Avient Corp (AVNT) 2005 Q1 法說會逐字稿

Good morning. My name is Jennifer and I will be your conference facilitator. At this time I would like to welcome everyone to the PolyOne first earnings conference call.

[Operator Instructions]

Thank you, Mr. Cocco, you may begin your conference.

Thank you, Jennifer. Well I am actually pleased to hear that we have at least 65 people on the call for as many times as I moved the start time for this conference call. I apologize but I appreciate it. We do try to coordinate amongst all ourselves the start of these calls. And unfortunately we had a little confusion. But we're going to get better as an industry going forward. Thank you for joining us.

This morning Tom Waltermire and Dave Wilson will, as has been the norm will some opening comments about our business. After that we will open up for Q&A. We will try to conclude this promptly at 12 O'clock. If any of you should have any additional questions after the call, certainly I will be available, and for some time Dave Wilson will also be available to answer any follow-up questions. As you know we are web casting this call. And this call will be available on our website for approximately 2 weeks. If you're with the media, we appreciate you joining us, but we would like to restrict the question and answer part of this call today to investors. And I would be happy to talk to any media folks later.

I would like to take your attention as I have done on past calls to our Safe Harbor language in our press release. We will be making some forward- looking statements in this call. These forward-looking statements give current expectations of our forecast and future events, but are obviously not guarantees of our future performance. We have tried to analyze the number of business risks. and list them for use of that you can be aware of what we consider risk to our forward-looking statements. I suggest that you look at that, which is in the press release, and also posted on our website.

In addition to that, it is likely that, and also we have in the press release both GAAP, and non-GAAP terms and reconciliation for the non-GAAP terms from the GAAP terms that we do use. These are operating cash flow, operating income before special and the per share impact of special items. We have a list of those, in attachment 4-- excuse me, attachment 5. So that you can have that as also you can also on our website. So you can reconcile to a GAAP term any non-GAAP term that we might happen to use today.

In addition to that, in attachment four in the press release is a list of our special items and the definition of our special items, we included special items. I would also suggest that you look at that so you are aware of how we're classifying special items are relative to the effect they might have on non-GAAP terms.

With that being said, I'm going to turn the call now over to Tom, who have some comments for everyone.

Dennis, thank you very much. And welcome everyone. And we characterize the quarter-- without question, it is the best first quarter that we have had since we formed PolyOne in 2000. In that respect, our earnings peak for themselves. What's also encouraging and important is that the results here are in line, in fact even a bit better, then what we were expecting, and were attempting to describe in our January earnings call for year-end, as well as the interim comments that we made in March.

We made very good strides in the first quarter on our objective, absolutely critical objective, of improving margins through pricing and marketplace as well as continuing work on raw material, fending off best we can raw material increases and product reformulations and so forth. As you know that restoration of margins on a sequential basis is one of our key goals.

All our business units improved their earnings from what we saw in the fourth quarter. Overall, our shipments were up 12% from that time period. However, year-over-year our shipments were down 1%. Two of our business units did have growth. In North America, color and distribution, and of course our Asian business grew. But that overall 1% decline in shipments is a recognition of the slower demand we're seeing generally in the economy at this point.

As we go through business unit by business unit, our capture rate on target new business was relatively good. We're fairly satisfied with what we're seeing there. But in this environment, as I will comment later, we are going to need to make sure that we pick that up.

We did see demand starts to slow down in March, although I would say frankly as we look back, demand has not really been growing all that strongly probably since the third quarter of last year. It was not declining, but it just did not have the same kind of robust pace that we saw in the first half of 2004. And what we're seeing now is reflective of not just something that has happened in the last month.

Despite that, we still expect our second quarter to be ahead of our first quart in shipments. I would acknowledge some of that is seasonal I don't want a portrait at excess that we're seeing some kind of rapid falloff in our business. But there is no doubt that it is soft out there. We expect higher shipments in the second quarter.

Dave, of course, will be talking more specifically about our first quarter financials and second quarter outlook, but I want to quickly walk through the four business priorities that we stated at the beginning of the year.

First is organic business growth. I have already commented on the quarter sequential, and year-over-year sales there. It's critical that we ramp up our close rate on the new business targets that we have established. In building our North American Color and Engineered Materials businesses to be successful contributors, we did make progress again year-over-year in our earnings in those businesses. Nevertheless, both of them, like most of our units, were doing that in a environment where they've been fighting with high raw material cost, as well as some softness in demand. So they were able to continue to make progress even in the face of that.

Our third stated priority is to complete our return to a strong financial position. The two focus points there are margin expansion, and margin recovery, as well as how we manage our cash flow. I think between the two of those, we did the better job on pricing, as we did raise prices at nearly every one of our business units, probably everyone of our business units and we captured most of what we set out to achieve.

With regard to working capital, our working capital efficiency relative to sales is that comparable to the good level, very good level that we achieved last year. Nevertheless, we set some key goals and some aggressive goals to improve on that this year, and in first quarter our achievement there was flat rather than showing improvement. Part of that certainly had to do with the fact that sales especially later in the quarter.

We're not as strong as we had anticipated. So our inventories are a little bit higher. So again, we are sticklers for performance and I don't not want the people to have an impression that somehow our working capital really ballooned. It didn't, but we're not where we totally want to be on those targets. And we feel very confident that during the second quarter we will achieve those targets and get that fully into line. We do expect because of that as well as just our operations to be cash positive in the second quarter. I'm sure Dave will have more to talk about that. We do remain on track and have a lot of confidence in the full-year strong cash flow that we have been expecting.

Our fourth area is ingraining our drive for continuous cost improvement. Here we are focused on two areas. One of course, of S&A expense that relative to sales and we have very good quarter ended there. The material we sent you describes some one-time benefits that we had which are real legitimate good stuff. But some of those are not continuing. But even excluding those things that we're not going to be able to repeat, even excluding those our S&A expense was closer to 9% and that's continued good progress.

With respect to unit manufacturing costs, which is another thing that we track business by business, overall cost control was good but without as much volume as we expected. We did get as much progress on unit cost reduction as we intended. But we will certainly continue to be going after that.

So we wrap all this together we are as we saying here we expect the second quarter to be better than our first quarter, and the first quarter was in total a good one. Within our business units, our operating business units, we know we have got challenges as we are facing a slower growth environment and without any real abatement in higher raw material costs. And that environment we are focused on three very clear goals as we move into the second quarter, and doubtfully for the rest of the year.

And that is accelerate the rate of new business closes because we're going to need to grow on our own, markets not going to give it to us. We have got to keep working on margins. We will be selectively surgically raising prices where the markets allow, and conditions are appropriate. And at the same time we in this kind of environment, we have to redouble our efforts on the raw material abatement front. And we've got to nail the working capital improvement metrics that we have set for ourselves. Our working capital level by historical standards is that a good level, but we are not done. It's an area where continuous improvement is essential, and our business units know that is a priority. They're going to be held accountable for progress there.

So, closing new business, working on the margins, nailing the working capital metrics that's we're focused on as we go into the next few months. Dave, why don't you take it from here and provide a more complete picture.

All right. Thank you, Tom. As we have said the first quarter performance certainly was encouraging for us. As you looked at the information that we provided at the end of the fourth quarter and updated in the third quarter, just going down the line, we met or exceeded those expectations. As you've seen in the outlook, we're looking for further sequential growth as well, so we are putting together the type of track record in 2005 that we have hoped that we would.

As we look at the first quarter, we showed sequential improvement in each of our segments. Our performance plastics business improved by $8 million on an operating income basis, and that was driven by volume as well as margin recovery. Our distribution business was up nearly $2 million due to volume and margins as well, and R&I as expected came in about $7.5 million better than the fourth quarter. That was driven by PVC margin and volume improvement, as well as improved for alkali pricing.

As we compare ourselves to a year ago, our operating income is up $14 million. Here the primary drivers were R&I our distribution business and structural and sustainable improvement in our overhead costs. On this latter point Tom talked about it. On the face of our income statement, our selling and administrative costs sales percentage is a little bit over 8%. That compares to a year ago of 10.8%. When we adjust for the roughly $4 million of largely onetime items, we come at 8.8%, a full 2% point better than where we were a year ago. That reflects improvement that we have made that we talked about through last year in terms of the programs on retiree benefit costs as well as our pension. That is very gratifying.

On the flip side, compared to a year ago and as we have talked about for the last, couple quarters our performance plastics business was down year-over-year. That is due to the margins. The margin deterioration that we saw in the second half of last year, which is why as we talked about our first quarter outlook at the end of the fourth quarter, a key principle objective was to get our prices to work on the sourcing front to improve our margins. As you've heard, we have done that and we are on pace as we have expected. Certainly more work to do. And as we have said we did not expect our margins at the end of the first quarter to have this back to the 2004 average. We need to get to about midyear for that to happen. And so there's further execution that needs to be successful in the second quarter.

As we look to net income, we booked $0.15 that compared to $0.04 last year, an $0.11 improvement. We also had special items of about $0.05. So if you add those back together, we would say net income per share before special items was around $0.20. That compares to a year ago of $0.11. This information can be found in attachment four on our earnings release as well as on the P&L statement to be able to gap those adjustments.

I would also point out last year, we still had the elastomer business, and of that $0.11 before specials, the elastomer business contributed about $0.05. And so there is market improvement year-over-year on the net income base.

Taking a look at the next quarter, our second quarter our outlook we have outlook sequential improvement again, Expectation of sales being up 7% to 10%, volume being up 3% to 5% in what is admittedly is the challenging environment for us in terms of expected moderation and inventory positions by our processors and I think generally known softening in the automotive industry. Nevertheless, we are anticipating that our volume will increase sequentially 3% to 5%.

Performance, our continuing operation operating income is expected to be out $8 to $12 million. That is driven by a combination of volume and margin, improvements in our performance plastics and distribution businesses, the fact we are overcoming a $4 million and so take that 8 to 12 of the reported operating income, and then also further strengthening in our R&I investments. We would expect that to continue as well.

In terms of our discontinued operations, we have talked about really on taking a look at the reported number, we talked about a fairly significant increase. I think the most important thing to do is take a look at and what we have said we expect the net income to be in our discontinued operations. And we do talk about that in our outlook. And that really equates to about a $2 to $3 million operating earnings performance improvement from those businesses. And that, too, is being driven by margin and volume improvement in both our specialty resonant films businesses.

All told, strong first quarter and then out looking was continued sequential improvement both top and bottom line. Tom talked about cash flow. As we outlooked, we said that it because our sales were increasing dramatically from the end of last year to the end of the first quarter this year, we would expect that we would be consuming cash in the first quarter as we built our working capital to support that strengthened sales level and that's what happened. We consumed about $66 million of cash. You can see that in the increased in our receivables drawings, which was a little less than $60 million.

Our working capital was 15.3% of sales. That is what is average for 2004. But in those metrics, I will tell you our DSO, which is an internal metric that we have, our days in receivables were under 51 days. That is the best in the history of PolyOne. Our inventory on the day's coverage was the average of 2004. As Tom has talked, we have more work to do on both those metrics despite how credible they are we expect in the second quarter to bring both of those down by a little over a day and half.

As we look at cash flow for the second quarter, we expect to generate cash. We told you that our expectation is for healthy, strong cash flow for the full year 2005 in light of where we are the end of the first quarter, you can expect it will be generating cash, positive cash flow in each subsequent quarter and the second quarter will be no exception in our expectation is to be neutral, to be slightly less in our working capital. We will also benefit from stronger earnings and then also expectation of receipt of distributions from our equity affiliates as which as we talked we usually do not get in the first quarter, particularly vinyls is looking at the same kind of working capital build that we look at it in our business, and so the distributions come in second, third, and fourth quarters.

Offsetting, partially, those positive factors is the fact that we will have higher cash interest expense for payments in the second quarter. As you know, our principal interest payments are in the second and fourth quarter. Never the less you had all those up and we are expecting to be generating positive cash. And you should expect to see that in a reduction in our drawings by the end of the second quarter. And so with that, I will hand and pass it back to Dennis and take questions.

Yes one second before we do that. I want to, I know everybody will have a desire to ask a question about our divestment's and how we're proceeding. I will tell you at this point, we really cannot comment on that and we will not comment on that investment and where we are in the process so save your questions for more material things. We cannot be really deal we talk about that today. Jennifer let's go ahead and open up for Q&A.

[Operator Instructions]

Your first question comes from Michael Judd, Greenwich.

Good morning Michael.

Good morning everybody. My question is on the distribution business. What are you seeing in terms of customer inventory levels? If you could just kind of give me a sense of overtime, we have heard from a number of companies this earnings season that this inventory build may have peaked through in December and that has been declining gradually. My question is, since you are in a unique position to comment about that, where are some inventories at the converter level now relative to where they were let say at the peak time, I guess maybe December? And where do expect them to go in the next couple of months, please?

I wish we had the ability to do track that on some kind of quantitative basis. I think what you're really seeing is what we think we're seeing is that there's a gradual, and I guess that's the right word, shift going where people are expecting at least for now, who knows what energy prices hold for us down the road, but at least for now I think people are thinking that they are kind of leveling. When things are ramping up in price, there's almost this unconscious build that goes on because you're more worried about availability than you are about inventory level and that just tends to happen. Then you get to a point where you say we do not have quite the availability concerns, and so then you can start ramping down. You kind of work at the lower end of your range rather than the higher end of your range.

And so it's not a, I don't think we ever had a sense that there were some kind of big back up. All we have is just qualitative indications. We do not have any way really quantifying exactly where customer inventories are and but we know that they are generally working toward the lower end of the range. They do not see as much risk on availability and they do not see that's the benefit from being somewhat long. I do believe that is what is going on very natural thing it happens that you have had a rapid run-up in prices. I do not think we are at the end of it now. I think we see it continuing for another few months. But we do not have enough time concrete visibility to say it is exactly going to end in 10 weeks or something.

Okay then secondly, you guys had pushed through some price increases in the first quarter to make up for some higher costs in the fourth quarter. I'm just curious with in sort of the softness, the inventory de stocking, I know that you had plans for additional price increases in the second quarter. How are those price increases working out?

The below you are really to say about the second quarter in terms of how things are working out. There is a whenever it demand is slower, it is just that much harder. And so we're going to keep pounding away, particularly where our margins are still substandard by our estimation. I guess I would characterize them to be what you would expect in this environment. It is harder to do but it has never been easy. Is been very hard over last year and through the first quarter. But you keep working away and it with a reasonable story, but I would say it is probably incrementally harder at this point.

Okay, and lastly that the 3% to 5% volume growth, I believe that was sequentially. Is that what you would typically expect seasonally in the second quarter versus the first quarter? Can you give us some little insight into that, please?

It is probably, on the low side of what we would typically expect between first and second quarter.

Thank you.

Thank you Michael.

Your next question is from Saul Ludwig(ph) from (audio gap) Bank

Good morning.

Good morning Saul.

First on this tax valuation allowance, where you book a couple tax provision and then down below was a special item that you take the tax valuation allowance. And that was about 4.5 million bucks in the first quarter. Are we going to see that every quarter, like we're going to have a special gain of $0.5 a share so every quarter and for how long is that the one?

Well we hope that we do not see that special gain forever, but we believe that it is more appropriate to portray our earnings on an after-tax basis. Because we are in the tax position that we are, for GAAP reporting, we do not tax affect our North American earnings. So that special adjustment is simply to put a tax back. That will continue until we earned out of the allowance and so I would expect that certainly for the balance of 2005, we will be reporting this way and likely in the 2006. But it depends on how it goes.

So the way you reported earnings like you have this $0.05 what you call a special gain on your continuing operations. We're going to see that every quarter for several more?

It is the same adjustment that we had in 2004. What we've got is when there are no special costs, the special item becomes an add back because we are tax affecting rather than offsetting costs. So it is not a new affect. That has been there.

Right I understand. Second question, on the performance plastics were your earnings of sale first quarter to first quarter by $9 million. You said basically that the color business and engineered materials business was basically flat, or up slightly. That wasn't the cause of the fall-off your year. Was it primarily your vinyl compound in business? Was it your formulated business? Or was it Europe that contributed to the $9 million falloff in the earnings?

Saul, we don't split performance plastics in that. What we have said is that our vinyl compound business, as you would expect, is under margin pressure. It is an area where we have been working actively to get our margins back. You can extrapolate from that. And we've talked about the softening that we have seen in Europe. And so that would have an adverse effect on the international business. And so thinking of where the volume is down, and we do disclose the volume by the business segments, in particular where the margin pressure is on vinyl, I think you've got a good focus on where the issues are.

So When you think about going forward, to move the needle in a positive direction lets say-you've addressed as SG&As, so it is not cutting more costs. If you're going to have flat volume for the rest of the year on a year-over-year basis, do you have to be able to move your prices higher by X amount to offset what is coming in the form of higher PVC input costs. What you have to do to get back to the margin levels that you want to get to?

You said it correctly. If our base costs are flat and you are saying that our volume is going to be flat, to get back to our margins we have to work the pricing, and we have to work the raw materials. There's nothing to say that in this environment that the raw materials are going to be going up. We have got to work pricing. We have said that. As Tom said, in the current environment, it is relatively tougher to succeed in price increases, but that does not mean we're not going out to do that. I would also not concede that will or not going to see volume increases. We expect to see them. That is one of the key deliverable for our company this year. It is the principal priority is to have organic growth year- over-year volume. So we're working diligently to get our earnings up. We expect to do that through improvement in margins, and improvement in volume.

I think I also do not want to discount the fact that we do have an integrated vinyl business, and where the margins are compressed on the compound inside, they have expanded, and the R and I businesses earning solid money and we've got $250 million invested in our back in businesses. We have a full expectation that at this time in the cycle where margin pressures on the downstream businesses, the upstream businesses ought to be, and they are delivering strong earnings and cash for us. PolyOne has that balance that is important, particularly in the vinyl business.

Thank you.

Your next question comes from Dan Leonard with First Analysis.

I want to make it crystal clear. The number one priority, for 3 to 5% volume growth, that is sequential and I year-over-year?

That is year-over-year.

Annual to annual.

That is the volume growth you expect in 2005 versus 2004?

That is the objective, yes.

Given that you're volume growth was down 1% in the first quarter, and you're looking for flatage volume in the second quarter, are there some large orders out there for bids but you could win and give you that?

Having not achieved growth in the first quarter, that objective for the year is going to be tough. We have not given up on it. But it is--we were not expecting a flat economy when we made that goal for ourselves. We haven't thrown in the towel on it, but we are behind the curve on it. That's why the emphasis that we placed on our business is that we have a rather rigorous process of collecting growth opportunities, ranking them, evaluating them, making sure we have the right resources on the ones we can capture fastest. When you're in a slow-growth environment, you have to do better on actually delivering on the opportunities that are there. To an extent that we would have expected some momentum, we were not expecting a lot of momentum out of the economy in 2005, but it does at this point look like we're probably going to have less than we expected.

Hey Tom, when you talk about the spreads getting back to mid 2004 levels, are you speaking on the gross margin line? Or are you talking about the operating margin line, which would include your equity investments?

Yea we actually, oh, no. It is definitely before the equity investments. We ought to look at it on the line that you don't see, which is the spread between selling prices of raw material costs. Even at the gross margin line, it is volume affected, and that's not what we're talking about. We're talking about the delta per pound or per kilo between selling price and raw material price. That is what we focus on. That is what we call it spread. It is a different thing than what the counting comes out to be.

So I shouldn'tt read that as a 15% to 16% gross margin target at the back half of the year?

No.

Thank you for clarifying. My final question, are you guys affected at all from the chlorine outage at Georgia Gulf? I don't know if your equity investments buy any chlorine from them.

No. No impact at all.

Ok great, thank you very much.

Thank you Dan, other than maybe positive to the extent the market is tighter.

Your next question comes from Alex Goldman from Morgan Stanley.

Can you quantify the price change on a year-over-year basis?

Probably not.

What I am trying to do--

When you look at our GAAP analysis, if you will, and you're looking at first quarter versus this year versus last year, and you've got the $15 million, $16 million improvement, which would include the discontinued operations. Pricing-- we have volume being adverse about $10 million. That is going to be-- pricing is going to be better, but I think you're real question is, where is the margin? And if the margin is down about 10 million volume is down. The benefits have come from our distribution business.

Okay.

Let me add to that-We watch that rigorously at the business unit level. We don't do pricing at the corporate level. It does not matter what our overall pricing is. Sometimes we do not have-- we have that information in more detail than we have it in total. It varies a lot by business unit. In our distribution business has pricing today that is probably 20% higher or more than what it did a year ago. The others are probably a bit less in terms percentage increase. It is a lot.

Let me ask it differently. You mentioned in the press release that excluding the Melos discontinuation, or divestiture, sales were up 8% and volumes were down 1%. That leaves price mix add up 9% year-over-year. So if one could make an argument that effect was probably 2% or so positive, would it be fair to be estimate that prices were up about 7% year-over-year?

That makes sense.

That is a great way to look at it.

Can you give more color on the volume growth in the North American Color business? Basically what drove that? Are we talking about new products?

Capturing new customers and to some extent new products.

Do you expect continued growth, or was it one time event of some sort?

We captured some particular business that did create a boost in the latter part, or middle or latter part of last year. We're expecting continued gains. Perhaps not at that rate. I am not sure that we can predict that, that we're going to be growing at nearly double digit year after year. We're definitely expecting continued growth there.

Tom is referring to a new piece of business. We talked about one in particular was one that started in the latter part of the third quarter. He saw the effect in the fourth quarter. You're seeing the effect year- over-year herein the first quarter.

Thank you very much.

You have a follow-up question from Dan Leonard of First Analysis.

Dave, I think you mentioned this but I missed it. What was the amount of accounts receivable at the end of the quarter?

$59 Million.

Is that still off balance sheet or you not pumping met in your net number?

For covenant test, it lumped into the number, but for our balance sheet it is netted against our receivables. If you look at our balance sheet, looks like our receivables did not go up at all. They went up about $59 million because we have noted that, the receivable facility, against it.

Thank you.

Your next question comes from Bill Hoffman from UBS.

Good morning. I have two questions. One, I was wondering if you could talk a little bit more about what you're seeing from the auto side and whether market conditions there that are causing incremental competitive practices, raising competitive practices that might cause a margin squeeze. I was wondering if you could give us some guidance on the distribution that is expected out of the JVs going forward.

I will take on the auto world to the extent we can. That is something we do not do as a company as tracked by market. We have somewhat qualitative perspectives from a number of businesses. We do have a little bit more automotive exposure. It is certainly the North American home based Company-- GM and Ford-- that have really attract back in their demand in the first quarter and going into the second quarter. The non-American based companies are doing much better. It only represent if you exclude our discontinued operations, automotive represents about an 8% of our business. We're seeing that it obviously affects everything we do. It does affect our color business, our distribution business, and our polymer coatings business.

Any sense on whether competitive conditions are tougher?

Relative to being able to sell it to those markets?

Yes.

I think it is always tough. That is why worry about our exposure being low, particularly with the North American based companies. They've been losing market share over the last few years. We have said that. That has always been a challenge for us. As much as we try to get our business and non North American based companies, it is not an area where we think long term it is important for us to be very heavily in.

What I would add, we would like to build quantify some of these trends. Volume is not growing as rapidly. We know that means there's going to be more competitive activity. It is just a given. It just happens. It is impossible to try to say-- to turn that into some numbers for you.

There is no doubt that the case. That is one of the reasons as we look at the need for continuing to improve our margins, we now have a bit more balance between moving the top line and going after raw material costs, not that we were not ever doing that. The other thing is true is that when demand is very strong, the raw materials have strength. Now that things are level a little bit, it may be harder pushing on the price line, so you gotta go back on the cost line. This is not a big pendulum moving from one side to the other. It is kind of reaction to a different tone in the marketplace.

Thank you. Yeah, The other question was just some guidance on distributions coming out of the JVs given the strong cash flows down there.

We have expectation last year I think the aggregate distribution from our equity investments was about $50 million. Our expectation would be that we would see more this year. We have talked about a similar increase in R&I earnings improvement in '05 that we saw in '04. That would take equity earnings up to around $80 million if we just add 30 to what we did last year. I remember that in Oxy Vinyls, a portion of the 25% off the top is taken to reduce debt, and so the distributions will not equal or some unlikely they will equal the equity pick up. Thinking that we would be $50 plus million over we were year ago, it should not be unreasonable for the year provided that's the strength in that R&I sector continues, as we do anticipate. It has to be booked.

Do you have any major turnarounds in the next quarter that would slow that down?

There are maintenance turnarounds, but no, nothing significant.

Thanks

Your next question comes from Kelly Romadendron (ph) State Street Global Advisors.

Quick question here given the slowdown in your business, where you see debt levels end year somewhere they are today?

We have talked about the need to continue to improve our financial position. We have stated that we have a goal of taking our leverage ratio, our debt to EBIDTA from slightly under four at the end of 2004, to slightly under three. This year we have talked about the fact that through a combination of cash from operations as well as proceeds from the investments that we would expect to be able to take our debt down in the neighborhood of $100 million. Obviously, all depended upon a lot of factors. But those of the primary target, but the real management objective is on the financial profile and bringing out leverage ratio down under three by the end of the year.

and right now that still as you look forward, that still that has not changed?

No we have not changed our objective at all.

Thank you.

York next question is a follow question from Saul Ludwig.

If you have the 3% to 5% volume growth sequentially, what would that imply second quarter to second quarter change?

Mostly flat.

Mostly flat

I believe. I'm sorry, for second quarter, maybe I did not hear the question. I answered second quarter to second quarter.

Right.

Was at the question?

Right. That of Europe 5%, you'd be flat with year ago. That if you are up 5%. What would be compared to a year?

We're doing a quick calculation. That might be down as much as 3%. I am just wondering. If you'd be in the 3% range.

So this softness, do you think it is the interesting or do you think its certain end markets that you are serving that is off a little bit?

I think Saul is said automotive we know is softer. That is having an adverse affect. But I think you have to think that there's inventory going. The dynamics of the first half of last year versus the dynamics of the first half of this year and the demand patterns that we are seeing would indicate that. We're also seeing market weakening in Europe. So that is contributing to that overall volume declined. I still would say to the level of business activity is still pretty strong, particularly relative to where we were a couple of years ago. It has a pretty good level.

I think the question on where energy costs are growing and the question where commodity prices are going, it would be anything but prudent for our customers. We're looking at it too. To make sure that our inventories are as tight as they possibly can be. It is clear as we look across the business that because we sell in so many markets and the slowing is there everywhere we look other than in China, this is not a discrete market issue.

Everybody talks more about automotive. We've talked about it. That is what it is. It is hard to look as you all know all of you on the call know that we are involved a lot in products that end up in building materials of one kind or another. That consumption area is probably flat, some reports saying even off some. As usual, we are a reflection of the broader economy. The fact that industrial production is leveling off is once again consistent with what we're seeing. That tends to be or continues to be kind of a benchmark for us.

Thank you.

[Operator instructions]

If you have a question Bob Amenta (ph) with JP Morgan.

Hi guys, couple of quick questions on the two JVs, you give some good information here in the quarter about operating income and we can back into LTM numbers and stuff do you have the total debt or more importantly I guess the net debt kind of balances at those two entities?

I do not believe we disclosed that, Bob, but I believe - I don't have it I am thinking now that we filed the K, as one of our exhibits are the full balance sheets for both Sunbelt and Oxy Vinyls. We know that we have the $79 million guarantee of Sunbelt. So the Sunbelt would have 2x that would have another half of that. On Oxy Vinyls, we would have it in a statement. I do not believe that we have split that out, but I believe it is in the K. attachment. I don't have what there any a couple hundred million dollars, but I did not have what is exactly.

Okay I will look it so 79 million you guarantee, times two, that is all the debt.

Right. Remember that Sunbelt was finance exclusively with the private placement.

Analyst: Okay, that's all had thanks.

At this time there are no further questions.

Thank you all for calling. Again, we are again we are expecting to see further improvement in the second quarter. Our goals are very clear on capturing new business and the opportunities we have, and including by the way one thing we did not mention is that we have now we are moving into our new plant in South China, which we have talked a lot about in the past, that plan again we're moving into it. We expect to be starting --we will be starting production there during the second quarter.

That will be providing incremental small benefit in the second quarter but is indicative of the growth potential and the agenda we have got. Second priority is making sure we make keep working away on the margin front. And then finally to make sure that our working capital cash flow is absolutely where it needs to be at midyear. So we appreciate your participation and Dennis and Dave will be available to you. Thank you very much everyone

This concludes today's PolyOne first quarter earnings conference call. You may now disconnect.