Avient Corp (AVNT) 2005 Q4 法說會逐字稿

Good morning, my name is [Taiwanda], and I will be your conference facilitator. At this time, I would like to welcome everyone to the PolyOne fourth quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [OPERATOR INSTRUCTIONS] Thank you, Mr. Cocco, you may begin your conference.

Thank you very much, [Taiwanda]. Good morning, everybody, and thank you very much for joining us today. In today's call, Bill Patient will be making some opening remarks, followed by David Wilson. I should point out that Dave is not physically with us -- I mean Bill is not physically with us, but he'll be joining us here. We'll open up the lines for questions a little bit later.

Because we would like to make, provide as much opportunity as practical for the investment community this morning, we ask that if you represent the media and have a question, we would like to take your calls at the conclusion of this call, and I can be reached at my office phone number at 444-930-1538. Of course that also applies to the investment community. If we don't have -- happen to get to your question this morning, both Dave and I will be available shortly after the call.

Last night, we posted the earnings release within the investor section of the PolyOne website. Of course, all of our past financials are also there. If you have any special requests for past documents, feel free to give my assistant, Darlene Hampton, a call at 440-930-1522, and I am sure she'll be glad to help you. We're webcasting this call. A replay will be available in the IR section of our website for approximately two weeks. Just two notes, I want to talk about non-GAAP financial measurements and in discussion today, we will likely use GAAP, generally accepted accounting principles and non-GAAP financial measures. The non-GAAP measures that we will probably refer to is operating cash flow, operating income before specials, per share impact, special items and earnings per share before specials. The definition of, and list of special items are found in attachment 5 of the press release and attachment 6, we do the reconciliation from non-GAAP to GAAP financial measures.

In addition, we are likely going to make statements this morning, defined as forward-looking statements. These forward-looking statements are going to give you expectations, or forecast future events, but they are certainly not guarantees of future performance. They are based on our expectations and they involve a number of business risks and uncertainties, all which of could actually cause the -- our results to materially differ from those expressed or implied from the forward-looking statements. I recommend you look at the updated list of risk factors in today's press release. We do that quarterly to try to make sure that we make you aware of all the particular risks and keep it up to date.

Finally, we recognize you would probably like an update on the status of our Engineered Films unit. However, as has been the practice in the past, we're going to refrain from any additional comments on the status other than to repeat our December announcement that we will likely complete that transaction here in the first quarter. Now, I would like to turn the call over to Bill Patient. Bill?

Good morning, everyone. It's great to be with you this morning, especially after taking a look at the results that we got for the fourth quarter. Dave will talk more specifically about the fourth quarter financials, but first, I want to spend a few minutes outlining my view on how we did on some of our most critical priorities for the fourth quarter that we discussed with you at the end of the third quarter. And I am going to review these over-rising goals for the organization as we move ahead into 2006.

In the fourth quarter, our primary focus was on getting price increases in all of our businesses in order to match the cost increases that we were facing with raw material price increases. As I told you all, we ran a classy price cost push going into the quarter. And I believe our results demonstrated that we made good progress, especially the vinyl compounding and our distribution units improved their margins. As David, and I think we did a reasonably good job in all of our businesses, and as Dave will describe in his discussion on the outlook, we're going in to 2006 in a lot stronger position than we did as we headed into 2005.

Meantime in the fourth quarter, we focused on our working capital cost to maximize the amount of cash flow we create. And, of course, this has been a theme that we have been working on for almost two years now and it has been really spearheaded by Dave Wilson. Dave will provide some details, but I'm overall very pleased on how the organization performed.

We generated strong free cash flow and did it during a period when we had uncertainty in raw material supply and, of course, raw material costs were going up, while sales were stronger than we really anticipated and, of course, that's not a bad problem to have, but it does create a challenge when you're trying to manage your working capital strongly, and the good news is we continue to reduce our debt. Performance like this just meant we set our expectations even higher in 2006, and David will discuss that a bit with you.

As we move into 2006, our agenda continues to drive maximizing shareholder value. Our goals are unchanged from the last conference, but it might be useful to repeat them here. Let's start with the goal to restore our spreads across our product platforms. Our earnings from our operating businesses are still not at acceptable levels. Restoring and meeting our spreads must be a primary focus of all of our businesses and every general manager in the Company knows that, and nowhere is this more important, of course, in our vinyl unit, which remains by far the largest part of PolyOne's polymer business.

Another goal is the goal with longterm implications is to accelerate our growth and enhance our presence in Asia. We have been spending an awful lot of time in the last quarter talking about opportunities in Asia. The only other plant in Shenzhen, China was a milestone, and we are installing the manufacturing equipment there to expand our product offering. A good example is the [inks] unit started up production in the fourth quarter to meet this new market opportunity. We must capture business now in this booming region or we're going to lose the opportunity. Of course, this is just not in China.

It's all across Asia, and we're looking at, you know, areas like Korea, and also, while we don't talk -- it doesn't fit into the Asian scheme, we're also looking at opportunities in eastern Europe. The third item we discussed is we want to accelerate our growth of North American color. Again, the key word is "accelerate." They are a market leader and we need to expand this business by gaining market share if we expect this unit to generate acceptable returns. We also have to continue to hone our operating costs. And I'm really encouraged by the enthusiasm and dedication in the management team in place, and I'm confident that they are going to deliver and we're also already seeing signs of that delivery.

The overriding goal is to increase the pace of the engineering materials fix. This core business must become a strong reliable earnings contributor soon. Through growth and a significant change to mix of higher-value added product. Our recent announcement to build a new compounding unit in one of our existing buildings in Avon Lake should help them and enable them to better meet the needs of the marketplace for smaller run sizes and more specialty products.

We expect that facility to be up and running by mid-year. With the addition of new sales and technical resources, this team has been gaining new customers with new product. And which is key to the turnaround we need for this unit. That summarizes our current priorities and goals.

On another topic which, I am sure that you are all interested in, I know that many of you would like me to address our search for a new CEO. There are a number of -- we have talked to a number of very talented and extremely qualified candidates, and we need -- and we're in final conversation with candidates and expect to announce our selection soon. Now, I will turn the call over to Dave and for a short review of the third quarter and talk about the -- I'm sorry, I'm a little bit behind, but we're going to talk about the fourth quarter and what we have in mind for the future. David?

Thank you, Bill. Thanks, everyone, for calling in and your interest in PolyOne this morning. As Bill mentioned at the beginning of the fourth quarter, we were facing unprecedented increases in raw material and energy prices, as well as raw material supply disruption due to the combined impact of hurricanes Katrina and Rita. We recovered from these hurricanes well, we remain safe and that was an extremely important objective for us remaining safe, and our affected plants came up quickly to their full credit. And this was true not only for our PolyOne facilities along the Gulf Coast, but also for SunBelt and OxyVinyl facilities as well.

As we entered the fourth quarter, we needed to maintain supply of products to our customers and recover our margins, as Bill stated. We did both. Price increases were implemented and overall, we strengthened our margin position such that we're entering 2006 in a better position than we entered 2005. I will mention, however, that despite the success that we have had, we still have more to do, and clearly for certain businesses, we're not yet at normalized margin levels and that will be a challenge for us as we enter, as we really move through the first and second quarters of 2006.

As we look at performance, we achieved in the fourth quarter $0.24 per share net income on sales of $607 million. The sales number is 11% better than a year ago, and compared to the fourth quarter of 2004, our earnings are substantially up because a year ago, we lost $0.15.

When we take a look at those earnings numbers on a before-specials basis and I would refer to you attachments 5 and 6 of our earnings release where we do provide reconciliations, our earnings in the fourth quarter were $0.15, that's up $0.12 from the $0.03 that we realized a year ago in the fourth quarter. I would say also that included in our fourth quarter performance was a $0.02 to $0.03 benefit associated with legal settlements and insurance recoveries for which we have received the majority of the cash, and we did that in the month of January. I should also note that our S&A in the fourth quarter, as you see it on the income statement, was 6.6%, and as we commented in earlier quarters our average this year of 7.3% to 7.4% of sales for S&A is more indicative of our cost structure, and as we have also included in our 2006 target for S&A to sales is to keep that number below 8%, and do that primarily through controlling our costs but leveraging that cost base by increasing our sales.

I also want to point out that in the attachment, one of the attachments in the back of our earnings release, attachment 7, where we talk about our segment earnings, I want to note that we did make an adjustment between the Performance Plastics and other segment where we subtracted almost $2.5 million out of Performance Plastics and added it back to other as a result of an adjustment to some international pensions. It had no affect on the total Company, but I think as you think of the performance of the Performance Plastics segment in the fourth quarter, you should add that number back and come up closer to a plus 6, rather than the 3.6 that we have reported there.

For the year, sales were $2.4 billion, up nearly $200 million, or 8% from a year ago. EPS was a record at $0.51, that compares to the $0.26 we reported in 2004. And on a before-specials basis, our earnings were $0.68 and that, too, clearly is a record for PolyOne, and that compares to the before-specials number in 2004 of $0.63 and when you exclude the Elastomer business so that you're look at more comparable year-to-year business portfolios, our earnings in '04 were $0.47. So, clearly, the fourth quarter performance propelled us to year-over-year earnings improvements, as well.

As we look at the improvement year-to-year, clearly, what we are seeing is earnings driven by strengthening of performance in our vinyl chain, especially Chlor-Alkali, and in particular, SunBelt, as well as lower S&A costs, and these benefits were partially offset by lower shipment volumes across most all of our business units with the exception of color.

Now, as we turn to cash flow, I want to make a point that our net cash provided by operating activities for the year was $61.6 million, which translated to an operating cash flow in excess of $30 million. In the fourth quarter, we continued to demonstrate improvements in managing our working capital investments, our internal receivables metric of day sales outstanding ended December under 50 days, and our inventory metric day sales and inventory ended the year just below 38 days.

Both of these are excellent results and, frankly, the fourth quarter on average was the best working capital management performance in our Company's history, across working capital and aggregate as well as receivables and inventories by themselves. And, really, the effectiveness of our business teams and our functional teams across the Company really is the reason that we have been able to achieve these results. It's been truly a team effort and a team accomplishment for which I am very proud.

In terms of liquidity and financial ratios, I would say that there are no issues. We don't have a Q with us, obviously, in the fourth quarter, so I will provide a little bit of the numbers here. In terms of available liquidity, we finished the year with undrawn capabilities of about $158 million. That is primarily associated with undrawn availability from our receivables facility and our EBITDA cushion, as it's defined in our financial ratio covenants, was roughly $80 million and so that was a substantial cushion in terms of us passing our financial ratios.

In terms of our debt coverage, we ended the year at 3.7 and that's down from about four times debt to EBITDA that we finished 2004. And so, as I say from a balance sheet perspective, we continue to make good progress and from a liquidity and covenant view, we continue to have no issues here.

If we turn quickly now to the outlook section. Our outlook does reflect our view that the momentum that we experienced in the fourth quarter is carrying over into 2006. We entered 2006 with strong volume and margin momentum and -- or stronger volume and margin momentum than we entered 2005, and this should certainly result in improved earnings and cash flow for the quarter, if certainly not for the year. Sequentially, we expect both Performance Plastics and Distribution to achieve high single-digit shipment volume growth and that will pace earnings improvements.

Our outlook, as you have read it in our release, points to our Resin and Intermediate segment earnings being generally flat with either the fourth quarter or first quarter of 2005, and that may prove to be a conservative viewpoint. We, I guess, would hope so. But as you know, it will depend upon the sustained, upon really sustained lower natural gas and ethylene costs, as well as successful implementation of an announced industry price increase for PVC resin.

We also listed a series of influencing factors on our 2006 cash flow, and we can discuss those in more detail during the Q&A section, if you would like. So really, to wrap it up, key themes in the fourth quarter, record earnings for the quarter and for the year, continued improvement in our asset productivity, and we have entered 2006 with strong momentum and, certainly, stronger momentum than we entered 2005 So with that, I will turn the mike over to Dennis and, again, thank you for your interest in PolyOne.

Thanks, Dave, and thanks, Bill. Bill, we just give a little note that as you answer questions this morning just speak up just a little bit louder, they're having a little challenge hearing you this morning. [Taiwanda], let's go ahead and take our first question.

Thank you. [OPERATOR INSTRUCTIONS] We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Michael Judd.

Congratulations on a great quarter.

Thanks, Mike, how are you doing this morning?

I'm doing well, thanks. As you announced some price increases in the first quarter, and it looks like volumes will be up, too. So things look good for the first quarter. Can you just describe, you know, how you were successful in the fourth quarter in terms of getting those prices up, I know it's taken awhile to get -- catch up with the the higher raw material prices, but you guys have a lot of success and one of the -- some of the things that you did differently in the fourth quarter versus, you know, previously?

That's a tough question to say what we did differently. You know, we had teams that were extremely motivated with the costs that were coming at us. We had no choice but to get our prices up and to be able to maintain and recover the margins. And so it was diligence, it was hard work, it was working with our customers and there was -- then there was an understanding across the industry, clearly, that the costs were up and remembering back to September-October time frame, when energy costs and derivative of raw materials were just starting to skyrocket, that was well-understood. And I think we also were seeing $3 at the, $3 per gallon at the service stations in terms of gasoline.

So, there was an understanding, really across, across the industry that costs were up and the prices had to go up to offset that, and our field teams went into, you know, went into the market and were able to achieve price increases. But, as I mentioned also, you know, we were able to recover the raw material cost increases, but we are still not at what I would refer, would view as normalized levels for some of our businesses, and so there is still, there is still margin that we need to recover for our earnings to be at levels that we would view as normal, or we'll call it more acceptable. So, there is still more work to do.

I think it's realistic to expect that, you know, the prices themselves, movements in prices themselves are going to be dependent upon changes in raw materials going forward here and if there is an expectation that raw material costs will, will start to moderate, our challenge will be to maintain our margins as that happens.

And, you know, clearly, we're working very closely with our customers. We do not want to lose share and we do not want our customers to lose share in their marketplaces, so we're working diligently with them. But we had, we had clear objectives that we had to achieve and the teams went out and did it.

All right. Could I add that I think that the most difficult discussion I think that any salesman ever has is with his customer is on price increasing.

And I think that we did an extraordinarily good job internally of preparing our people to go out and talk to our customers. I think our customers understand that, you know, we can't be a top-notch supplier to them if we're weak financially, and as David said, we're working with our customers to help them move their prices through the marketplace is also something that we try to do wherever we can. So, it was a intense effort that is continuing because we have not got our product margins to the point we wanted in all of our businesses. We have to keep up the effort.

Well, terrific. Great quarter. Thanks a lot.

Thanks, Mike.

Your next question comes from the line of Nancy Traub.

Good morning.

Morning, Nancy.

It looks to me after I put in all of the adjustments that the corporate other line swung about a little over 10 million year-to-year and also, the other income and I know, Dave tried to address some of this stuff, but maybe you could go over that again for me and see what we'll be having in '06 compared to '05?

Okay, the -- yes, in the fourth quarter -- .

I was talking for the full-year.

Okay, for the full-year, you add back the adjustment that we talked about in the fourth quarter, but in the corporate and other is where, you know, insurance recoveries and other, other types of non-specifics of business adjustments occur and --

How big was that?

It's been about, it -- I would say it's probably around $9 million for the year and compared to a year ago that's up, oh, $0.02 to $0.03, maybe. A year ago, I'm told, it was 2, or so, plus some other adjustments, which make it 4, so there is a $4 million to $5 million adjustment, or difference in corporate other compared, comparing '05 to '04. You know in 2006, I know that we'll get some, I know that we'll see some benefits there. It's the type of adjustments that occur with some frequency, but you just don't know what they are until they're realized, Nancy.

Uh'mm.

And so I think it would be prudent to expect that in '06, we would see that number go up compared to '05 by, you know, $5 million to $10 million and that just, you know, is in addition to the cost structure that we need to overcome in our margins. But at this point in time, that may happen and we may do better than that.

But I think in terms of thinking about 2006, you know, there is a $5 million to $10 million adjustment there. We have also talked about, you know, compensation costs, differences between this year and where we would be targeting, and it's for these reasons that we talk about our S&A as a percent of sales being targeted closer to 8% next year and keeping it under 8% than being able to sustain it at the 7.2% or 7.3% that we reported this year.

Okay, and the other income, the biggest swing there was -- ?

The other income in '04, we had debt repurchases and we had premiums on that debt. And that was -- I think, Nancy, that's the single largest item in there.

So we should take the '05 number and kind of go -- run with that?

In terms of other income, yes, I think so. I think so. You know, there, too, you know, foreign exchange flows through and the impacts there, but who for, you know, who can forecast that very well? I mean our challenge is to take our cost base as it is in 2005 and improve our earnings, and if the costs go up, we have to get it in the margin and volume, and to the extent that, you know, we do see some increases in these lines, we have got to show increases on the earnings side on other lines.

Okay. A question on your raw materials. You know, they have, they did go up in 2005. Do you have a number as to how much more you had to pay for raw materials?

We have a GAAP analysis that shows our raw materials having gone up nearly $300 million. And as we think about increases in natural gas, ethylene, you know, that number feels right. So, you know, somewhere between 250 and 300.

Okay. And how about manpower expense?

That, in aggregate, I don't know, but I'm going to guess, you know, the salary increases in general were 3%, or so, but I'm going to -- I would think that our manpower cost is down $10 million to $15 million year-over-year, and in some of the that is in incentive compensation and continued improvements in our benefit cost structures and pension costs getting, realizing some of the benefit from the prepayment that we made in 2004.

Okay. Thank you.

Uh-huh.

You're welcome, Nancy.

Your next question comes from the line of Saul Ludwig.

Good morning. Very good quarter there.

Thank you, Saul.

What was the pre-tax amount of those settlements that were sort of a credit in the other segment in the quarter? This was the insurance recoveries and legal settlements?

The pre-tax number was -- well, depending on how you slice it, the pre-tax number was 8 or 9, and I would say that, you know, on a non, kind of a bluebird basis, that number is probably closer to 5.

I don't understand what you're --

You get some all the time and we had been accruing some in the fourth quarter for some of those settlements and so when we actually got the settlement per se, that number is in the 8 or 9 level. The net impact on the quarter is less than that.

So in the quarter, it included, what, 5 million?

Yes. As I mentioned in my preamble, $0.02 to $0.03.

Okay.

For sure.

And we're going to get another 4 million in the first quarter?

I'm not sure where you got the 4 million, Saul?

You said you got 9 million in January, and if you already booked 5 million, it seems like there is some left over.

Oh, Oh. That was cash. My reference in what we received in January was cash, from those settlements.

And you had -- you had previously accrued some estimated settlements in prior quarters?

Yes. Yes. Yes.

Okay. So and that 5 million all went into this other segment?

Yes.

Okay. And then you said that other segment also was helped by 2.5 million related to some pension, something or another, that you took away from Performance Plastics and credited to other.

That's correct, Saul.

So that says says other got helped by $7.5 million, which means that absent that, the other segment would have had a loss of $7.5 million?

That's how the numbers work, yes.

And why would that have been so big compared with last year's 3.6 million, or any other quarter that you had in that other category? Why would that expense have been so big?

Because we're not also reflecting some of the positives that adjust there. Saul, in previous years, we have seen true-up for accruals at the end of the year flow through there and we had some of that this year. It's tough to call those adjustments out, Saul, because they happen every year, and I don't, you know, you look at them as just the cost of doing business and so, you know, the -- and that's really why.

Why, why we're talking about, you know, when you're thinking of '06, you know, do the add back that we discussed with Nancy, and I think that's a fair indication. In '06, there will be things positive and negative that will impact us. We have to earn through them.

Okay. Next question, how much was the contribution to you for OxyVinyls and SunBelt?

In terms of earnings or cash?

Earnings.

That's right, we didn't do a Q so you don't have that. OxyVinyls was a little under $15 million, Saul, and that's --

Like 14 point -- .

A little less than 3x what it was in the third quarter, so you know, one of the really good stories in terms of the, you know, the turnaround that we saw in the fourth quarter, and I mentioned it, was the strengthening of the chlorovinyls, but as we talked at the end of the third quarter, the margins in our PVC resin business at OxyVinyls came under extreme pressure and in the fourth quarter, we saw a good recovery.

In terms of SunBelt, the earnings were around $12 million, and that is generally comparable with where we were in the third quarter. It may have been up just a little bit. I'm not looking at the third quarter number, but, you know, as we have talked, SunBelt -- .

It's 9 million in the third quarter.

Okay, SunBelt has been running around that 10 million a quarter range and our expectation is for that to continue through '06, as we've talked.

And so if you had 15 in OxyVinyl and 12 in SunBelt, that's 27. Usually there is a subtraction to get to your seg -- Is there any -- some other source of income in the Resin or Intermediate segment?

There was a, there was a very -- no. No. The adjustment that we usually have -- .

Is a negative.

-- was -- yes, it's usually a negative. In the fourth quarter it was, by and large, a push and that had to do with some other benefits that we got in terms of historical insurance settlements that we would have applied against our R&I segment, and these would be historical associated with environmental remediation-type settlements.

Okay. Then you said, Dave, that we would expect in the first quarter the resident intermediate section to be comparable with the fourth quarter of '05 and the first quarter of '05. The first quarter of '05, you only had 22 million. You had 28 million in the fourth quarter, which number were you referring it to be comparable to?

I was looking around 25, Saul, to be honest with you. That's about the middle of those two.

Right.

In the Resin and Intermediates, as I think we all know, if, you just can't call it within a couple million dollars as much as we would like to. You know, we have seen what ethylene's done in January. Will that sustain in February and March? Will the PVC resin increase? How much will take hold and how fast in February? You know, all of those things are, are millions of dollars to us, you know, natural gas in January came down to under 8 and went up to almost 10, and now it's back in the mid-8 range. I was trying to find in the outlook an indicative level of performance, you know, I don't see factors at this point where you would have a breakout either up or down.

Right. Right.

And then my final question, you know, you have got this roughly $2 billion Performance Plastic segment where you made $60 million, or a 3% margin. What, what are you sort of targeting for in '06 in terms of the profit contribution from this $2 billion business? Should it move up to a 5% margin or maybe, Bill, you have comments on that, as well.

Well, let me, let me say, Saul, that we don't provide that level of outlook in guidance. I think it would imprudent for us to say that, but we also --

Not to the third decimal, you know.

Yes, what I would also say is 3% is not in any way satisfactory, and as we've talked, we recognized that the quality of our earnings, which is our earnings base excluding our R&I segment, has got to go into the 70% to 80% of the total Company range. Now, I don't expect to do that in one step in 2006, but we do expect to make good headway.

And, you know, this year that quality of earnings metric was well under 50% as we go forward. My hope would be that we would be able to bring that number into the 55%, 60% range in 2006, as a good step forward towards that ultimate target, and we place that ultimate target on more of a normalized R&I earnings level. So that, you know, we don't get the benefit when R&I earnings go way down, you know. Our quality of earnings better be 95% or so.

You don't back into it.

I, I would just like the comment that, you know, looking at this thing from 30,000 feet is, you know, can be useful but it also, I think, belies the fact that the way we're running the business, Saul, and that is this is general manager by general manager and each one of these guys has got very specific plans, very specific focus, and they know that in some cases, as we have discussed in the past, with this, with this audience, some of those performances have been clearly unacceptable and we have targets that, while they're not going for 2006, while they're not going to bring this to the level that we want to be at, ultimately, they're going to bring us a long way to where we want to be.

And as I have told each one of the general managers when they made their presentations to the Board about 2006, they weren't making presentations, they were making commitments. And that's where we are right now and I think each one of the general managers is on focus and moving their businesses in the right direction. And we're going to -- we expect to have a good 2006.

Thank you very much.

All right.

Your next question comes from the line of Robert Ottenstein.

Hey, guys.

Morning, Robert.

Good morning, nice quarter. Just want to ask you, start off with sort of a philosophical question, maybe a couple of sort of philosophical, theoretical questions in terms of running the business. You made in the introductory comments a statement about not wanting to lose market share. Why is that so important? You're both mostly going batch manufacturing and when you have gross margins as low as you have, the -- kind of the price volume trade off, you know, tends to favor price, in terms of driving the bottom line. So maybe you can kind of talk about, you know, just philosophically how you look at that volume/price trade off, why market share is so important when your margins are still very depressed?

Well, clearly, clearly we need to get our margins up and that was job one in the fourth quarter, Robert, and, and my comment in terms of losing share is that we're not going to -- we, we need, you know, we're in business to help our customers succeed and it's crucial for us to maintain our customer base, and we will do that. And so we're not going to take an attitude into the marketplace to just jam our prices through.

We're going to do it in a way that protects our margin structure, but we're also protecting the viability of our customers. And so when I say we're not going to lose margin, or market share, it's in that light that we need to work with our customers so that we're both successful so that, you know, as we go forward, we both grow our earnings and our businesses. So, it's, it's a fine line and we've got to walk it, but the successful companies will do that. That's what we're doing.

That's all well and good, but your margins are still well below where they should be.

Let me just comment. I think that some smart guy in Harvard said, you know, the Company's job is to create and keep customers and that's really what we're trying to do every day. But, at the same time, you're absolutely right if you're out there in the marketplace and you need to get your margins up, if you're afraid to walk away from some business, you're probably never going to be successful. So we are always looking at our business portfolio.

We're always looking at our, you know, our margins and we're, and we have to get those margins to where they're, as you say, they're acceptable or we're going to be a weak Company trying to serve our industry. And that, that is never going work. So, you know, we agree with you.

I mean, you know, where, for example, we have talked about in our EM business that we're changing our mix. And that probably means that ultimately, there will be some products we're not going to continue to manufacture. So, all of these things are on the table constantly within the business.

And just one further question. What -- now that it looks like, you know, now that you're generating some nice cash flow and earnings, can you give us any sense of whether you're considering bringing back a dividend and what would be the triggers to give you the confidence to do that?

Well, I think that ultimately, we would like to bring the dividend back and it's, you know, it has not been a, a main topic with our Board because of where our performance was as we continue to improve. It will become some. I think, Robert, there aren't any specific triggers that we would be looking at. I think they're, you know, would come from management for a Board action based upon where we are, where our outlook is, but philosophically, Bill, please do jump in, but philosophically, we would like to reinstate our dividend. I would expect that when we reinstate it it would be less than the $0.25 per year that it was when we had one before, but as we see ourselves, we see ourselves as a dividend-paying company and, you know, as our performance improves, that becomes sooner to reality.

Again, and -- any triggers? What you're driving towards to give you the confidence to bring it back?

I, you know, you can't quantify a specific trigger, Robert. It's going to be qualitative in terms of the level of earnings and the sustainability. One thing we need to do, and we've talked about it a little bit, is get the operating businesses sustaining on a positive trajectory of earnings growth.

Because that's where the heart of the earnings have got to be for the Company, and, you know, we've talked, and you brought it up. We're not seeing that just yet. We're seeing some improvement, but we need to see a greater pick up than what we have now.

But, we do expect to make good progress in '06 and, as you say, as the earnings improve, as the balance sheet strengthens, you know, the dividend becomes closer to reality. It has to.

I think, Robert, the key thing here is, as David has said, we've not only been focusing on the P&L, although that's what we talk on these earnings calls, primarily, about, we have been really focusing on the balance sheet, and you know, talking about our working capital control and all the things we're working on has been ex-- has gotten a lot of focus. You know, my goal is to maybe look, maybe standing where we are today, is I want to see us as a Company have a investment-grade balance sheet, and because we need to get there so that we have got the flexibility to grow this business the way we want to.

To make acquisitions when we want to, to be able to move this business forward the way we want to, and so that's where we're driving and I think we're going to get there, and when we move to a point where we can afford a dividend, I think as David said we'll be, you know, when we get that balance sheet in the kind of shape that will allow us to do that and still do all of the things we want to do to grow our business.

It sounds more like '07,'08 time horizon than this year. Is that fair?

Yes, that's fair, Robert. I, you know, I don't see it in '06, but I'll be optimistic and let's hope.

Okay, thanks a lot, guys.

Your next question comes from the line of Rosemarie Morbelli.

Good morning, all.

Good morning.

And congratulations on the very good quarter.

Thank you.

It sounds, just following up on Robert's question, it sounds as though it's not even an '07 topic, that dividend. We may have to wait until '08 after we see where the Resin business, the joint venture business falls off a cliff in '07.

I'll go back and it's dangerous to speculate on any sort of year-to-year look at it. We've said I'm hopeful as soon as I can, and I also want to emphasize the quality of earnings and we do know that R&I earnings cycle up as they have, and they will cycle down and, you know, we need to have our operating businesses strong enough to offset that downdraft when that happens. Now, there will be some natural benefit in our downstream vinyl businesses as OxyVinyls' earnings cycle down.

The spreads on our compound business some should cycle up, naturally, and so there should be not a one-to-one offset, but certainly, we wouldn't lose 100%, but really, you know, it does go back. How much progress can we make in improving the earnings of our core businesses, you know.

This year it was 3% as it was mentioned, return on sales for our core businesses. We need that to get up, you know. We've talked about the fact that 8% to 10% are not unrealistic goals for those businesses. We're a long way from it on certain, and we need to see that improvement. As that happens, you know, the finance, the financial capabilities of the Company, obviously, just expand.

And staying for a second on the cycle, I mean, in the past those joint venture of the cycle has been pretty dramatic. Do you see that there has been changes in terms of capacity, additions and so on, so the next cycle down won't be as dramatic as in the past, or is the industry operating still in the same fashion?

I think we're still operating in the same fashion. I think the fact that we didn't see as much capacity come on in the 2001 through-'04-'05, through last year, frankly, has enabled the strength of the cycle to be what it has been and stay stronger a bit longer than it typically does. But, I think, when the market starts to head down it will, it will show the same type of decline that it has in the past, you know. I wish it were not so, but I don't know of any reason why that wouldn't be the case, you know.

Having citizen said that, we're looking at '06 to be a year where Chlor-Alkali should stay roughly equivalent with the performance that we saw in 2005. We don't see a decline there. We had talked earlier about potential decline on the PVC margin side driving OV down a little bit.

you know, that's going to be dependent upon what happens with energy costs and ethylene costs and our ability to recover margins, clearly, but here, too, I think that, you know, the change would not be significant either up or down and so all told, Resin Intermediates for '06 is going to be, is going to continue to be a very solid contributor of cash and earnings for the Company. And you would think that with the, the increases that had been announced for PVC Resin North America, starting to come on stream in 2007, you would expect to see the cycle start to moderate and earnings start to come down, starting in '07 or so.

Okay. And you talked about strong volume in the first quarter of '04. And I guess companywide your volume was flat and before I forget, if you could give us the volume price mix currency, you know, split to get to your 10% and 11% top line growth, that would be helpful, so back to the initial question, volume was set actually based on what I think. When you see [INAUDIBLE] in the first quarter, is that based sequentially, is that based versus '04 and why -- versus '05, I mean, and why will it be strong?

What we're referring to in the write-up was primarily sequential strength in the high single digits, 8 to 10, basically 8% to 10% is our expectation, and that's a little stronger pick up first quarter versus fourth quarter than you traditionally see.

But I think it really refers back to the expectations that we had in 2005 and the disappointment that we saw in the second quarter last year, the fact that momentum on the top line was just starting to build when the hurricanes hit and that slowed everything down, and then as we look at the fourth quarter, which is typically down, and for us, sequentially, it was down as well, but what we were able to see in looking at the different product lines and business units and segments was, you know, continued strength and strengthening as we move through the quarter so that, you know, as what we saw as the November-December when typically things start to decline, you know, we didn't see the level of decline that you would expect, there were a fewer business days because there were more holidays, but the business activity per day stayed stronger than it typically does.

So that's really the basis. And as we look at, you know, what we have seen in January and what we're starting to see in February, you know, we're confident that we are seeing a good pick up and it's logical.

The fact that the building construction recovery that is required along the Gulf Coast, you know, is going to require a lot of the products that we sell.

Building construction is our largest market segment that we participate in and so we will -- and expect to see the benefit from those construction projects and we believe that we saw the beginning of that in the fourth quarter, particularly in our Distribution business, which is a little broader, and then in our Vinyl business, we would expect to see that start picking up in the first quarter as, you know, as you phase in when products would come in to a recovery project. And so that's the basis, Rosemarie.

I would add one point. As we look at on a monthly basis October through December, you know, look at it versus what we normally see seasonally, obviously, business was slower in December. The momentum was business was certainly different in December than in past years and we, we averaged, obviously, have moved into January already, and we're seeing that page for the most part maintaining. That leaves us to the optimism we have in the growth here in the first quarter.

All right, and I think one other thing is, I want to make sure that this isn't, this is not all serendipity, or just what happens out in the economy. We're focusing very, very strongly on growing our Color business. We're tackling now customers and new products in our EM business, we're working like crazy to expand in Asia and eastern Europe, and we're doing some things and, of course, I must admit on an economic basis, Western Europe is getting better, but we're also putting new products into the marketplace in Western Europe.

So, I don't think that while we can talk about the economy which, is important to us, obviously, it's important to any business, I would like to think that we're also growing our business on purpose, and that's what we're doing and, again, every one one of our business managers in this Company has got very specific goals that they're being measured against to make those things happen.

All right. That sounds very good and if I may, one last question. You are keeping the Specialty Resins business, how much did they contribute to your earnings in the fourth quarter and during 2005, if you had been back and since you are keeping them, do you have any plans to make changes, what and how major will they be?

First of all, Rosemarie, we don't provide product line operating income information, so I really can't help you there. But it was, obviously, it was a, it was a, as you can tell, the change from discontinued operations since we reclassified it, there was a big swing from a positive contribution to now a negative contribution last year. Obviously, all that was Specialty Resin. So Specialty Resins was, from an operating income, was a very positive contributor.

So we assume that they added 3.5 million to the fourth quarter. If I take Q3, 4.8 million from discontinued operation to only 1.3 in Q4 or the seasonality is half of it.

You can't make an assumption on the fourth quarter. What can you do is gauge total year from that adjustment, right?

I would look at the full year.

Okay.

But in terms of making changes, you know, structurally within the business, we have been operating it as, as a unit. It was -- and so we don't really anticipate significant change organizationally if that's what you were referring to. Clearly, what we're doing is leveraging the strength of PolyOne into the marketplace for it. So the challenge for the business is to continue to demonstrate the performance improvement that it demonstrated in 2005.

Right.

And continue to grow the business, continue to take advantage of its, what we believe to be cost leadership, as well as market leadership in the business, or in the industry. And as we say, continue to grow the profitability, which, you know, as I think everyone knows, showed a marked improvement in 2005 compared to where it had been traveling, really between 2001 and 2004.

Right.

Thank you, and good luck.

Thank you, Rosemarie. We'll talk take one more question, we are about six to seven minutes past the hour. We'll take one last question here, and I apologize for this. Oops. Go ahead.

Yes, sir, your final question comes from the line of Andrew O'Connor.

Morning, Andy.

Morning, gentlemen, congratulations on the quarter.

Thank you.

Dave, I wanted to know if there is a specific debt reduction goal that PolyOne is articulating or targeting for '06 at this time?

For 2006 --

Yes.

We're targeting to get our leverage ratio down under 3. We have to do that in '06. So that implies the level of performance improvement, as well as debt reduction. You know, we mentioned that our cash flow is, principal reuse for our cash flow is going to be debt reduction, and I will be disappointed if, including, when you include the proceeds from our, from our divestment of the films business that we expect, you know, to happen, that we are 2.5 to 3x in aggregate. More cash flow from operations than we had this year and the majority of that certainly would go to debt. What we want to do is be prepared to, you know, make an intelligent financial decision when the high-yield bond is callable in May of 2007.

Okay, thanks for that and then you mentioned the high-yield bonds which, I think are due in 2010?

Right, yes, they are.

Can you remind me what other debt maturities are there in '06 and '07, then?

In '06, there is a million-dollar stub from medium-term note, in '07, there is $20 million of medium-tomorrow notes, '08, '09, $20 million a piece and then you've got the $300 million high-yield bond in 2010. There is a couple traunches more in '10 and '11 for the hot- and medium-term notes. There is 200 in 2012, that would be the '02s that we went out with, or the 2002 issuance, and then there is $50 million in 2015. So, really as far as the maturity schedule goes between now and 2010, it's very light.

And, you know, that's, that's my plan. We worked last year to take down debt. We'd work this year to take down debt.

We have also last year, I'll remind everybody, made the voluntary pension contribution, which negated our having to contribute to the North American qualified plans in '05 and in '06, and brought us a long way towards funding so that we reduced those short-term maturities, if you will, as well. And so, you know, we have -- we have worked diligently to reduce the exposure to debt retirements or, equivalent retirements over the near-term.

Thanks for that and then, Dave, I thought I heard you say the leverage ratio down to three times, does that include the proceeds from the sale of Engineered Films?

In terms of a debt reduction, yes. Yes. Yes, we would expect that at the end of the year when you, when you add up the debt, the funded debt, whatever we have drawn on a receivable facility, which, hopefully, is negligible, plus the SunBelt guarantee, that number would be less than 3x, what our adjusted EBITDA would be.

Got it. Thanks very much. Good luck, guys.

Thank you.

Thank you, Andy. For the rest of those of you in the queue, I apologize, but I think it's time to -- I know a number of the participants have already left the call. I want to thank you for joining us this morning, and as I said earlier, myself and Dave will be available for the balance of today to answer any follow-up questions you may have. Thank you. Everyone have a great day.

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