Avient Corp (AVNT) 2003 Q4 法說會逐字稿

Good morning. My name is Toshiba and I will be your conference facilitator. At this time I would like to welcome everyone to the PolyOne fourth-quarter 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. (OPERATOR INSTRUCTIONS) I would now like to turn the call over to Mr. Dennis Cocco, Vice President of Investor Relations.

Good morning, everyone. Last night we sent out, and hopefully everyone has received (technical difficulty) supplement. If for some reason you did not receive it, please access all the information that we sent out last night either through our website, which everything is posted out there or if you need to you can call my assistant, Darlene, at (technical difficulty), and she will be happy to (technical difficulty). As you know, we are webcasting this conference call this morning. (technical difficulty) Because this call is open to the public, I am sure there will be (technical difficulty). We welcome (technical difficulty) the news and ask them to hold their calls until after (technical difficulty). There are a number of things I want to make sure is clear about today. First of all, concerning the fact that we will be talking about the forward-looking statements today, I am sure (technical difficulty) expectations based on our best estimates, terms such as project, expect, anticipate, much like we put in the press release. We ask you to look at the press release (technical difficulty) most of the risks that we have as we go forward and it's fairly self-explanatory, but I’d ask you to look at our press release concerning forward-looking commentary.

One of the things that we're trying to be very compliant with is in our use of both (technical difficulty). One of the things we want to make sure that we're compliant with is the use of GAAP terminology (technical difficulty) And because of that, you will see in our press release a commentary about the use of GAAP and non-GAAP items. We consider non-GAAP items are things like operating income before special items, net income before special items and net income per share before special items. When we refer to special items, we are talking about things that principally relate to restructuring charges, employee separation costs and other things, plant closures, asset impairments and so forth; again we have explained that in detail in the press release.

The reason that we may use today and we did use to some extent in the press release, non-GAAP terminology is because management uses this to look at our business and look at segment results, and try to understand profitability and how they may best look at it in the future compared to the past. We use it as a basis for allocating resources in our annual (indiscernible) plans are based on non-GAAP terminology, so therefore you will find that we do use that, but we try to and in every case we have reconciled non-GAAP numbers to GAAP numbers. That is also in the press release, and so I would ask you to look at the press release, look at what is posted on the website relative to those reconciliations.

If you have any questions along that, certainly give me a call. At any point in time we can explain where we were and how we reconcile this information and what we consider special items. With that comment and those opening remarks, I want to turn this over to Tom Waltermire for some opening remarks and then Dave will follow and then we will follow with the question-and-answer period.

Dennis, thank you very much, and good morning, everyone. I want to tell you that we see momentum building in our business and I think our results in the fourth quarter showed the evidence of that. As our sales increased 6 percent on a continuing operational basis over the prior year, this was a widespread improvement. We have certainly benefited from the general economy picking up, but the industrial production index that, as you know, we talk about regularly as a general indicator of our momentum, while it was improving it certainly did not improve nearly as much as our own business improved. So we saw improved sales in nearly every one of our business units and we believe that is a combination of not only the economy starting to turn, but also the payoff from a lot of the work that we have done particularly over the last year in targeting new business closes, refocusing our sales efforts.

The results of course came through in our operating earnings, again following Dennis' description, looking at our operating income before the special items that Dennis described was up in the range of $20 million versus a year ago. Some of that came out of our Resin and Intermediates group, but it came principally out of our operating businesses and was of course a combination of the benefit of sales improving, as well as our continuing work to reduce our costs. In the fourth quarter alone, we reduced our staffing by over 200 positions, a very large portion of that were in overhead positions.

In terms of other operating parameters, our businesses did a good job in controlling their inventories and receivable balances. As we finished the year and Dave Wilson will have more to talk about that, that continues to be an important focus for us and as we go forward in the first quarter we are managing those areas very closely and aggressively to make sure that we don't have -- we know we will have some kind of seasonal uptick in our working capital, but we are working very hard to make sure that we keep that at a minimum and only what is absolutely required to support the growing business that we're seeing at this point.

Other important developments in the fourth quarter that we included in our press release were the acquisition of ResinDirect, which is a distribution business. They are an excellent addition to our distribution operations. They focus on commodity resins. The transaction that we did was very economical from an investment standpoint, so while they are a good addition and a meaningful addition to our distribution business, it was not a major cash outlay. As we have gotten into the details of the business, we have found that you have even less customer overlap than we thought we might have originally, so that means even more opportunity for growth. The ResinDirect customers were exclusively being supplied commodity resins by ResinDirect. That gives us an opportunity to supply our engineering resins through that same market channel. So it is a real fine addition to our distribution group.

We also noted that we had completed the final acquisition of our outstanding interest in our compound business based in Turkey, Tekno Polimer. They have been doing quite well particularly the last 18 months or so and we're glad to have them 100 percent of PolyOne at this point. As we move into 2004, after we got the usual year-end slowdown in December behind us, sales have been picking up and resuming the kind of pace that we saw later in 2000 (ph), and that is again generally fairly widespread in our businesses. Nearly all of our businesses are reporting good sales levels as we move here into the early weeks of the year, and customers I would say are still more on the cautious than the wildly optimistic side. We have all been through too many tough times over the last few years I think for that to have been turned around, but it is clear that underlying demand has been improving.

For us and I should comment one other trend going on here clearly in the first quarter, started later in the fourth quarter, is what we would all hope is a seasonal pickup in energy costs and we are seeing that same kind of issue that developed early last year, not quite as severe, but it is definitely there and our earnings release commented on the likely affects of that on our earnings from the Resin and Intermediates area as well as from our operating businesses. So that remains one of the bigger challenges, maybe the biggest new challenge that we have going into the first of the year here is coping with that pickup in higher carbon driven raw material costs.

For PolyOne overall our priorities are very clear. And they remain debt reduction, accomplished both through divestment of the discontinued operations as well as aggressive working capital management, turning around our Color and Engineered Materials businesses in North America, so we have a heavy focus on that continuing; achieving our overhead goals, which we did very well on last year, but we are not all the way to where we want to be, so that work continues and needs to get accomplished in short order. And for the long term and very importantly we need to demonstrate this to you and to our customers and ourselves, and that is simply getting our topline moving well again.

The economy is going with us at this point, but we have expectations ourselves to exceed what the economy is going to do for us through our work on better targeting of our -- and disproportionately investing in our target customers, continuing our good growth, and accelerating that with capital investment internationally, particularly in Asia. And also by commercializing a portfolio of new technologies that we are now bringing into the marketplace particularly in our plastics compound (technical difficulty).

So those are our priorities. They are very clear and very straightforward and very focused, debt reduction and the portfolio change, turnaround in Color and Engineered Materials, getting the overhead structure where it needs to be, and get the topline moving again in those various ways. And that is where we are. We think the fourth quarter showed progress in that regard. We are encouraged by what we're seeing in the first quarter. I can tell you this is a very determined and focused organization. And with that, David, how about some more specifics on the financial results?

Tom, thank you and thank all of you for your interest in our fourth-quarter conference call this morning. I will be covering four topics, quarterly cash flow and liquidity, resin and intermediate segment performance, discontinued operations treatment as we reflected on our financial statements, and then a brief discussion on factors influencing our first-quarter 2004 outlook. Let's start with cash flow.

You heard from Tom, areas where we saw a considerable encouragement in our performance, but I would tell you that the one area that was below our expectation was cash generation, where frankly we had a shortfall against our internal expectations of approximately $15 million. This was seen from our drawings on our receivable facility, which ended the year at $71 million as compared to a target in the range of 55 or so. Overall the increase in our receivable drawings was more than offset, the cash used by financing activities for continuing operations and the $1.7 million decrease in cash and cash equivalents. The shortfall can largely be explained by our low year-end payables balance. In the quarter we drew our payables down about $40 million and this was about $18 million more than we had in our internal projections. Essentially we ended the year with minimal corporate float on statements made but not yet cashed. The cycle of payments in December and the low activity level during the last week and a half of the month created this dislocation and enabled nearly all payments to be cashed. This should be only a timing issue and we would expect that this fourth-quarter shortfall would in fact be made up in the first quarter.

In the quarter we also had an unanticipated FX hedge contract cash payment associated with strengthening of the euro, especially the strengthening as occurred in December. Partially offsetting these two factors were slightly better earnings than projected internally and further improvement, as Tom mentioned, in our inventory management, where on our interval day's sales and inventory metric we finished the quarter a little less than 8 percent better than where we stood at the end of the third quarter. As compared to the second quarter, which really was the step off point for where we drove inventory management actions, this represents a 20 percent improvement. And I tell you that our goal for 2004 is to keep this metric close to our year-end level.

Receivables management held steady in the third quarter for 2004. We are targeting a year-over-year improvement on our DSI receivable metric of about 6 percent. With respect to covenants and liquidity, we were in compliance with all loan covenant test (ph) for the quarter and excess liquidity available to be drawn from our borrowing facilities at the end of the year was $113 million, which is $13 million above our $100 million target, but was down $20 million from the third quarter. This decrease is primarily due to the lower availability on our revolving credit bank facility as a result of limits on the amount of secured debt we can incur. The impact is essentially 10 percent of the change in our shareholders equity balance between the quarters, which, as you know, would be driven by the net loss that we reported.

Now let's turn to Resins and Intermediates. I would say that there are no special items associated with Resins and Intermediates in either the fourth or third quarter this year or the fourth quarter last year. The segment operating income for the quarter was $5 million, down $2.5 million from the third quarter, but up 1.4 million from the fourth quarter last year. Corporate costs allocated to resin intermediates were up roughly $1 million for this quarter compared to either the other two quarters, primarily due to an increase in environmental expense associated with inactive sites based on our annual review of environmental exposures.

Lower earnings versus the third quarter were primarily due to seasonal volume declines and lower PVC resin and chloryl alkalide (ph) pricing. Higher ethylene costs were offset by lower natural gas costs. As compared to the fourth quarter of last year, the earnings improvement was largely due to stronger shipment volumes and higher PVC resin pricing, partially offset by higher ethylene and natural gas costs and lower cost of silver pricing. As far as discontinued operations, this is probably one area where I should only respond to questions, but I do want to make some comments on the topic and I know it is complicated and complex.

As disclosed in the fourth quarter, we report an impairment charge of $135 million to reduce the carrying value of the net assets held for sale of three units now reported as discontinued, to their projected net sales proceeds. These three business units are, as you know, our Elastomers Specialty Resins and Engineered Films business units. For operating performance reporting, essentially we pulled Specialty Resins and films out of the performance plastics segment and then eliminated the Elastomers segment. We also redistributed the allocated costs previously assigned to these operations that we will retain to our continuing operations business segments.

For 2003, these retained costs were a little under $18 million. The performance of the three units within discontinued businesses will now be reported on one line on our P&L statements, income or loss from discontinued operations net of income taxes. This is also shown on a per-share basis. Similarly on our statement of cash flows, performance is recorded on a single line, net cash provided or used by discontinued operations. On the balance sheet there are four lines for discontinued operations, one each for short and long-term assets and liabilities. If you add up those four lines, the net asset value is about $145 million.

I should also point out that as of December 31, $62 million of discontinued operations accounts receivables had been sold to our funding Corporation, which is associated with our receivable sales facility. As a result, these assets are not reflected in the current assets of the discontinued operations. Also since discontinued operations have been adjusted to the projected net sales proceeds, going forward we will not record depreciation or amortization for these operations. In 2003, D&A in our discontinued operations totaled $20.5 million. Now coming back to the retained costs for a moment and also following on what Tom said, we continue to target our estimated sales ratio to 10 percent, with the reductions made or known, our plan for the total company for 2004 had us averaging 9.7 percent.

For continuing operations, however, the ratio is 11 percent, so we therefore have further reductions that need to be made to get our cost structure in line with our target. We are actively implementing programs and assessing new ones to achieve this objective. We intend to make these cost reductions completed concurrent with the divestment of the discontinued operations. Now talking a bit about the first quarter outlook, as you heard from Tom, or have had the opportunity to read in our releases, we have been seeing encouraging evidence that demand is building. In our earnings release we outlined the market dynamics that we believe will have the greatest influence on first-quarter earnings.

The most positive aspect of likely performance comes from expected improvements in demand. We believe we will see sequential improvement in sales of 6 to 8 percent and then when you take that number and compare it to the first quarter of 2003, that would represent a two to four percent increase on what, as you will recall, was a fairly strong sales level last year. Another positive factor for us is the expected improvement in PVC resin prices, two cents per pound increases are in the market for both January and February and it would appear likely from industry publications that these increases will stick.

It is important to remember that as a result of our investment in Oxy Vinyls we are net sellers of roughly 600 million pounds per year of PVC resin. Principal clouds on the horizon as Tom outlooked our energy and derivative feedstock cost increases, natural gas is likely to be up at least $1.25 per million BTUs as compared to the fourth quarter and this would adversely affect our earnings in the quarter by $3.5 million. Moreover ethylene cost increases being proposed into the market could in fact create a quarter-over-quarter average increase that would likely exceed 4 cents a pound. An increase of that magnitude would adversely affect earnings between $7 and $8 million for the quarter, and frankly for both natural gas and ethylene I believe there is more downside risk than upside potential.

Obviously in the face of these cost pressures we need to take the appropriate action to preserve margins. In the press release we stated our expectation that net income per share would likely be a loss between 9 and 17 cents. Included in that range are an anticipated $11.5 million of restructuring charge, and a foreign tax expense of estimated between $4 and $4.5 million. We also pointed out that we do not believe that we will be recognizing U.S. income tax benefits on domestic losses in the quarter. These factors in combination lead us to outlook a small profit in the fourth quarter based on the same factors that the First Call (indiscernible) had anticipated a 7 percent loss this past fourth quarter. With that, let's open it up for questions.

(OPERATOR INSTRUCTIONS) Adrian (indiscernible) of Merit Asset Management (ph).

That question was withdrawn. Stephen Bleier of Morgan Stanley.

A few questions about your cash flows. First for discontinuing ops in the quarter was -11.2 million. See that your operating income from discontinued ops was 1.1 million. Could you help us bridge the gap between operating income of 1.1 and -11.2 million? Really what I want to get to is, what do you think your run rate cash flow from discontinuing operations will be in 2004?

The run rate cash flow for 2004 is expected to be neutral to slightly positive, particularly in light of the Engineered Films business, which is currently restructuring through the closure of the Burlington facility. Early in the first quarter we will build inventory with them through the balance of the year we would see that inventory deplete. We also saw that occur in inventory build in our Elastomers business as we are closing two plants there, and so really in both situations we were been building inventories in order to have sufficient inventory to meet customer demand through transition of production sites. And really the working capital for the businesses is a large part of where the difference between the operating earnings and the cash flow would come in. But as we go forward, as I say, I would say that neutral to positive. I would hope that by the second half the cumulative cash flow for the discontinued operations would be positive. It should be, particularly in light of the inventory balances at the end of the year.

Okay, you forecasted 30 million of cash restructuring charges, cash restructuring expenses 2004. Is part of that 30 million in your discontinued operations?

Some of that will be. The cash severance costs (indiscernible) are on a continuing basis, and that is associated through the three plants that we're closing. Some of it will be for the continuing operations reflected of overhead costs that we still need to get down.

Your capital expenditure forecast is 35 to 40 million. Does that include CAPEX for discontinuing operations?

Yes, it does, although the majority of the CAPEX is going to be deployed for the continuing operations, and half of that number is going to be for our international operations, which have, as we've talked, a solid growth profile.

We took about CAPEX we will always be talking about it on a total company basis of what we're doing.

What is your CAPEX for discontinuing ops and what was it in 2003? Just a few million I guess?

In 2003, it would have been 5 to $6 million in aggregate, and our plan for 2004 was at the low end of that range.

Great, cash taxes during the quarter and what do you anticipate them to be in 2004?

Cash taxes during the quarter, I'm not sure. What I would expect our cash taxes to be is roughly 25 to 30 percent of our international operating earnings. We do not anticipate paying any U.S. taxes, and so in the fourth quarter thinking about the number the cash taxes had to be around $2.5 million. I can probably get you that information.

I'll just go on to my last question and then I'll get back in the queue. With respect to your pension expense, the current minimum funding requirement is 16 million. Is that going to be in addition to the pension expense that (inaudible) your P&L?

No.

For instance your pension expense in the P&L in 2003 was around $20 million, right?

A little higher than that, yes.

Okay, so the pension expense will likely remain unchanged in '04, the minimum funding requirement is 16 million, it will actually be a source of cash of the difference?

Yes, it would.

I will get back in the queue.

We heard that the cash expense for the fourth quarter was cash taxes, well, our cash flow has it as -2 million dollars. That is probably in the right range.

Robert Ottenstein of Morgan Stanley.

Did I hear right that the corporate expenses that were allocated to discontinued operations in '03 was 18 million?

Yes.

How much of that 18 million would go away automatically with the sale of the businesses and how much will you have to eventually cut out?

Well, none of that 18 would go, because we took it as the incremental cost that would be retained by the company. Now, in 2004, we have made reductions in our cost structure, and so the targets for what you'd say the retained cost portion is closer to $13.5 million. We would anticipate that about $4.5 million of corporate costs that are currently being allocated to the discontinued operations would go away, and these are as we went through function by function, truly incremental and the functional leaders understood that these are costs that are directly associated with those business units. But also on the overhead cost piece, it is a question of how you want to look at it and the way we choose to look at it is that we have an overall overhead cost target. And the one way to watch it and track it is to look at our estimated sales ratio and our target there is 10 percent. I mentioned in the call that from a total company perspective for '04 we were below that but continuing operations were above it. So we in fact have eliminated overhead costs that equal or exceed that retained level, but we still have an overhead cost base that needs to be 15 to $20 million less, and that is the target that our management team is focused on. That is the target that is built into the overhead cost reduction priority that Tom mentioned.

Okay, and how much of that do you think you can do in '04?

All of it. The intention is to have those costs out concurrent with the divestment of the businesses. We have programs that we are implementing that will draw some of that out and we are also looking for new ideas. As you can well imagine, from what we have done in '02 and '03, going after the last $20 million in '04 is very painful and requires a lot of innovations. But we have got a team directly assigned to that. We're working cross functionally across the businesses and we're coming up with the ideas, some we are going to hold ourselves accountable for getting our overhead costs this year down under that 10 percent bogie.

This is Tom Waltermire. Let me add quickly to that or briefly to it, that we have not been waiting for the divestments to make reductions, as Dave described, what we have outdone is identified some very specific costs that are directly, immediately directly tied to those businesses, and those do disappear as coincident with when the business gets sold. But we started working last year on trying to get ahead of this curve, so we are not -- by looking at our total overhead structure because in order to get those costs down where you want them, you've got to redesign how a lot of things are done and not just have them tied to the business being divested, so we have been after that now for a number of months. We made good headway in that. A lot of what we did but its hard to quantify it, almost impossible to quantify it exactly, but a lot of what we did in the fourth quarter was getting support functions aligned in anticipation of those divestments taking place. So we are really in midstream or probably well past mid, but we have still got more to do and it shows up in these numbers as Dave has described it.

One last question. Can you give us an update on your customer rationalization strategy, where you are looking at the profitability of the different customers and weeding out those ones that are drag?

I would say that we are very well into that and all of our continuing operations, particularly in the U.S. or North America. That has the framework for doing all that was put in place during the middle of last year or probably during the third quarter. Each of their business units have implemented a segmentation strategy. We also have identified looking at both cutting, both through products as well as customers places that we have some work to do, and I again I don't know that it would be proper to quantify individual business units aggregate, but we know that we saw benefit in the fourth quarter and we have built into our operating plans for 2004 some millions of dollars associated with that work.

Can you give us any sense of how many product lines or customers were rationalized?

I don't think that would be a meaningful number. It wouldn't be in the right context. Dennis and I will talk about whether there is something there that might be indicative of to give you a feel, but just throwing numbers out I think would be out of context, probably wouldn't be very helpful right at the moment.

What about efforts in terms of pricing the value?

Again, it's all part of that. What you do when you go through customer by customer is first of all make sure you've got all your information right, and you are looking at the combination of the product and the customer and you say all right, can we reformulate the product? Actually the first thing you do is look to see whether we have an alternative product that is better for us and better for the customer. If that doesn't work then you reformulate the product. If that doesn't work then you talk about price increases, and if that doesn't work, then you have to part company. And that has been very a specific and diligent customer by customer, product by product going on in each of those business units.

Thank you very much.

Bill Hoffman of UBS.

I just wanted to walk through a couple things, on a cash flow standpoint just to make sure that we've got the right picture here. And this is really looking forward into '04, you indicated the cash restructuring (indiscernible) in the first quarter to be about 8.5 for New Jersey and 7.5 I guess for Wisconsin, Arkansas closures. Can you give us -- fill us in with what the expectations are for the rest of the year, as far as those cash restructuring type costs look like at this point?

As we look at it, we've said the total year would be around $30 million, and so the cash that we would expect in the first quarter is probably at the high end of that 10 to $12 million, and then it scales down. We currently would project that by the fourth quarter that number is probably in the five, and then going into 2005 we really are not anticipating that would be a material amount. It is our intention to have the restructurings complete this year. That means the book charges associated with them would be taken this year, but also the cash outlays by and large completed this year as well.

Thank you, and then with regards to the banking facility, you indicated that the availability number ticked down because of financial results in the quarter. I was just wondering if you could give us a little bit better understanding about how that may work going forward, whether we expect to see that tick down further or do we balance out here where we are?

What it has to do with is each of the public debentures has got a security basket, if you will. And the lowest level is 10 percent of our retained earnings, so that is really the impact. So to the extent that we see further losses, then we would have -- I am sorry, not retained earnings, shareholders equity. But to the extent that there is further losses, 10 percent of that would affect the basket. To the extent there is gains and profitability, which we hope, it would increase that basket. But really the key on availability is going to swing more on our operating cash flow, which would then enable us to reduce the drawings on the receivable facility, and obviously as those drawings go down, availability goes up. So in the fourth quarter, we highlight the one impact because it was a fairly significant impact, but really looking at 2004 availability ought to be moving off of cash generated by the operations, which enables us to draw the receivable facility down.

Just as we talk about this cash flow for '04 target I guess is 69 million reduction in working capital receivables inventory numbers, could you just walk me through how you manage that in the event that sales are improving? Can you sort through that?

Well the event that the sales are improving and we are anticipating that they will improve and frankly we also anticipate that over the course of the year working capital will serve as a source of cash. We have very aggressive receivable and inventory goals, and we are going to put payable goals in that rank as well. We have got to pick that up; certainly the fourth quarter was a call to action. But on the receivable side, as I mentioned, we've got a fairly good percentage reduction target. On the inventory side, the year-over-year is about a 10 percent reduction, so as sales increase, what we need to do is hold inventories on a day's in inventory basis at the level they were at the end of the year.

And then frankly on receivables, this is going to be the challenge, we have got to bring it down about 5 percent or 10 percent from where they were at the end of the year. We finished the year at about 55 days. By and large our '04 average target is between 50 and 51 days, and so through the combination of those two factors, sales can increase 3, 4 percent, and working capital can continue to be a source of funds for us.

I would also point out the fact that in the fourth quarter with payables as low as they were we would not expect that to happen, so that ought to be almost a boomerang that we see the benefit of in the first quarter.

Thank you, and then in regards to this ResinDirect acquisition, you indicated about 500 plus million of sales through the ResinDirect. Can you give us some kind of indication what kind of margin opportunity that might provide to you or cash flow that we ought to be thinking about?

Let's be clear that what we stated in there was the size of our existing distribution business. That was the number that you just cited. I think all we said in the announcement was that the ResinDirect was handling about 60 million pounds of commodity resins. And so you can do a little bit of homework to figure out what typical pounds of polyethylene, polypropylene, polystyrene are selling for these days. It does represent roughly 20 percent increase in our own commodity resin sales. I don't think it would be appropriate to comment specifically on incremental income opportunities from this, but it is -- I think we have said in the past generally our incremental margins in the distribution business are around 10 percent to 15 percent of sales.

And we did pick up a few people, but no facilities, just a few sellers and some inside salespeople, but we very much like the business model that ResinDirect is running. They had a good, successful business built around a very targeted, well thought-out product line, and they were doing a nice job of running a smaller distribution business and they were succeeding with it because they were very focused in what they did. (technical difficulty) And so I think there are some things we are learning from the combination already.

Good, that's helpful. Last question the joint venture interests, it looks like distributions in the fourth quarter we calculate up to be about 16 million and just wondering if you could give us a little thought on your views on those joint venture interests this year, whether you (technical difficulty) expect to monetize them or whether you expect to --?

I would anticipate that distributions in 2004 would be pretty close to 2003. The profitability of both Sun Belt and Oxy Vinyl ought to be close to the same. A lot will depend on really the first quarter energy surge, if it comes back down, I think Oxy Vinyls will be earning about what they did this year. Sun Belt may be a little off. The ECU is off, the peak that we saw in the second and third quarter, but not materially in terms of the bottom line. And both of those units by and large give back to the parents as much cash as they can. I think Oxy Vinyls we got a little less than $20 million this year. I would anticipate that is a fair proxy for 2004. Sun Belt, we would expect to get about $2.5 million more cash than we would book as an equity pick up, bearing in mind that Sunbelt will be reducing its guarantee by 12 plus million dollars the end of 2004 per scheduled. Fifty percent of that would be reflected on PolyOne's guarantees. So all in all about what we saw this year is what I would expect to see next year.

Great, thank you.

Kunal Banerjee from Goldman Sachs.

Just a few questions here. First, can you remind us again what the working capital cash generation target is for this year? Do you have a number?

We have not given a target. We have not stated an amount that we would be looking for working capital to be a cash contributor, but 2004 target is for a working capital to sales ratio of about 1.5 percentage points better than what we were saying in 2003.

I would add to that we track that I think in a much better way than looking at year end to year end, and the ratio, the improvement Dave cited is one that we track on a twelve-month average end-of-month basis, so you pick any two end-of-year points and you can get some funny numbers, but you've got to manage this stuff month after month after month. In fact we're trying to figure out how we can actually track it intra-month because that is really the way you've got to do it. You can't just manipulate your business at the end of every month, and so its a very serious goal and 1.5 percentage points on commercial working capital as we track the total of our receivables and inventory and payables is what we're going after.

Okay. On the assets write-down and the discontinued ops, does that revise your value expectations out of that business and the divestiture, or were you already factoring this asset write-down into --?

The asset write-down brings the proceeds from the net assets in a level that was consistent with our thinking. It was the low end of the range, but it is consistent.

Okay, and then the just moving to your JV, you talked about sequential price movements in PVC down one penny. One of your competitors has reported today that they saw an upward movement of one penny going from the third to the fourth quarter, and I was just wondering whether it has something to do with mix. Is Oxy Vinyls in a different market and if you could just provide some color there?

I would find it very difficult to provide color there. Oxy Vinyl's market position is across-the-board. To the extent that they may have a higher percentage in rigid applications, I don't know. I can't say. I just know what we saw.

You did see the one penny erosion going from the third to the fourth?

I think what we also saw and commented on is what people are tracking the market and write newsletters about (indiscernible), so it's not our job to explain what somebody else who had a conference call today said.

Okay, and then on compound price increases, again I've heard 3 cents is in the market out there. Can you comment on your price nominations and also a chance for their (ph) success?

We have notified customers of a 3 cent a pound price increase. We are in the process of working on that. Customer by customer and it would be too early to comment specifically on what that would mean.

Typically what would you say the duration would be given that now you've got the volumes behind you as well? I mean the volume uptick etc. Are you hopeful that you can see some of that start to flow through in the second quarter or beyond?

I think the best way for us to say it is very difficult. We're not going to try to forecast how much price increase we are going to get, but remember also that a year ago we nominated at least 5 cent price increase in a really tough environment and got a good share of it. We're hopeful, but it is very difficult for us to predict. We will talk about it as we go forward.

Fair enough, and then lastly can you chat a little bit about the new business wins on the OEM side and colors and compounds? Are these outsourcing contracts or tooling contracts? Or are these, if you could just provide some color on that.

Most of -- if you take our continuing operations, I would just educated guess would probably be 90 to 95 percent of what we do are proprietary formulations. So if you just take our business as a whole in our plastics businesses, both by and large that is what we work to do. We have some focused areas and some relationships with individual resin producers where we do some work on their behalf, and sure, we work on those things, but that is not the main thing that we do, and that is not the strategy for improving our performance in Color and Engineered Materials. Why we would include some of that work, that is not the dominant strategy. It is an add-on to the main thrust, which is our own proprietary formulations.

So that is not behind any of the adverse mix shift? It was just something else that was driving that? You talked about lower pricing because of a mix shift.

Even within the proprietary section, we have got some things that are very specialized and we got some things that are more standard, and I'm trying to think of the exact timeframe we were talking about, but there were I would say that in general probably not surprising, the more our more standard product line are more economically sensitive, more driven by the economy. So it's probably undoubtedly true and I think across our businesses that as the economy has improved that we have seen more of a stronger, faster pick up in our commodity products than we have had in the more specialty products, so that's probably part of what is going on there.

And so down the road you could expect some of these specialty products to pick up as well and raise the mix?

Sure. Certainly part of the continuing strategy.

Saul Ludwig of McDonald Investments.

On the asset sale proceeds, you wrote this business down 145 million and then you said something about the $60 million receivables. Do you expect to get 145 million or do you expect to get 200 million?

The latter. Although that is not necessarily our expectation but the write-down is more a reflection of the 145 plus the 62, yes.

So we're talking in the neighborhood of 200?

I think so.

Secondly, when you were giving guidance for the first quarter you said that Resin and Intermediates would be down 2 to $4 million compared to the fourth quarter and you gave the reasons for that. Then in regard to the performance plastics and distribution, you said that costs would be impacted negatively by 4 to 6 million compared to the fourth quarter, but you did not really -- do you expect that sector to be up versus the fourth quarter even inclusive of the 4 to 6 million hit? If so, what magnitude?

You really weasel worded this here --.

Saul, are we supposed to do all your work for you or just half of it.

Well, I mean one sector you were giving us a first quarter versus fourth quarter outlook then it sounded like in the next sector you were dodging that question.

I guess we should not have done that in resin and intermediates.

So the answer is no answer?

Saul, as you look at the business, we are indicating that we are expecting to see an improvement fourth quarter versus the fourth quarter. If R&I is down you have to assume that our viewpoint is the performance plastic segment will show improvement. With demand improving, that is going to drive a lot. We have highlighted areas where we think our margins are most at risk. And we are saying demand is going up sequentially by a fair amount, and that is largely in the performance or the performance plastics segment.

Okay.

Yes, we would expect to see an improvement, but you have got to bear in mind there is some clouds on the horizon.

And will be muted by the factors you indicate. Okay, the $18 million residual costs that you have had in '03 and the 13 million that you expect to have in '04 related to the discontinued businesses, where are those costs, where do they appear in '03? In which sectors?

We allocated that $18 million back 40 percent to performance plastics, 12 percent to distribution, 48 percent to corporate and other.

Okay, and when do they go away?

As soon as we can get rid of them.

They go away through the first half of the year, we would hope, as we said. They go away coincident or concurrent with the divestments.

So they are costs that will negatively impact your earnings from continuing operations that will then help you in the second half of the year when they disappear?

That is a way to look at it, yes. When you look at the comparisons, you go back in history now, we have reflected those costs in the segment performance for 2002 and 2003, and so your comparison for history you don't see the impact. But certainly as those costs go away the benefits will show in performance plastics. Yes, it will.

That's where will show up.

And then in the first quarter you talked about the 4.5 million in foreign taxes. Was that considered a part of the special items in the first quarter, or is that an expense that would be part of your continuing businesses?

It is not a special item. We put that in as a (indiscernible).

Okay, so let's just say you were to make one penny per share, just theoretically in the first quarter. That would be about $1 million. Then of course you have the 4.5 million taxes so you would have 5.5 million pretax under that example. Is that correct?

No, I think, Saul, if you look at what we have said in terms of starting with the earnings per share loss expectations and then build backwards you get closer to what you're trying to achieve.

But the tax as an ongoing expense 11.5 million is a special.

Absolutely, Saul. The taxes for our international operations and that is reflective of the statutory rate that we would expect.

It looks like you're going to make $20 million pretax in your international business in order to pay the 4.5 million in taxes.

That would be a pretty low tax rate.

What did you say your foreign tax rate should be?

What I said was cash tax is different than --

The book taxes would be 35 percent?

In that range.

So we would be talking 15 million pretax internationally in order to generate the 4.5 million tax expense. Order of magnitude.

Do the numbers. We don't disclose intra segment operating income.

Okay. I think that does it. Thank you.

I apologize to the folks who are still on the call, but we made a commitment to keep this call to one hour and I know there are other people on the call and I apologize for that, but it sounds like the way it was going we could go for quite some time. And (indiscernible) folks who have other calls to go to we are going to stop this at this point in time. Certainly if you have follow-up questions, David and I will be around to try to help you out for the balance of today. I want to thank everybody for joining Tom and Dave and I on the call this morning and thank my team here who frankly make us look really smart every time we do these calls and we do appreciate their help. Thank you for joining us this morning.

Thank you for calling in to today's PolyOne fourth quarter earnings conference call. You may now all disconnect.