Avient Corp (AVNT) 2004 Q4 法說會逐字稿

Good morning. My name is Crystal and I will be your conference facilitator today. At this time, I would like to welcome everyone to the PolyOne earnings call. All lines have been placed on mute to prevent any background noise. After these 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 and Communications. Sir, you may begin.

Thank you Crystal. Good morning everybody and I hope everybody is having a good day today. I want to thank you for joining us. I'm going to have a few brief remarks this morning, and then I'm going to turn the call over to Tom Waltermire Dave Wilson for additional remarks.

We're going to try to conclude this call at 11. I know there are other conference calls going on today and we want to make sure that we have ample time for you to take those also. If you are a representative of the media, we certainly welcome you on this call, but we would ask you to hold your questions until later today so that the folks on the call in the investment community can have a chance to have their conversation with Tom and Dave this morning.

If you if you have any further questions after the call, Dave and I will be available later today for follow-ups.

The one thing I wanted to remind everybody -- most of the people on this call should have received a noticed about our March 8 Analyst Meeting that we're having here in Cleveland. As you may note, we're having it in conjunction with a few other companies here in Cleveland, including Lubrizol (ph), Umnova (ph) and RPM. If you have not received any information and would like to participate, please give my assistant Darlene a call at 440-930-1538 so that we can provide you information about that meeting that we're having here at Avon Lake.

Two subjects -- Safe Harbor. Today, we're going to discuss information defined as forward statements within the meanings of the Private Securities Litigation Reform Act of 1995. They are based on our management's expectations that involve a number of business risks and uncertainties, any of which can actually result and materially change what we are going to discuss in our forward-looking statements today or in our release. I would specifically ask you to a look through those factors. We spend a great deal of time of looking at those and making sure that we have given you every risk that we can identify relative to the comments that we're talking about going forward.

Secondly, we do use non-GAAP financial measurements in our discussions both today and in our release, specifically operating cash flow, operating income before specials and the per-share impact of special items. There are two attachments to the press release; one that reconciles non-GAAP terms to GAAP terms and I ask you to look at that that's in the release, which is going to be posted on the web site. In addition, we have a list of all the special items posted by the quarter and for the year so that you can see what we consider special items. With that, I'm going to turn it over to Tom Waltermire.

Dennis, thank you very much and welcome everyone. I suppose that in keeping with the regulations, but I don't know what year the law was passed like Dennis does, the comments I will be making will I guess in virtually all cases have to do with our operating results before special items and Dennis has told you where to find the reconciliation of all that. That is what we use as our management tool so that is the perspective that I bring to this.

We view our results in 2004 as very credible. And I have put it that way because there's obviously a substantial improvement, but we don't in any way think that we're in a broad sense satisfied with where we are. We know we have a lot more to do and we're very confident about getting to the levels of profitability and returns that we should be in our business for the long-term. But nevertheless, 2004 saw a substantial improvement in the performance of the Company, and as I think we said in the note, certainly aided by a recovering U.S. economy. But we have so many examples throughout the company where what we saw in 2004 was a payoff of a lot of hard work that went on in the years -- the last few years. And it was really opportunity meeting preparations that led to the performance improvement that we achieved. And I want to thank everyone throughout PolyOne, some of whom I'm sure are listening in, and others will be listening in on the replay, for the hard work and dedication and just flat-out excellent execution of our goals in 2004.

Our results themselves are on a -- looking at the EBITDA we generated from our continuing operations, it's more than any year in our history, including our pro forma 2004 -- our pro forma 2000 when we created PolyOne, and that despite a U.S. manufacturing economy that still for the whole year was not at the same level as 2000.

As we look at our fourth quarter on a pre-special basis, it's our first profitable quarter -- fourth quarter -- since we formed the company and it is it usually our slowest quarter because of seasonality. And doing that in the face of a sizable pop in hydrocarbons and ethylene costs in the fourth quarter shows just how much progress we have made. And it was a typical seasonal fourth quarter. We did not -- the economy is not really blooming at this point. It's gradually growing, but we saw a typical seasonal slowdown and we were faced with a pop in raw material costs, and yet we were still able to have a profitable fourth quarter, and I think that again says a lot about our progress.

I think an important contributor to our results and achievements in 2004 is the fact that we went into this year very focused on four areas that we drove throughout the company. And in my internal communications as well as my communications to you on quarterly calls and others, I have kept our organization focused on those four areas and we delivered on all of them. Our reduction in debt and other financial obligations met our goals and we still have two more divestments we're working on that would further enhance that, but I will talk about 2005 in a moment. We did a very good job of moving our performance in our North American Color and Engineered Materials business up the scale and those businesses were positive cash contributors to us in 2004, so they're no longer a detractor to the company's financial health and we expect them to do even better in 2005.

Our overhead goals have been achieved and we're now broadening our view about into more of a continuous cost improvement, and our topline clearly improved with good increases in shipments in all of our key businesses and the beginnings of some price recovery.

We also succeeded in getting some new manufacturing capability put in place and some key new product lines and we're on our way to completing construction of our third plant in China, which I visited last week, and it's an impressive facility and it's going to give is a lot of growth opportunity there for the future.

So those are the four goals that we had -- debt reduction, turning around our Color and EM business in North America, hitting the overhead goals, and getting the topline moving -- and we delivered on all of them.

As we turn to 2005, I have set five goals for us this year to be focused on, and they are in many respects a natural progression and evolution from what we did in 2004. At the top of the list is to further accelerate our organic business growth. It would be more challenging this year because the economy. The manufacturing economy is not expected to be recovering at as rapid a pace. But we have got very focused customer and new product commercialization plans for 2005. And so at the top of our list for 2005 is organic business growth, very targeted in all of our business units.

Secondly, we need to build on and continue the turn-arounds in North American Color and in EM. We have got a new general manager leading our North American Engineered Materials business. He is an outstanding individual with long expertise in the specialty compounding business. Richard Burns is already having a positive effect and we have expectations. Our plans clearly bring these businesses into the profit column as well as expanding their cash contribution to the Company.

Our third can objective I'm calling to complete our return to financial strength. And while in 2004 the focus and was largely on the balance sheet, we do have some of that in 2005. But in the current environment, the top goal there is restoring and improving our spreads over our raw material costs which did continue to feel pressure and -- actually increasing pressure -- as we went to 2004. It is -- I really commend our organization that has responded quickly and aggressively because we're working hard in all areas to appropriately deal with increased prices as well as aggressive purchasing activities and product formulation activities, all of which combine to bring our spreads over our raw material costs back more in line. That is absolutely critical for us to hit our financial goals and achieve cash flow that we have for the year.

We do have -- under the heading of financial strength, we do have continuous improvement in our working capital deficiency and also the completion of the remaining divestments that were not completed in 2004.

Our fourth priority in our list is to take the work that we have done over the last few years, which has largely been oriented at overhead reduction and broaden it into more of an overall productivity and continuous improvement of productivity initiative. This is going to be a long-term drive. We're going to be focusing more on unit manufacturing cost and just total cost of delivering our products to customers. This will be, as I say, it will be with us on an ongoing basis and we need for to ingrain this year much more the drive and make it more of a habit, the year after year plan, and build into our planned improvement in this area.

And the fifth item this year, but in many respects the most important because it drives all of the above, is a focus on building on the energy and skills of our people. The last few years as we have been going through slim-downs and reductions and cost reductions have been difficult, been difficult on our people, and I recognize that. Our people were seeing the success of all of that work in 2004 and energy levels and enthusiasm are rising, but it is vital that we build on that, that we communicate with our people about what our opportunities are, that we're going after for the future so we can create -- make sure that we have a positive growth-oriented environment -- and with our people skills, enabling everything else that I've talked about. But we're going to be expanding the amount of development and training and so forth we do with our people because the skills of our people are the foundation of everything that we do. And I am devoted to making that a competitive advantage for that -- for us and I want our people to know that.

So those are the five areas that we're going to be focusing on in 2005, continuing on a clear focus on our goals, I think will continue to be an important contributor to our success. And so as I get back talking with you either on these calls or in visits one-on-one business with you or at the various conferences, I will be talking about accelerating our organic business growth, continuing the turnarounds in our Color and EM business, completing our return to financial strength with a particular focus on margins over raw materials this year, ingraining our drive for continuous productivity improvement and building on the energy and skills of our people. And that will be my focus and my responsibility to deliver results on those areas in 2005.

So Dave, let's talk about more specifics on the results for '04 and the fourth quarter.

Alright. Thank you, Tom, and thank you everyone for listening into the conference call this morning. I think the headlines and the bullets under the headlines for news release really capture a lot of the positive momentum that we're seeing within PolyOne -- the fact that in the fourth quarter, we were profitable; the fact that our sales growth this year was 10 percent, strong improvement. Several businesses as you will see in the release had double-digit growth year-over-year. The operating income improvement that we realized this year with every business unit across the company contributing to that improvement, and then as Tom alluded, the strengthening of the financial profile of the company. The benefit from a strong cash flow from our operations, the benefit from the proceeds of the divestments, our ability to take down debt, to make pension contribution and the overall improvement to our liquidity ratios is really very rewarding and as has been said in 2005, we have to continue that momentum.

As we look at our performance for the fourth quarter, we see that we've had over $500 million of sales. That was a 9 percent improvement compared to a year ago. Operating income -- and remember that the base of our income statement is only discussing our continuing operations with our discontinued operations as a single line shown below the net income from our continuing ops. But operating income showed a $24 million improvement and net income, by the time we took into effect a lot of the special items, we recorded a 15 cent loss. I would direct everyone to pages 3 of the earnings release where we give a summary of the financials and then also attachments 4 and 5 of the release where we go into detail and summarize the special items and then also provide reconciliations of GAAP to non-GAAP terms.

So as you go through those exhibits, we take our 15-cent loss in the fourth quarter. We add to it 18 cents worth of special items and come up with a 3 cent gain. The special items as you will see are generally associated with the various asset impairments. That as has been mentioned is the first fourth quarter that we have been profitable and it represents a substantial turnaround from the fourth quarter last year.

When we compare our results to the fourth quarter last year on an operating income basis, we are showing an improvement of some $12 million total company before specials. And that is driven really exclusively by improvements that we have made in our cost structure. The margins, particularly on our downstream chlorovinyl (ph) business, were negative more than the income improvement. And so the pressure that we've seen in our vinyl compound and specialty resin business in the fourth quarter, particularly compared to a year-ago fourth quarter, was dramatic. But those margin pressures have been offset by the cost improvements that we've seen, but also offset by the improvement that we have in our equity earnings from OxyVinyls and SunBelt. And so the integrated chain, we're seeing a balance as pressure occurs on our downstream compounding businesses. We aren't seeing a market strengthening in the upstream equity investments that we have in OxyVinyls and SunBelt.

When we look at the fourth quarter compare it to the third quarter, as one would expect, our sales were down. They're down 7 percent and that's a general seasonal trend down. That reduction in sales plus really an intensification of the margin pressure that we're facing, particularly in our vinyl-related businesses, drove an earnings decline compared to third quarter -- not unexpected, and I think in line with the guidance that we've been providing. As we look at operating income, total company before specials, you'd see that it's down roughly $28 million going from 52 million in the third quarter down to 24 in the fourth. And here too as I say, it's a decline in sales volume which really hit generally all business platforms and margin reduction associated with our primarily vinyl compound business. But that was the principal driver there.

We look at our year-to-date performance, total year performance comparing that to a year ago, here a very gratifying turnaround in performance. Sales up 10 percent. The net income improvement of over $3 as reported obviously reflects significant special items in the 2003 period, a lot of that associated with the impairments we took as we were DO-ing (ph) the three businesses. But on an operating income basis, performance improved over $400 million, and that as we have said through the year, has been a balance of improvement. We've seen volume improvements across the board, we've seen cost benefits from the restructuring, the improvement in our equity investments, OxyVinyl and SunBelt, up dramatically year-over-year. And as has been -- as we've seen it shift through the course of the year, by the time that we have completed the year, our actual margins, average margins '04 versus '03, are down, and that really is a reflection of the margin pressures that we have been talking about that started in the third quarter and really came home in the fourth.

But despite that fact, volume offset the margin improvements and then broad benefits from the cost reduction initiatives that we've been taking and also the improvement in our equity investments really paced us to over a $100 million turnaround in operating income. So as we've said, it's a gratifying performance, it's a good start, good momentum going into 2005. We have to continue the pace.

If we look at our cash flow and liquidity, we generated cash in the fourth quarter -- that's always a good thing. And here, I would point you back to Attachment 5 where we reconcile the non-GAAP operating cash flow that we look at internally to the closest GAAP measures. But from a cash flow perspective year-over-year, our cash flow this year is close to $100 million. Last year, we consumed close to $100 million. And so there's a market turnaround there and that performance has really been driven by the lift in earnings, an improvement in our working capital efficiency and also the fact that we had lower restructuring cash outlays in '04 than we did in '03.

Our working capital has been a success story through the course of the year. We've talked about it -- fourth quarter is no different. We hit our targets for days outstanding and receivables and days in inventory, bringing those down below the averages for 2004. When we compare '04 to '03, the working capital efficiency and receivables in inventories has resulted in freeing up over $50 million of capital. We're down year-to-year over 2 days in our receivables and down 7 days in inventory, and that's a really dramatic improvement and our 2005 objective is to continue to demonstrate improvement. As a percentage of sales, our working capital this year was 15.3 percent compared to 17 last year and in '05, where our intention is to take it below 15.

On a liquidity basis, we had nothing drawn on our short-term facilities, so obviously, we had full use of that. One number to point out is that our leverage ratio, and this would be the debt to EBITDA as defined by our covenants, came in under 4. And that is a remarkable achievement in light of the fact that we started the year at 12-1/2. And so the combination of taking down our debts and improving our earnings combined to make a dramatic step-down in that ratio, and as we've talked, our 2005 objective is to bring that number under 3 and continue our improvement of our financial profile to be much more of an investment-grade company.

Also point out in the fourth quarter that we made a $65 million a voluntary contribution to our pension plan. That improved our funding obviously. And what it does from our perspective is take questions of the underfunded nature of it that had been in the press in '02 and '03 generally off the table. We will not have to make a contribution in '05 and '06, and if we do have to make contributions after that, those will be fairly small. And so the pension contribution question has been resolved by our performance in 2004.

Turning now to the outlook, we provide the outlook in our earnings release and for this analysis, we use the fourth quarter of '04 as our base so it's a sequential look. And I would characterize it to say that there are encouraging signs. Although demand started slower than we would have liked in early January, it's gaining momentum. The margins that we have, pressure across the board, we are working to affect a resolution to that. I think it's going to be a challenge for us all year. But we are working hard in the marketplace and having success. And so we're making progress there and we're seeing demand improved.

In our outlook section, we talk about our continuing operations and expectation that our sales will improve, that as a result of that sales improvement as well as an offset on costs that we're looking from our operating businesses, earnings to improve compared to the fourth quarter, some $8 to $12 million. We are also looking for a $3 to $5 million improvement in our Resin and Intermediates business, and this is a combination of improved resin spreads. We would expect that resin and PVC resin pricing will exceed the increases quarter to quarter that we would see in ethylene and chlorine, and also the fact that chlor alkali is stronger in the first quarter as a result of the increase in chlorine and caustic, as compared to the fourth quarter. So if you add those two up, we would expect to continuing operations -- or continuing operations operating income to be up $11 to $17 million. As a result of improved sales and also the margin recovery, particularly in the specialty resin business, we would anticipate that our discontinued operations, would be up a million or $2 million in the first quarter versus the fourth and as a result of the improvement that we made and the debt reduction that was taken in the fourth quarter and the third quarter. Our financing costs would be down a million dollars or so in the first quarter compared to the fourth. And if you add all those numbers up, you come up with an opportunity that would have us looking at, on an after-tax basis, a $7 to $12 million improvement. And then you can take that up and to the math. But we are expecting to see our first quarter continue to improve compared to a year ago. As I say, we are seeing some encouraging signs in terms of demand development as we come into February, and also encouraging signs in terms of long leading indicators are starting to indicate that there is growing momentum for manufacturing in construction markets in the North American economy.

And so, with that, I think I will stop and we will open it up for questions and pass the Mike back to Dennis.

Yes, thank you, Dave and Tom. Crystal, let's go ahead and start the first question.

Robert Ottenstein, Morgan Stanley.

A couple of questions. One, can you give us a little bit more granularity on pricing? How much you achieved in the quarter as detailed as possible and kind of what the momentum there looks like?

In which quarter, Robert, the fourth?

Right.

We had price increases pretty much across the board. I don't want to get into a by-business. We had moderate success, but we did not make -- we still were losing ground on our margins. And so, that is one of the reasons that even the year-to-date numbers, our margin compared to '03 is down and clearly why the intense efforts we have in each of our businesses to take our pricing up. And so the fourth quarter, I would say for where the market was, we saw success but it was not enough to offset the increases that we saw in raw materials. And this is not only the commodity resins, but also the compound additives. They've really kicked in in the fourth quarter. As we look to the first quarter, we expect our price improvements to start making gains against the margins. We would expect to see our margins improved in the first quarter compared to the fourth, but not improve to where they would have averaged in '04 and certainly not where we would like them to be on a more normalized basis.

You're not giving us a lot of details here, but it would appear that the pricing is somewhat disappointing. And this was going to be one of the major initiatives, one of the things that we were working on, was discontinuing unprofitable volume. I'm just trying to.

Finish -- what we saying that you understood one of our initiatives were, Robert?

To eliminate unprofitable accounts.

That has all been going on. The issue here is raw material increases at profitable accounts and going into the marketplace and announcing price increases and convincing customers to pay them. So, we have we always better success with that, more regular success in our distribution business. The issue we're talking with you is because we have different situations in different markets, especially if you take it on a global basis, and with different product lines I should say. And in our distribution business, prices tend to move through more regularly because it's the nature of that business. And some of our businesses, smaller increases than others. Clearly, the business that was challenged the most were all of our businesses in the vinyl chain and our PVC compound business and in our specialty resins business, although we started to move prices there reasonably well in the fourth quarter.

So, the problem is, you'd have to go through all the different product lines and we would end up taking up the rest of the day talking about all the pieces in different markets. We've got different issues in Asia than we have in the U.S. And so probably something that we ought to see if there's some way that we can kind of summarize this kind of thing in a more aggregate level. But there's just -- it's something we execute on a detailed level. And how I can guarantee it, it's not having to do with raising prices at an unprecedented -- dealing with chronically low profit customers. This is mainline raw material increases, and we are expecting 2005, we've kind of modeled in over $100 million of raw material costs in 2005 and -- relative to 2004 in the aggregate. And some of those are already in place because it's full year '04 to full year '05, but that is what we are out there battling away.

Let me kind of re-ask the question. Is the issue more a question of contracts and the timing issue, or is it more one of competition being very competitive and not allowing you to get the price increases?

I would say it's a little of both, frankly, but I mean when we are looking at our downstream businesses, the commodities move faster. And so the question is -- how can we -- can we increase our downstream business prices enough to keep up with where the commodities are moving. And we have done a better job in '04 and we are on top of it in '05, but the momentum that we saw, particularly at the end of the fourth quarter, set us back. Ethylene went up over 6 cents in November and December, and you know it's difficult to get compound prices up in that part of the year because the market's a little soft.

As far as competitive responses, it has been mixed in the marketplace and there's stories abounding on that. But I think what we're seeing is not atypical for what any other compounder is looking at. And so the profitability and the margin improvement that we need to see has got to be viewed the same way by our competition, be they integrated or not.

Remember that this is, folks, this is not a commodity business that works on operating rates and tightness of supply. Capacity can be additives added and subtracted to this business, so we don't go into shortage and with prices flying up by and large around our business. So, whenever we are facing raw material pressure, it's always a matter of going out into the marketplace, convincing customers that we're doing the right thing by them. And there typically always is capacity around in the industry if somebody wants to be on a volume hunt. So that's why prices tend to move more gradually at this part of the chain rather than at the commodity end.

One last question. You did a nice job on the selling and admin costs, both sequentially and year-over-year. How sustainable is that kind of low 40's run rates going forward?

I think the low 40's needs to be adjusted between depreciation. What is sustainable is a level in the low 9 percents to sales. And as we talk that objective, we could get it under 10 was the first point; getting it under 9 has got to be our objective for 2005. So the type of things that we have done to take costs out, we will continue to do, Robert. And as Tom said, it's more sustaining, it's more continuous improvement and it's now leveraging to the existing cost space with stronger sales.

I'm sorry if I missed it -- where there some non-recurring items that drove down selling and admin in the fourth quarter?

No. I think the numbers themselves have been moderately restated -- well, the trend has been -- the fourth quarter has got a catch-up to make the year-to-date right. And so that's where it is. You'll notice too that -- okay, our depreciation (indiscernible) 42, no, no, no. I think we are closer to a run rates, Robert, in the high 40's, not the low 40's.

I'm a little bit confused. Perhaps we can talk off-line on what is going on there.

The 200 million was -- it's a good base, and frankly, will be a challenge base for 2005. So to take 42 times 4 is not realistic. I don't think we can sustain that.

Andrew O'Connor, Wells Fargo.

I wanted to know, Tom, I know you don't want to spent an (indiscernible) amount of time on it, but just looking ahead the next quarter or two, can you maybe highlight PolyOne's -- or rather demand for PolyOne's products by end-market? Collectively, you're looking for a volume increase of 5 to 7 percent in the Q1. Again, can you just speak to individual end markets or highlight that for us, what you're looking for?

Dennis, why don't you take that one. I would -- this is Tom, and I would say most of that improvement you'd probably call seasonal rather than sort of sector growth, because that's a pop-up compared to the fourth quarter. But Dennis, why (multiple speakers).

Yes, I think, Andy, what we can talk about is that the principal growth is going to be in our vinyl compound business, as you might expect, with the building materials demand growing here in the first quarter. Of course, that was the one that pulled back a little. We're seeing in the automotive markets reasonable good demand. I can't say that there's going to be a pickup in the first quarter versus the fourth quarter. Packaging applications, the packaging needs are going to be fairly similar to the fourth quarter. So overall -- again, you're going to see that the biggest one is vinyl compounds, it's going to probably progress the most, although all of our businesses will see some pickup because they don't have -- we don't have obviously a holiday shutdown in North America that we've traditionally had, or in Europe. But the biggest pickup will be in vinyl products.

Okay, thanks for that. And then Dave, you spoke to an investment grade goal. Can you recap what further steps do you think are necessary to reach investment grade and what kind of timeline do you think is reasonable to get there?

(multiple speakers). Well, the steps that we're going to take is to continue to bring our ratios down. We've targeted to get it under three. We believe that's a realistic target for the end of 2005, but that is an outcome. What we need to be doing is improving our operating business performance and getting sustainability of our core business earnings up, and that's the challenge that we have. We'll also be using -- our expectation is that the R&I business is going through a cycle peak right now, and so we're going to get an uplift in our earnings there and cash flow and take that cash at the upside of the commodities cycles and take our debt down. So we will be working both ends there. But I think what we need to be able to do is hit the ratios, demonstrate operating performance and do it for multiple quarters. And I think realistically, we would expect to see improvements in the rating in '05 moving to '06. When we could actually pass into investment grade is one of those where other people are going to have to make the call. But we recognize we've got to put probably 6 strong quarters on the boards and we've got to do so with very strong ratios and also the quality of our earnings has got to be strengthened.

This is Tom. Let me jump back in on that. One of the -- as I look at it, for the long-term, our goal has always been to be an investment-grade rated company. That's what we've always wanted and as a matter of long-term financial policy, we intend to see that we run the company with those kind -- that kind of financial profile. What kind of ratings somebody puts on us is obviously not our call, but we're going to run with a good profile. At a very pragmatic level, what we're really pointing to is the eventual refinancing of the 2010 -- the 10-5/8 paper and the market. So as a practical matter over the next couple of years as we prepare to do that, that's where we're really pointing to. What kind of moniker somebody puts on us at that point will be whatever it is. What will really matter is what the market looks at us as because that's going to determine the cost of refinancing and that's what we really are driving for.

So as a part of this, are we hazarding an estimate for debt reduction in '05 at this point?

Well, what we've talked about in the outlook is the fact that we would expect our cash from our operations to be in the range of what they were in 2004 and that we've got a few more businesses to divest which I think the market has made some assumptions as to what the proceeds could be, and the debt reduction is still a key driver for us and that we would expect our capital investments to be in the $40, $45 million range, slightly up from '04, but not materially. So the majority of the total cash would go against debt and we would hope that that number would be north of $100 million.

Just to add to that, as you know, we do have one majority for sure that still remains at $45 million. So you know we're going to reduce that at least by that much at the very least.

Rosemary Morbelli, Ingalls & Snyder.

Good morning. Coming back to your latest comment on your joint ventures, do you think that 2005 is peak earnings?

I think it's going to be close. I'd would like to think that '06 will be better than '05, but we are certainly expecting a market step-up, particularly on the chlorovinyl -- not the cholorvinyl -- the chlor alkali side of that so that the SunBelt venture we would expect to be substantially more profitable in '05 that '04, and also, the chlor alkali portion of OxyVinyls. I think the market industry experts would indicate some tipping down in '06, but still very strong. So we are looking at two very healthy ears coming at us.

Don't read our comments, Rosemarie, as saying that we have called the peak. That context was that we are clearly in the range where margins in those businesses are at higher than kind of higher --- they're at the higher end of the range. So they're kind of in peaking kind of territory. But what the peak is, we will let you guys call that.

I guess where I was doing is just assume that '06 starts slowing down and we get to the '03 level whereby you get about 39, 40 million of income compared to close to 65 this year and maybe 69 next year. Could it go down to a negative 8 million as you experienced in '01, or has the market changed or what you're doing, what they are doing changed in such a way that you could not have this kind of a drop?

Impossible for me to answer with any certainty. What I think we're seeing now is the cost of energy being pushed forward and margins recovering on the commodity side for higher energy costs that we hadn't seen in 2001, 2002 and started in '03. Whether it goes back to that is supply-demand. And as we don't call a peak, I'd hate to call a trough, but you know it's going to go up and down in significant amounts. And at this point, we're looking at moving into a period when the cash flows from our equity investments are going to be very strong.

Generally, we still believe that the vinyl chain has at least a modest ongoing growth in it. It's not the growth tiger it was in the 1980's or '70's. But as we still see that chain growing, chlorine demands by growing gradually, but not rapidly, at least on a trend basis. So as has always been, the secret to look for is new capacity. And that is what is going to determine this cycle. It doesn't have to go down, it just will only go down if you have a lot of capacity coming in. So, that's what you need to watch, we watch, everyone on this call watches it. And the conventional wisdom these days is because the U.S. is not as low a cost producer because for energy costs these days that not as much capacity will be added as in the past. So we will see.

Okay. And you mentioned on the Engineering Material in your -- not in your remark, in the press release -- that in the fourth quarter, you took steps to replace some low price tolling with more specialty. Now my understanding is that was a goal and a project that you started the minute you put both companies together. Could you comment on that comment?

Your comments -- the comment that it was a goal when we put the companies together?

You make it sound in the fourth quarter release as this is the brand-new project as of the fourth quarter, while my understanding was that was all along a project.

I mean, Rosemarie, we want to tell you the things that were actually done. It was not a brand new idea that we just thought of in the fourth quarter. But we actually executed on some things and so we told you that we did. Yes, that's not a brand new idea and it's not the first time we've had any progress on it either, but we did in the fourth quarter so we reported it.

It was as much to illustrate the change in pricing in volume as it was to anything else to help explain some the things going on, and this something that has been an ongoing activity.

Yes.

How far along are you, or do you believe that you still have some stalling -- tolling forever?

I would expect so, because some of it's pretty good. It's not all bad business. Some of it you take in when you have some extra capacity and it helps and it's better than not having it. And then you go to work trying to upgrade. So it's an ongoing thing that will kind of ebb and flow based on opportunities.

On the inventory side, the level is the same while prices are going up, the material costs are going up. Did you take those inventories down, or is it the impact of discontinued operations?

Well, on the face of the balance sheet, the discontinued ops would have an impact. As we look at our internal metrics, we are down dramatically compared to a year ago in our inventories. Our days in inventory are down a fair piece from where they were last year as well as average year-to-year, we're down 7 days. And so the improvement is real, in terms of our working capital efficiency, Rosemarie, and that has helped us offset the inflationary impact that we're seeing on our finished goods.

Thanks. And my last question -- charges for environmental remediation are up a lot by about 6 million. What is happening there? Is it because of the discontinued operations, or are you going to find additional sites to be cleaned up?

I'm sorry Rosemarie -- the reference?

You had charges for environmental remediation last year of about 2.7 million. They're now at 8.7.

This year in the third quarter, we reassessed particularly one side of New Jersey and increased our reserve and the charge in the third quarter was $7 to $8 million. It's not so much -- it was an adjustment to the reserve as to cleanup that we're going to be doing over the next couple of years. It's not indicative of a trend by any means. It was a single site.

And it was a site that we've known. This was not something we discovered. It was -- and we do that on a regular basis. We're not concerned about any other others at this point, but that one was starting to brew and it finally became clear that we were going to have to accelerate the spending and increase it.

Bob Goldberg, Focus Asset Management.

Dave, a question for you on cash flow. It looks like you have about 105 to 110 million in CapEx and cash interest expense. What other outflows or requirements do you have for '05?

I think we will have working capital will go up in 2005 compared to the end of '04, and that just discontinuing on the general trend that we would expect to see our sales evolve. Interest would be down. So really the increase in CapEx would be the principal. Interest expense would be down. Our cash interest and taxes we would project to be down year-over-year and restructuring would be down dramatically. So the ones that are going up would be CapEx and working capital really.

What would you expect to restructuring cash taxes to be on an absolute level?

The restructuring charges?

Yes.

Between zero and $2 million dollars -- very small. We are at the end of that chain. And the cash taxes, still about 20, 25 percent of our international earnings. So in the $9 to $10, $11 million range. It's not materially different than this year.

Could someone provide an update on where you are in the divestitures and whether? In one of them, I know your larger competitor has left the business.

We have not changed our strategy. And we're keeping the two businesses as discontinued, which in and of itself, would indicate that we continue to have the process going. But as we have said, we can't give anything other -- an update, other than we haven't changed our strategy that these are discontinued operations and the accounting rules around them probably give you as much guidance as we can in terms of the activity base.

Comment a little more -- what's going on in the specialty resin market and what that means? Maybe not everybody on the call is up on that.

In the specialty resident market, there were 4 competitors with manufacturing operations in North America. There's always the imports. The second-largest was OxyChem and in early January, they announced that they were closing their Pottstown, Pennsylvania specialty resin facility. As a consequence of that, the market has tightened and as a result of that, we would have higher expectations on our specialty resin business. And I think the market is reacting to how to get additional supply. And we are in a good position with our cost structure and our capacity and the quality that we have -- we have to believe that this action has done nothing but strengthen our market position and the strength of our business.

But you haven't given -- you haven't come to the conclusion that because of the change and the competitive situation that this business now might be worth more to you than to someone else?

I can't really go too far from that, other than to say it's still a DO'ed business (ph).

Again, Dave, on the pension situations, what is the underfunded status as of the end of 2004? And what do you expect for pension expense in '05, up or down from '04?

We expect to pension expense to be about flat. And the disappointing thing there is that, even though interest rates seem to be going up, the discount rate on our pension went down. And as a consequence, we're looking at a pension expense to be in the $10, $11 million range which is not too far from where it was. What we have done is taken an expense that was in the low 20s a couple of years ago to the 10. And as we continue to have our funding ratio go up, our expectation is that the number goes into mid-single digits in three years or so. And so that's a real strong story for us.

And again, it's basically, it's another noncash charge. That's our pension expense, but there's no pension contributions contemplated for at least two years. And pending hopefully good equity market performance if all you guys do your jobs out there and the stock market performs well and our pension portfolio performs well, we have a reasonable prospect of not having to make any further contributions to the pension fund. So what we talk about as pension expense is noncash at this point.

Last question, just on raw materials. I think Tom, you mentioned you expect $100 million maybe more hit for all of '05. I'm just curious if you have a forecast for the first quarter, how much of that would be in the first quarter?

No, we really don't.

I think the guidance that we gave relative to operating income change is obviously (multiple speakers) incorporates that into it, so that's the way we (multiple speakers).

We think it's easier and maybe more productive for you guys that if we start splitting the two, then we got to talk to you about how much pricing we're going to get. So we tend to think in terms of spreads. And as we look at the spreads in our various businesses and the trends on them and we thy to bring that together a little shorthand for you.

The reason I asked is it just seemed to me that the raw materials really started to increase late in '04, and I was wondering if the toughest comparisons for most of that 100 million might be in the first part of '05?

Yes. It's a good question and I guess to some extent, that's true. But you know, it was certainly there -- I guess we said, again, we just don't tend to look at it just as raw material costs. We think about it as spreads. So our spreads were probably -- hopefully at a trough in the fourth quarter, and we're going to be starting to repair that as we go forward. So that's just the way we look at it.

We're running up on -- we're going to take one more call, and I apologize. I know there's some more folks on the line, but we will take one more call.

Saul Ludwig, McDonald Investments.

Well, what do you know -- the one and only sneaks in under the wire. You know, with your goals last year, you put some numbers on it. You told us for '04, you wanted to have a (technical difficulty) debt reduction, you wanted to get Color and Engineered Materials to break even, you didn't quite get there but you quantified that goal. You talked about overhead getting under 10 percent. And now for '05, you give us some nice words. But let's put some numbers on these five points. And if you can't measure it, you don't know if you get there. So what do you mean by accelerating organic growth and the further progress in Color and Engineered Materials and build finance -- put some that numbers on these so -- like you did a year ago so we will know at the end of the year whether we got there or not.

I suspect when we get to our meeting in early March, we will share that with you all in a more specific basis.

Dave, you know, when you work down to the 2 cents a share for continuing operations, ex-special charges, that business actually had a pretax loss and it looks as though you had a $3 million tax credit, which is what enabled you to have the couple cents share profit. Help me understand why that occurred.

I got to go through that, Saul. That's going to take more than time that we want. Do you have something that we can answer fairly quickly and we will respond? The important thing that we know is, we do have taxes on our foreign operations and so the international businesses to the extent they make money you're going to see a tax there, Saul. On the U.S. for special purposes, we tax effect it and then take it out in the allowance. And it's the movement between foreign and domestic taxes that results in that kind of a number. And when you're hovering around breakeven, it just takes a little one way or the other to make the numbers skew and look strange. But the fact is, there's an actual tax that we've got to reflect on the face of our financial statements for our foreign earnings, which as you know, are there and consistent and happen quarterly. And then to the extent that there's not an offset on domestic to overcome that, you end up with these kind of -- this kind of presentation.

We'll circle back on that. Just finally, the corporate expense number, when you have your segment numbers and you had $2.5 million of expense this year versus the 4.2 a year ago, and that 2.5 was lower than any of the numbers in any other quarters. Was there anything special in there that made that number so low? And what do you think about that number going forward?

I think going forward, that corporate number is going to be more in the 4 to 5 million range where it has been in times. There are offset going in and out of our other income and our S&GA. And Robert asked a similar question on the 40 million that we show in the fourth quarter. There were some true-ups at the end of the year, but I think the ongoing rate of cost is reflective in the total year number. So when you look at our first quarter, that corporate number, $4, $5, $6 million, some of the impacts we had to had to do with the fact that our -- some of our incentive compensation on equities, we had to book some costs there. And hopefully we get to do that again, because that would be reflective of our equity appreciating. And then there were also some adjustments in terms of benefit costs that we made, continuation of some of the actions that we were taking in the third quarter that we talk about.

For the rest of you, I know there's a few more people on the q-and-a, and I apologize for that. But I do want to take us to the hour that we designated earlier on. Thank you very much for participating. As I said, Dave and I will be available throughout the rest of the day to answer any additional questions. Thank you very much for your attention and support of PolyOne and we will all talk to you shortly.

This concludes today's conference call. You may now disconnect.