 million?

Yes.

How do -- I see 7.4 million. How do you reconcile that? Is that where the (indiscernible) fell?

I will tell you how you do it, because I've had to do it myself. You go into cash provided and that 7, and you add back 25 million for the receivable for the reduction in the receivable facility. Okay? Then you back off capital expenditures, which is about nine, and you add back the sale of assets, which was four, and that was one airplane and one closed site. Then you subtract from it the foreign exchange 4 million. And when you do all five of those, you come up with about $24.4 million, and that was what I would say was our cash flow from operations. So it's taking out all of the quasi-financing aspects of the cash flow. Okay?

Any expectation for the fourth quarter on that metric?

We should continue to generate cash in the fourth quarter. We anticipate that we will see continued improvement in working capital. We would also expect to get just a seasonal bump as sales go down, our receivables will go down with it. So yes, we would anticipate generating cash in Q4.

Michael Judd, Greenwich Consulting.

I see that you are expanding in China. This will be your fifth plant, but Asia only accounts for about 3 percent of PolyOne's sales. So it sounds like this additional capacity, it would be nice to have that since Asia is growing much faster than a lot of other regions of the world. But it might not have that much of an impact on sales. Are you guys being -- given your debt levels, are you just being very conservative in terms of your expansion into regions of the world that are growing very rapidly? Or is there some other reason? That's my first question. My second question is, your existing plant in China -- where do your source your resin and various raw materials from? Are they sourced from Chinese producers or are they imported?

By and large, our sourcing in China is from Chinese producers. And the same would be true in Thailand. In Singapore, I think there may be more North American supply. Your question relative to -- one, I would say our debt level is not slowing down. Our intention is to grow our Asian business organically. In terms of making a large acquisition, sure. But we are moving as rapidly as we can with the infrastructure that we have to build on. It would be our expectation that you will be hearing about expansion capital for both Eastern Europe, as well as Southeast Asia, and Asia in general, every year. So we have an expectation that our international business and our Asian business will within three to five years, be substantially more than the current three percent of sales.

Our plan is to grow faster than, certainly faster than GDP in those markets. And we have been doing that. We did expand in China at the existing site in 2002. Or is it '02 and '03 -- probably (indiscernible) in '02 and got the benefit in '03. So I would expect, based on the growth and the growth track we have been on there, that we would be investing and expanding there probably every year. We wouldn't be adding a new site every year, but the existing facilities we would. And in fact, what was approved at the same time as this new site, it also included some modernization of the existing facilities so they could do -- take on new things that we want to be able to do there. So it's high-priority, it's obviously working off a small base, but our growth rate continues there to be very good.

Lastly, I can see that SG&A as a percentage of sales has certainly come down by almost a percentage point on a nine month basis, '03 versus '02. But you're running about 10.7 percent, 10.6 percent in the last couple of -- year on year, I guess, for the third quarter. Do you have an ultimate sort of objective there?

We intend in '04 to be running below 10 percent.

Bill Hoffman, UBS.

I wonder if you could -- and I know you put this in the press release -- but just run us through, again, the components of the liquidity with this AR facility and some of the things that are charged against the other bank facility?

We have -- for our short-term facilities, we have a receivable facility which has a capacity of $225 million. At the end of the third quarter we had receivables that would enable us to use around 210 of that facility, and we have drawn about $65 million.

Do you have any letters of credit used against that?

No, we don't. Although there is room in the facility for letters of credit. All of our letters of credit are being applied against the revolver. We've got a $50 million revolver on which nothing is drawn, although we do have 30 odd million dollars of letters of credit and a little less than $10 million of a secured bank loan associated with our Colombian JV. So that in effect uses a fair amount of the revolver's capacity. But when we put it in place we really had not anticipated ever drawing on it. The receivable facility is our -- in effect, it's our short-term facility for working capital needs.

Bob (indiscernible), 4086 Advisors.

A quick question on the pensions and the JV cash contribution. The pension first. I think you said you could contribute as much as 50 million cash next year. From an income statement perspective, how much of expense do you expect is kind of already going to be flowing through, so that we don't double count that?

Good question. 25 million. And it's about the same as it is this year. We're not anticipating our pension expense to go up more than $1 million year on year, despite probably a 50 basis point decrease in the discount rate. That would be a reflection of, obviously, asset performance in '03.

Do you expect any cash contribution in the fourth quarter this year, or are you done?

No, I don't expect any. We're done for this year for pensions. And we do expect another distribution from our equity affiliates in the fourth quarter. And for planning purposes, I would just simply use what we got in the third quarter.

That was my other question. Tracking through the cash flow statements and your income statement lines of income from equity affiliates and such, trying to actually reconcile that to cash. I know I've talked to Dennis before, and I don't know that A, it's possible for us to do that, given the financial statement. So I was wondering if you could give me a year to date cash, and I guess third quarter -- since I am going to need to use that for the fourth quarter -- received, and then what you received from those in all of '02?

In the third quarter we received $10.6 million, and we've received year-to-date $12.6 billion. That would be on our cash flow statement.

Okay. So that's the dividend distribution received line?

Yes.

So last -- okay. Going forward basically, all I need -- that is the one line that actually can get us to the (technical difficulty) cash coming out of those (indiscernible) --?

And 2 lines above that is the book -- the income line. So we had $11 million of income from our equity affiliates and we got about $11 million of cash. On a year-to-date basis, we've booked 27 million of income; we've only gotten 12.5 of cash, but we do anticipate that we will get more cash in the fourth quarter than we will get earnings.

That's normal. That's been the way it's been going for the last few years.

I guess I wasn't clear that that was the one line. That certainly makes it easier going forward. Lastly, just a generic comment about the businesses you're going to sell. One is -- do those businesses sell much through your distribution business? And would you expect any type of negative impact on distribution by selling -- once you ultimately do sell those businesses?

No, they do not sell through our distribution (inaudible).

And your JV interest -- I don't know if non-core is the right word -- but are those kind of also in the same vote as the businesses you outlined?

They still are something that we are willing to consider (indiscernible), but probably most likely with our joint venture partners. But as a number of you have reminded us, there is a good cash flow outlook there, so it's not something we are going to hand away.

we will take one more question.

David (indiscernible).

I just wanted to make sure I understood the liquidity. I think you characterized liquidity (indiscernible) 135. And based on the numbers you just gave to the last questioner, it looks like you've got more than that. (technical difficulty) then you've got 210 available (technical difficulty) receivables facility. And you are only drawing 65.

We subtract -- in terms of our available liquidity, there is a $25 million liquidity reserve that is built in. And what that is is when we want to draw that last $25 million, we have to talk to our bank groups. And so we subtract that. As you work your numbers, you probably came closer to the 160?

Okay. That's helpful. I just want to make sure I understand the remaining cost savings that you are focusing on. Is it pretty much the SG&A target of around 10 percent? Is that (indiscernible) stable topline -- is that really what you are targeting? Is there anything else I'm missing in terms of (multiple speakers) cost savings?

We're also focused -- we look at overhead in general. So there is -- the plant overhead, and this way we can look at total functions across the Company. So that moves into the S&GA. But by and large, the S&GA is the target that we are shooting for. There will be others. I mentioned earlier that we had balanced capacity with demand, and so there is not an expected '04 significant benefit from further manufacturing rationalization for our core businesses going forward in '04. And we would hope that demand patterns would hold, that we don't have to do further restructurings.

That's why we've cited that we are going to get the SG&A number below 10 percent, because we don't -- this is an area -- or maybe I should say editorially, another area where GAAP accounting doesn't necessarily reflect how you want to run the business. There are overhead costs that show up in cost of sales that you manage just like you manage things that show up in SG&A. So we're managing the whole group of what we call overhead costs, and we are trying to manage that down to 10 percent. That should drive the SG&A number itself below that level.

Two final housekeeping questions. Again, on the cash flow statement, it looks like the third quarter cash payments for employee separation totaled 12 million. Anything going forward there on cash (indiscernible) restructuring charges?

Yes, we've got that in there.

From the fourth quarter?

Fourth quarter, and I guess any (multiple speakers)

I would anticipate that the fourth quarter number will be between 10 and 12. And going into the first quarter and second quarter next year, we will be at that rate.

10 or 12 per quarter?

Yes.

Finally, just to finish up on the previous questioner's question about the accounting for the JV equity (technical difficulty). Maybe I'm not doing this right, but if you're recognizing the 11 million or so on your academic coming from oxyvinyls, it looks like if it's cash -- through cash, why is it getting backed out in the cash flow statement? What am I missing? Under income from equity affiliates (multiple speakers). It shouldn't be backed out, you should just leave it there.

The income line includes the equity income, and so as we go through the cash flow, we take that equity income out and add back the cash.

Add back the distribution

Yes. Add back the dividend distribution.

Right. So where -- I mean, under -- in the cash flow statement, income from equity affiliates -- negative, right? The negative 11? That's reversing the income statement.

Right.

So where does the cash come in on the cash flow statement?

Two lines down. Dividends and distributions received.

Thank you everyone. We've sort of run over our time limit here, and I apologize for that. Certainly, we'll all be around the rest of the day. I want to thank the group, as you can imagine. There are people that make Dave and I and Tom look good, and they are all sitting around this room (indiscernible), and we appreciate it. Have a great day, and give us a call if we can help you.

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