Avient Corp (AVNT) 2004 Q1 法說會逐字稿

At this time, I would like to welcome everyone to the PolyOne first-quarter earnings conference call. (OPERATOR INSTRUCTIONS). I would now like to introduce our speakers, Tom Waltermire, Chief Executive Officer and Dave Wilson, Chief Financial Officer. Now I will turn the call over to Mr. Dennis Cocco, Vice President, Investor Relations. Please go ahead.

Good morning. Thank you, very much, for everyone joining us this morning. As in our most recent conference calls, Tom will be making some opening remarks followed by Dave. We will then open up the line for questions. We understand your time constraints this morning continued, considering the season and we have promised to conclude this call at probably 10:00 this morning, our time. Because of that time constraint, we are going to ask that we restrict any questions only from the investment community. If you represent the media and you're on this call and you do have a question, please feel free to call me at the conclusion of today's call. Also if you'd like to have any -- if you are in the investment community and would like to have any further discussions with either Dave or myself, we should be available sometime after 11 this morning. In.

If you did not receive my earlier note and are looking for our earnings supplement, you will not find it. If you are on the distribution list, you should have received an earnings release and a Form 10-Q. We decided to file -- accelerate our filing of our 10-Q and by adding certain content to our press release, we believe we have provided you with our normal complement of information. Personally, I'd welcome any comments or suggestions on how we are doing. And if you have anything that you can help us (indiscernible), we would be certainly interested in looking into that.

Both the earnings and the 10-Q were posted last night on our Investor Relations Web site in PolyOne. If you want hard copies of either the release, the 10-Q or any past documents, feel free to give my assistant, Darlene, a call at 440-930-1522. This morning, we are Webcasting this call from a Webcast; a replay will be available for about two weeks after today.

We will talk about Safe Harbor. On today's call, we are likely going to discuss statements or other information defined as forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements give current expectations or forecasts of future events and are not guarantees of future performance. They're based on PolyOne's management's expectations and involves a number of business risks and uncertainties, any of which could actually results (ph) are different from what you may hear this morning. Specific factors that could cause these actual results to be different can be found in the forward-looking statement that we've included in our press release.

In addition to that this morning, we will be using both GAAP, Generally Accepted Accounting Principles, and non-GAAP financial measures in our discussions. The non-GAAP measures include operating income before specials, per-share impact to special charges and other things. PolyOne uses non-GAAP financial measures for a number of particular reasons. Number one, to review -- as our review of consolidated and segment results, excluding for special items is used to enhance our understanding of current profitability levels and how current levels may serve as a base for future performance. Number two, we use it as a basis for allocation of resources. In addition operating income before special items is a component of our annual incentive plan -- and at the corporate and business segment level. Today in the press release, and on our website, you will find a table that reconciles each of the non-GAAP financial measures to the most directly comparable GAAP financial measures. With those opening remarks, I would like to now turn it over to Tom.

Thank you, very much. And first of all, I want to welcome everyone on the call, and especially what I would expect to be many PolyOne people who are listening in or will be listening to the replay of the call. The results we are reporting are a direct result of your hard work and commitment. You should be very proud of the performance that we announced last evening.

All of us at PolyOne are proud to report the best operating-income performance since PolyOne's formation. We have a lot more to do to reach our ultimate goals, but the results in Q1 are a big step forward. We exceeded our own plan for -- by Q1 and the guidance we gave you in February, and trust you will not hold that against us. We would like to make that a regular achievement. The turnaround in our results actually began last September. And over the last seven months, the only truly negative month we had was December and that is typical for seasonal reasons. We do know the pickup in the U.S. economy is helping. But as we look over at the year-over-year numbers, which I know Dave will talk more about, the volume gains contribute only about a third of the improvement. The great majority of the gain from a year ago stems from -- stems directly -- from the aggressive actions we have taken over the last few years to operate the business more efficiently. The improved volume brings that efficiency quickly to the bottom line. Dave will describe further our view on the second quarter, but I would add now that demand remained at or near March levels in most of our product lines, and that continues to be encouraging.

Commenting on a few units in particular, we saw strong demand in our vinyl business units. Both vinyl compound and OxyVinyls had strong volume. Compound was up 14 percent from Q4 and 8 percent from last year. Demand for PVC resin and OxyVinyls was strong and created tight supply in the PVC resin industry. And OxyVinyls was able to raise prices enough to offset higher ethylene and chlorine costs.

In Europe and Asia, we saw continued, steady growth and continued solid performance and those businesses continued to do well. I will talk a little bit more in a moment about our Color and Engineered Materials unit, but their first-quarter results, very importantly, are ahead of our plan and reflect a significant step forward in the turnaround, which is, as you know, one of our top priorities.

I could go on at length about every unit in the Company, but I guess I have to resist that temptation. Suffice it to say that across the board, results are improved. And this goes for the continuing operations as well as the discontinued -- those that are classified as discontinued. Our Engineered Films and Elastomers units both are seeing good volume improvement and the efficiencies from the recent plant consolidations are also showing up in the bottom line.

As I said in the press release, we are encouraged by these results but far from satisfied. I have likened it to many of our people to winning the first round of the playoffs, as we immediately turn our attention to raising the bar still higher. Our shareholders and our people have waited a long time for direct evidence of both an economic turnaround and a PolyOne turnaround, and the past quarter shows that we are on the way to fulfilling that expectation.

For 2004, our priorities have been stated over and over again -- reduce our debt, turn around the North American Color and EM units, hit our overhead goal and demonstrate consistent, self-created growth, and here's how we are doing. Reducing our debt of course comes from three principal sources, operating earnings, which naturally is the best way, targeted investments and aggressive working capital management. Our improved cash earnings were naturally a contributor to a positive cash flow in the first quarter, which is another real milestone, and I know Dave will be talking about that a lot more in a moment. Working capital management in the quarter was excellent. We set top targets for each business and most of them beat the target. Our days sales and inventory and our days sales outstanding in receivables are both down sharply from a year ago. On divestments, you know I can't say much until we really have something to announce other than that we remain committed and confident to implementing these transactions as rapidly as possible within this year.

Secondly, turning around Color and EM in North America -- these businesses improved their operating income by more than $5 million in the quarter compared to the first quarter a year ago. They did this through a combination of topline success and lower operating costs. Especially notable are two specialty color milestones, a half $1 million in new sales growth that we captured at a number of wire and cable accounts, as well as growth at a savings that we are particularly targeting, and that is recapturing our position at large part (ph) injection molders. Color and EM still have a lot of upside to get to where we ultimately want them. But as I said, year-to-date, they are ahead of the improvement track, the improvement track we had laid out for them.

Third, reduce our overhead costs -- on a total company basis, that means continued operations and discontinued, our S&A, selling and administrative costs for the first quarter came in under 10 percent of sales. This was our first milestone. Now we need to finish the task and get there on continuing operations alone. We are projecting that we will achieve that goal in the fourth quarter and I want to emphasize that when we talk about reducing overhead costs in addition to that S&A metric, we are not -- even though we are looking at it as an metric, we are not just limiting ourselves to S&A costs. Our business process re-designs and reductions and plant overhead costs are definite sources for contributing to our lower cost structure.

With respect to consistent growth, in a time of strong economic rebound, the progress we are making may not be quite as obvious in terms of what we are doing on our own without the economy. We have a good stable of new technologies that are being commercialized this year. But more importantly, for 2004 results, is the benefit of customer segmentation and greater focus on closing targeted accounts. In our operating reviews, we can see that our rate of capture of high-priority sales goals is improving. A couple of examples I would note is in PolyOne distribution, we had a very good performance in the first quarter with U.S. and Canadian volume up 12 percent. The ResinDirect acquisition made a contribution and we are very happy to have them as part of our company. We believe we are gaining marketshare in our distribution business. We have some unique product offerings and we simply out-service our competitors, and our customer surveys tell us this.

In Vinyl Compounds, as I noted earlier, we saw very good pickup in demand. In the first quarter, we benefited from gains -- our work to gain new business. An example would be the capturing a sizable piece of business at a wire and cable account in a customer that we have convinced we are better off supplying them compound than their producing it themselves. And our sales of injection molding grade material are up more than 20 percent in the quarter; and that is a product area where we have had, and continue to have, market and technology leadership.

We devoted extensive effort last year to sharpening our sales and marketing skills. Frankly, I think we can still do a lot better than we are doing right now. But the good news is that that work is paying off and we can see it in our results in this quarter just ended.

In summary, we are making real progress on our strategic priorities. And our efforts are reflected in the first-quarter results. Our internal programs along with the improving economy give us reason to be optimistic that this will be the first of a series of positive quarterly earnings reports from PolyOne. And our priorities remain the same for 2004, reduce the debt, get Color and EM to acceptable levels of profitability, hit our overhead goals and continue to demonstrate consistent topline growth quarter-to-quarter. With that introduction, Dave will go into more of the numbers for the quarter.

Thank you, Tom, and thank you all for your interest in PolyOne's first-quarter investor (ph) conference call. As mentioned, I intend to cover three topics -- first-quarter earnings, first-quarter cash flow and liquidity and the second quarter outlook.

The first two topics represent two gratifying accomplishments that could not have been achieved without the dedication, commitment and perseverance of people all across all the business units who are PolyOne. And with Tom, I echo my appreciation as both a fellow team member and as a shareholder. In the quarter, we earned 11 cents per share and generated $17 million of positive cash flow. Each of these well exceeded expectation, and demonstrated a marked turnaround in performance from a year ago. This earnings progress is encouraging. As provided in our earnings release, we reported net income of 4 cents per share, which included 7 cents of special items for a total of 11 cents per share before special items. This 11 cents compares favorably with 3 and 7 cents losses before special items reported a year ago and reported in the fourth quarter. And for the quarter, both continuing and discontinued operations made money. Sales for continuing operations were $536 million, up 9 percent from a year ago and 13 percent from the fourth quarter of 2003. Operating income for continuing operations was $24 million, up $15 million sequentially and $19 million from a year ago. Operating income before special items for the total company was nearly 36 million, up approximately 25 million from both the first and fourth quarters of 2003. As compared to a year ago, as Tom alluded, this earnings improvement was balanced and reflects a realization of initiatives implemented broadly across our business units. The $25 million improvement comes roughly evenly from volume increases, lower plant costs, lower S&A costs and the elimination of depreciation reported on our discontinued operations. Additionally, Tom mentioned that our total company estimated sales ratio was under 10 percent, which is consistent with our target for early 2004. Our earnings also exceeded the guidance that we provided during our fourth quarter call by about 10 cents per share or approximately $15 million of operating income. This improvement was driven primarily by two factors, sales growth exceeding earlier projections and better than anticipated Resin and Intermediates Segment earnings. Total sales were about 6 percent higher than our guidance, which drove approximately 10 to $13 million of higher margins across our businesses. Additionally, we had anticipated that R&I would likely be down $2 to $4 million compared to the fourth quarter when in fact, earnings were up a million. This improvement was primarily due to higher PVC resin margins resulting from greater than anticipated resin price increases.

Now turning to cash flow and liquidity, this represents the second major accomplishment of the quarter. We generated nearly $17 million positive cash flow from operations. This represents a $92 million improvement from a year ago when we consumed approximately $75 million of cash. This performance clearly benefited from our turnaround in earnings and also demonstrated markedly continued improvements in our working capital control processes. For the quarter, our internal metric of working capital as a percentage of sales, which would include receivables, inventories and payables over sales, was under 15 percent at 14.4 percent, an improvement of 1.3 percentage points from a year ago. We are encouraged by the progress we are making in accounts receivable and inventory management, as well. Looking at our internal metrics again, days sales in receivables ended the quarter at 50.9 days, down 4.5 days from a year ago's improving performance. And as you will recall, through 2003, we commented on the improvements that we were making quarter-by-quarter in our DSO numbers in a tough environment. Days sales in inventory finished the quarter at 43.2 days, down 7.6 days from the first quarter of last year when DSIs were traveling north of 50 days. I can also confirm that payables snapped back as expected in January from the December low. Consistent with the solid cash performance, we ended the quarter in a strong liquidity position. As outlined in the Q, we had $123 million available drawing capacity on our short-term borrowing facilities, plus another $14 million of short-term investments. In total, therefore, we had approximately $137 million of unused and available sources of liquidity.

Now, let's turn to the outlook for the second quarter, and as we do, I draw your attention to the discussion that we have in the earnings release as well as our forward-looking statements. It remains our position to base our outlook on an optimistic but cautious viewpoint of what we see coming into the second quarter. As you know, industrial production gave up a little ground in March and the growth rate associated with leading indicators has begun to moderate, although remaining nicely (ph) positive. Our sales levels in April have remained strong and generally at March daily levels. We believe this trend will continue through June. We certainly do not see indications of a repeat of last year's precipitous volume decline that occurred in May and June. Our outlook for sales has declined up to 3 percent as compared to the first quarter. We believe that the strength that we saw in February and March, especially on a daily sales rate, will tend to dampen but ordinarily would be a stronger seasonal upturn in demand. Still, with the 3 percent estimate first quarter -- first-half sales, rather, from continuing operations, would be up a healthy 9 percent year-over-year. We also anticipate earnings improvements from our upstream chlorovinyl equity affiliates, as PVC resin and chlorine prices are expected to increase. The quarter-to-quarter increase in average PVC resin pricing is expected to be between 3 and 4 cents per pound based upon the announced April 2-cent increase being realized. Industry contract chlorine prices are projected to rise approximately $50 per ton, with upward price share (ph) likely to be seen in the spot market. We would expect ethylene and natural gas pricing to moderate seasonally, but frankly with natural gas currently around $6 per million BTU, this expectation is a risk. If pricing for these products were not to moderate, our guidance for R&I could be off roughly 2 to $3 million for the quarter. Generally speaking, the factors that contribute to R&I earnings growth results in margin pressures on our downstream vinyl business units. Moreover, we anticipate additional margin pressure from compound additive raw material increases. Taking all these factors together, coupled with a moderately lower cost structure, we anticipate operating income from our continuing operations to be up 4 to $6 million as compared to the first quarter.

For our discontinued operations, we anticipate a net income improvement. And I will remind you, net income is how we would report discontinued operations; so on a OI basis, you would have tax-affected (ph). Primarily resulting -- and this improvement would primarily result from lower cost structures associated with the three plants that we consolidated during the first quarter, which will more than offset the pressures that we anticipate from upstream vinyl margins. We do not expect to see a material change in either interest or other expenses. And I think we addressed restructuring-related special charges in the earnings release.

We believe we are providing an appropriate yet cautiously optimistic view of the second quarter. We are projecting continued earnings momentum and progress. We are encouraged and we expect our first-half numbers to demonstrate market year-over-year improvement. Be assured, though, that going forward, we will take the actions necessary to improve our results and to achieve our priorities in order to enhance our value to all of our financial holders. And with that, I thank you, and will now turn the mike over to Dennis and open the conference call to questions.

Let's go ahead and start taking the questions.

(OPERATOR INSTRUCTIONS). Alan Cohen.

It's actually Dan Leonard. First question for you Dave, can you walk me through what's going on in the tax rate in the quarter as well as what you are expecting for an effective tax rate in second quarter?

I can try. The effective tax rate for the second quarter, we will start with that. For book reporting, anticipated tax rate in the neighborhood of 35 percent. That's a little lower than the guidance that we've given traditionally and reflects, frankly, a higher percentage of international earnings as well as a higher percentage and recovery in the R&I segment, which for technical reasons, carries a slightly lower tax rate.

In terms of what you see on our financial statements, we have got -- we are showing a tax impact associated with our foreign earnings. And the domestic earnings are not tax affected. We have the tax allowance (ph) as we explained. So what you see in the first quarter is a tax rate on the face of our income statements that exceeds the pretax earnings that you'd see on the face of the income statement. And what you need to do is break the pretax earnings into two pieces -- foreign, which would take the tax rate that you see or the tax expense that you see and U.S. basically, which would have zero. It's a combination of those factors that results in the tax rate that you see, which we have attempted to explain and probably better than I just did in the Q; and so I guide you to that and then take, obviously, further questions. But for the second quarter, with earnings improvements anticipated in U.S. operations, I would be thinking of using an effective tax rate in that 35 range, which is down a bit from traditional guidance. And in fact, has about a half to a full cent favorable impact in the quarterly earnings.

Thank you. And in terms of organic growth in the quarter, can I assume that resins contributed about 6 million on the topline? Is that accurate, do you think?

Probably not materially off, but it may be a little high because we started ResinDirect really towards the end of January, and really did not get up to speed until the middle February, March. But I would tell you that the distribution business is, as Tom said, we believe taking share. The ResinDirect acquisition is being built into our business very effectively. It is a great team that has joined PolyOne. And we are very pleased by the early results and anticipate that there's going to be nothing but positive comments about how that acquisition is helping us penetrate the distribution market, and particularly, on the commodity side of the product line.

Okay. And just this final bookkeeping question, the interest expense to me look like it increased sequentially in the quarter. Or am I missing something?

I am sorry?

The interest expense in the first quarter looks to me to be higher than it was in the fourth quarter. Is that accurate? And if so, do you (inaudible) in that?

It should not be moving materially. What we have got is a slight increase -- I think what we probably had and we can check this out -- is a moderate adjustment in the fourth quarter. But really, in the first quarter for interest expense, there has been no change in the amount of long-term debt that we have for (technical difficulty) fourth quarter versus first quarter. So I would anticipate in the second quarter, an interest expense looking a lot like what we saw in the first quarter.

Bill Hoffman.

Just a couple questions on the working capital front. I just want to get a sense on how things -- how we should sort of look at things going forward? Obviously, you had a snap-back in the payables, funding some of the increase in the receivables and inventory side. Are you at a more comfortable level of inventory at this point in time? Do you have to build any coming in the second quarter? And maybe if you can just sort of walk us through it a couple quarters. And I have a couple of follow-ups.

I think we are becoming comfortable with the inventory level that you are seeing. The metric that I shared is a forward-looking metric. So it was based upon our expectations for April and May demand levels. And the businesses are improving. And a year ago, we started making significant strides, blocking and tackling for inventory management. And we are seeing the results. So whether we stay at the 43 level or move back to 44 or so, that is going to be noise in the system. It's -- you can't turn your inventory down without being extremely dysfunctional in the plants on the dime (ph). But certainly in terms of the trend that you are seeing, we would expect that to continue and we are comfortable. Service levels, by and large, were quite good in the first quarter. What you are seeing is PolyOne managing its inventories more effectively and getting the benefit of it in our cash flow.

The second thing is just when we look at the demand increase quarter-on-quarter, any sense on whether there's -- any of your customers are re-building any of their inventory? Or are we just seeing a real -- just a real surge in actual demand here?

I don't think we see people stockpiling inventory. I think their customer base is certainly more optimistic than what they have been. I really have felt since later last year, part of what we have seen is more the end of the inventory contraction rather than some rapid buildup. But like with ourselves, our inventories are, in dollar terms, not lower. It's the ratio that's lower. And so the -- it is I think -- we do not hear people stockpiling. I think the general view is, among processors, is that they saw last year, a softening in some resin prices around the middle of the year, later in the year. And I don't think they want to get caught long (ph) with lots of stockpiles of higher-priced resin at this point.

The only thing I would add, Bill, is there's obviously some evidence that most people came -- most of our customers -- came into this year with relatively low inventory levels and cautiously (ph) being what they are. It's likely -- we are not seeing the big seasonal pickup that we normally see going from first quarter to second quarter. It's possible that some of the business that might have been pulled early on -- if (ph) our customers saw demand in their marketplaces, they were quickly to replenish. But that's why we're only seeing a -- we're only forecasting a modest increase in growth in first to second quarter.

Thanks, that was helpful. And one other question just -- I was wondering if you guys talked about -- had been a problem you were dealing with last year with some of your customers in-sourcing some of their compounding etc. What is happening with that trend at this point in time? As your customers start to see some growth, do you see any of that product starting to come back out yet? Or is it still too early to see any kind of change in that dynamic?

I think it's really a little early to call a real change. It is a constant ebb and flow based on the circumstances of individual customers. But I think the other part of that trend, as you are referring to, which we certainly saw two years ago or three years ago, is as the economy fell off that incremental outsource business for us in a way. We have not gotten back to the point where a lot of that kind of business is flowing in. I think that's true. I do not think we have gotten to that level of demand yet. And recognize that overall industrial production, as it's -- even though it's improved, it is still well below the peak of 2000. So I think we're probably still more in that intermediate phase where you win some, lose some on that front. And generally, the economy has not quite perked up all the way to that level yet where we are getting incremental business.

Ed Mally, Murray Capital Management.

Just to circle back to the working capital topic for a moment, just to look at the second quarter outlook, and is your expectation that working capital will be a source or a use of cash in the second quarter? And then overall for cash flow from operations, do you expect another positive contribution on the cash flow from operating activities in the second quarter?

The answer is yes, I think, to both of those questions. We anticipate that second quarter, we will generate positive cash flow, maybe not the magnitude in the first quarter. But still generating positive cash flow in the second quarter, obviously, makes the first half positive. And that would represent somewhere in the neighborhood of 130 to $140 million swing half-year to half-year, which, as we saw in the first quarter, a combination of better working capital management as well as the strong turnaround in our earnings. As far as working capital goes, we would anticipate that it would be largely a push if not slightly favorable to cash for cash in the second quarter. Because, frankly, March is one of the strongest sales months of the year. And one of the key things that we see is that having gone through March and hit our working capital objectives, we sure (ph) did (ph) set ourselves up for the year. And so our expectation is continued improvement in the second quarter and that should in turn translate into positive cash. One thing I would remind everybody, as you look at the first-quarter funds flow statement, you don't see interest expense. Our interest expended (ph) is paid in cash twice a year, once in the second quarter and once in the fourth quarter. And so from a cash-flow perspective as you are looking at your models, the second quarter is going to have about a $35 million cash expense for interest that was not in the first quarter. Having said that, we still anticipate generating cash in Q2.

And then away from the interest-expense impact, as you look at the second half of the year, would you expect that there will be any reason, say for seasonal purposes, that you would have a reversal in that trend of cash contribution?

Wouldn't anticipate it. Frankly, I can hope. This is a mixed blessing here. I am hoping that demand continues to surge through summer. And as a result of that, the cash outlay for working capital (indiscernible) because our sales are high for receivables as they are in our inventories -- may be a little higher although the metric continues to be in line because of expected demand. But -- and bearing in mind, August, September, October is a strong part. But so any reversal that we would anticipate in the third quarter certainly would be offset in the fourth quarter, which seasonally is a period that would capture a working capital again.

(Inaudible), our sales are a little lower in the second half because you have got a slow month in there in July and then coming down to November and December. The other point I would really stress in here on working capital is that at the levels where we are now, even though we are continuing to push further, by any benchmark we can find around our general industry, we are very effective. And so I would want to tell people that somehow we have got some huge source of cash that's sitting there waiting to be just falling out of the trees in working capital. I mean we are managing that area very effectively at this point. We are going to continue to go after it, because it's a key part of just further debt reduction. But the gains going forward here are going to be more of a continuous improvement rather than some kind of further step change.

Rosemarie Morbelli.

I am a little puzzled by your expectation for the second quarter. You are expecting overall operating income to improve by 4 to 6 million versus the first quarter, but it includes 3 to 5 million from Resin & Intermediates. I guess I was expecting more of an improvement given the economy is up, revenues are up, you have a lower cost structure, even with raw material costs being high. And you also, looking at your numbers in the first quarter, seem to be getting price increases, offsetting some of those higher cost of raw materials. Could you give us a better feel as to why you're not going to show more of a sequential improvement? And then is there something else that you are doing, other steps you are taking in order to improve things a little faster in the future?

Yes, Rosemarie, the key on your question is our anticipation of margin compression on our operating businesses. And that's somewhat of a wild card. We've put forward what we believe to be a realistic view point. I mentioned, frankly, that even on the R&I side, our expectations may be overstated in light of where natural gas is currently tracking, to the tune of 2 to $3 million. We are also seeing, with the pickup in demand across the industry, non-vinyl, the additives, stabilizers suppliers moving to get their prices up. Now what we have not done and what we usually don't do is project a lot of success in market price realization. And your question as to what are we doing? Clearly when we see margin pressure coming down the road, we respond to price. And so that is the key step that we are taking but the markets remain extremely competitive. And we will be pleased to book success there and to exceed our guidance if we are successful at preserving or spreading the margins more than what we have built in. But it really is margin pressure. The second quarter, we are not anticipating a significant step-down in our cost structure; that is more a second half expectation. And so it is a combination of those factors that lead us to that level. But I would say that with the guidance that we've provided, we are certainly looking at the strongest EPS number that PolyOne has ever turned in. And looking at the first-year numbers or first half, it was really quite strong. And so it's -- and we are going to be cautiously optimistic. We hope we beat the numbers, but we also do not want to put ourselves out for a market that still there is a level of fragility to it, clearly.

What kind of cost structure savings are you expecting in the second half versus the first half?

We are expecting that our S&A numbers will be coming down 2 to $3 million per quarter. Looking at the quarter, if you look at our fourth quarter, on continuing operations and you look at total year's sales, we are anticipating that we will be at the 10 percent levels, whereas for continuing operations, we were over 11 percent in the first quarter.

Ten percent on continuing operations.

Yes, that is our year-end goal. As Tom mentioned, and as we talked in previous periods, our original target was to bring the total company estimated sales down to 10 percent. We have achieved that in the first quarter, now we have got to move on and assure us that the continuing operations cost structure is equally in-line.

And on the cost of goods, do you have any other plans, either in the works or that you are working on in which we would see later on in the year starting next year other than selling (ph) price increases?

Yes, we anticipate, as Tom mentioned, the re-designs that we have and we are looking at plant overhead. And so it's not -- you are going to see cost benefit or we are going to see cost benefit in our base cost lines, and you'll see it in the gross margin improving as we go forward through the year. We are also going to continue with initiatives like our integrated supply, which is where we serve as our own great (ph) bulk (ph) distributor for raw materials, capturing logistics savings, as well as raw material cost savings. So we will continue to be pulling levers that we have been pulling for the last couple of years to continue to improve really all aspects of our operations and also, topline. Tom mentioned the success that we have had and seen in the first quarter. We expect that to continue. We are going to continue to invest in those geographies where it has a stronger growth profile. And so, our intention is to do that as well.

Lastly, in corporate and other when you look at the segments, that number of 38 million is about, on average, pretty close to 8 million above what you had last year on a quarterly basis. Is that a new level and what is included in there which was not last year?

What's the 38 million --

Corporate and other, 38.2 million in your segment, it was 32 percent in the first quarter of last year, but then went down to an average of maybe 29 percent in the following three quarters. So here we are substantially higher. I wonder why and whether this is a new level?

I think what you see here is continued penetration in our POD business as a result of further improvements in selling vinyl materials and engineered materials. So it's a (indiscernible) -- so what you're seeing, one way to look at it is what you're seeing through that other sales line is the success we are having at pulling more and more PolyOne products through our distribution business. And so it is my hope that you will continue to see that inch up.

Okay, thanks.

We view that as a positive.

Bob Goldberg.

I felt (ph) the big surprise in the quarter was actually the discontinued operations and how well they did, and they only earned $1 million in operating income in the fourth quarter before special items, 11 million or so in the first quarter of this year. Could you talk a little bit about what happened there? I guess your guidance implies that it seems to be sustainable. I guess there's nothing unusual in those numbers, is there?

No, there really isn't. What you're seeing is the benefit of the cost restructuring that we announced in the fourth quarter. Both the last Elastomer and the Films business saw marked improvements; and it's largely -- a fair amount of it is cost structure. But then too, sales for both of those business went up double-digit, certainly, sequentially. So we are seeing a combination of their markets improving, their market position improving, getting the margin there, but also being able to leverage that over a much better cost base. We would anticipate that in the second quarter, our cost structure for those businesses will continue to improve as we get the full-quarter benefit.

But Ed, I am glad you noted that --

Bob.

Because the -- I think a lot of hats off to people in both those business units. You know, it is not easy running a business when -- if the Company has said that you are open for divestment. And people in that business -- in all those businesses have really buckled down. They've worked to improve their position and they know their future is a lot more positive if the improve their own performance. The -- in our Films business in particular, we are doing a very good job at turning around the manufacturing performance there. We are also benefiting by some good work that has been done over the last, frankly, over the last couple of years in positioning where sales are. We now have two of our top five customers in our films business are -- in the automotive half of it, two of the top five customers -- are associated with transplants or the new (ph) domestic -- however people refer to them -- as opposed to the former big three. And we are on some good platforms and our automotive sales are up significantly more than overall automotive production is up in the U.S. So there is good work going on in there and I'm glad you noticed that.

This is off the subject of the first-quarter results, but do you happen to know -- the consensus estimate for the year I think is about 20 or 21 cents. Is that only a continuing operations estimate, or does that include --?

We believe that is total company. (multiple speakers).

The answer is, Bob, there is one analyst who is only looking at continuing operations. The rest of the analysts, as I understand it, are looking at both continuing and discontinuing operations together. So there is a little of a mixed number there. But -- that's all I can tell you. There's just one analyst who chooses only to look at continuing operations in doing outlook.

Obviously, you're penalized if you to it that way because you're not allocating interest expense to the discontinued ops.

That's right. That's why it's an odd thing to try to forecast because you have to -- to really do it right, you have to make an estimate of the amount and timing of the proceeds. And if you are going to do it that way -- and so you can do that, but it can get complicated.

As we talked about, the focus on continuing operations, sales and operating income because that's the -- that's what we are having going forward. But as we are configured now, total company net income, total company cash flow.

Right. Just, from these results, it seems like the discontinued ops should earn more than the 20 cents for the year. Because -- should be almost there in the first half if your guidance is accurate.

I would think that, in light of what we saw.

Bob, also, in terms of the improved cost structure in the quarter-to-quarter comparisons for discontinued -- I omitted and should have mentioned the fact that we are not depreciating, so that's about a $5 million, if you look at the two quarters, fourth and first quarter difference. But there (ph) too, it's sustainable. So what we have for continuing operations is the -- and OI that looks a lot like EBITDA. (multiple speakers).

Let me also ask if I can if Dave, your thoughts on cost reduction for the second half, does that -- I assume that does not reflect the divestitures happening, does it? If divestitures happen, doesn't that ramp up even further?

Yes, yes. We don't, in our viewpoints, talk about a post-divestment look in terms of going forward. But as you would expect, there would be a level of overhead, that is currently associated with the company that would go away. Although through the accounting conventions for discontinued operations, what you have got being allocated to those businesses is our estimate, by and large, of what we would expect to see go away. So the -- but for a trail of continuing operations, is the best of our ability, a good portrayal of what you should expect to see going forward. Now off of that base as well, you know, we have cost improvement initiatives going on.

Let me comment on that a little bit further because there have been other questions and discussion on how (ph) we are doing. We have, you know, Dave said, from an accounting standpoint, those costs associated with the discontinued operations are only being allocated to them (ph). And those costs in every case, we know, obviously, exactly what they are and we are ready to move on making sure that those are eliminated. Those get immediately triggered. When we decided last year that we were going to move in this direction, we really worked to try to get ahead of the curve. And a lot of overhead reductions we did last year and continuing onto early this year, was to try to get ahead of the game and to get caught out in advance of these reductions. So we are -- where we are right now is a combination of some very specific reductions that truly get triggered by the divestment because it's very closely tied to them on the one hand and the other hand is a continuing broad attack on complexity and just overall cost level across the organization. And so it's a -- does not serve a lot of purpose to try to track a lot of dollars between what was allocated and where we're charging them now and everything. If you just look at it on a cash basis, we're going after overhead cost wherever we can find them, plus we have some specific things that truly only happen when the divestment takes place.

That's great, thanks.

Let's take one more question.

Saul Ludwig.

How many dollars of the -- were continuing operations penalized by allocation of cost that formerly were in discontinued in the first quarter?

Well talking to -- responding to Tom's point, we think we have taken a lot of those costs out, (indiscernible). Is it are we ahead of the -- you know, how do you look at it that way? What you've got is comparable numbers between first quarter this year and looking at the continuing operations as we portrayed it, first quarter to fourth quarter and then first quarter last year. It's on a comparable basis. So as you look at your continuing operations, there really should not be penalty, per se. However, as you look at the history we provided in the fourth quarter, the amount of adjustment that we made when we split the operations between continuing and discontinued -- and that number was in the neighborhood of $20 million, Saul, and we split it about 40 percent was performance plastics, 10 percent to distribution and 50 percent or so to corporate (ph).

(Indiscernible). But that was $5 million in the quarter. You actually -- and if I penalize your earnings from continuing operations by $5 million that you are targeting to go away when you do complete the sale of the assets.

We have talked that we are targeting a 10 percent estimated sales number, so it's difficult, Saul. We don't look at it (multiple speakers).

There is no practical, useful way of just going after some cost that happened (ph) to (ph) have (ph) been allocated. That's not the way you run the business. You run the business by looking at activities and functions and go in and reduce the cost of those functions. I don't care whether the cost was allocated to somebody or not. I mean that is not what we are doing. It is not a practical way to attack it. And so that's why we did a lot of it ahead of time. That's why we are continuing to look for opportunities now. And you just go to get yourselves in a -- you know we get ourselves in the mindset of how do we want to run the Company better. And I don't care whether a cost is allocated or not, if we can reduce it, we are going to reduce it. And some costs, we know you can't eliminate that were (ph) allocated. I mean, Sarbanes-Oxley costs don't go down proportionally with divestments. So you just can't get hung up on what's gotten allocated. You don't just tax (ph) the allocation. You tax (ph) how you operate. And that's what we have been doing for the last 18 months.

And then final question, your Color business -- it's very encouraging to see the improvement there. We have talked about this new technology. I remember at the plastics show, you had this little (ph) computerized technology for color matching that was supposedly differentiated from anybody else in the industry. What's ultimately happened with that technology? And is that part of the reason that you are doing better from a volume standpoint in Colors?

Saul, thanks for commenting on that. It is in the first quarter per se, I don't think you'd probably see a big effect from that other than we are using it in two stages. First of all, is really to make our own internal operations more efficient. Part of the reason color is -- (indiscernible) of the reason color is doing better is because our costs are down. And we have done that in part because that technology is allowing us to do color matching much more rapidly and efficiently and so forth. Just within the last month when we've rolled out another expansion of that technology, which is giving us another big step-up in speed and accuracy in response time to customers, I think that is going to start showing up more on a sales-growth basis in the coming months and coming quarters. So up till now, it's been more of an internal efficiency thing and now we are starting to move it more into truly affecting our service responsiveness level. So that (indiscernible) really is full (ph) coming (ph).

Again compared to all the other guys that are in the color business, do you feel that this technology is a real differentiating characteristic of PolyOne versus --?

No question about it.

Okay great. Thank you, very much.

Thanks, Saul, and thank everyone for joining us this morning. We really appreciate your spending some time. I can tell you that are folks in this room other than Tom, Dave and myself who are important contributors to this call, and I want to publicly always thank them because they make this process happen and happen correctly. So thank you.

Thanks, everybody. And I will sign off again by thanking everybody throughout PolyOne for really working hard and now we are going to get onto the second round of playoffs.

You got it. Thank you, everyone.

Thank you for participating in today's conference call. You may now disconnect.