Avient Corp (AVNT) 2006 Q1 法說會逐字稿

Good morning, my name is Zendra and I will be your conference operator today. At this time I would like to welcome everyone to the PolyOne earnings conference call. [OPERATOR INSTRUCTIONS] Thank you.

Mr. Cocco, you may begin your conference.

Thank you, Zendra and good morning to everybody. Thank you for joining us today. On today's call we have Steven Newlin, our new CEO, who will be making some opening comments. He'll be followed by David Wilson, our CFO, who'll also be making comments about the past quarter. They're going to open up the session this morning for questions. Because we'd like to provide as much opportunity as practical for the investment community to ask questions this morning, we ask that, if you represent the media and have a question, please feel free to call me at the conclusion of the call today. I can be reached at 440-930-1538. Of course, if you are a member of the investment community, you're also welcome to call either Dave or myself after this call today.

Last night we posted our earnings release within the investor relations section of the PolyOne website. All our past filings are there also. But if you have a special request for a past document, please feel free to give my more than able assistant Darlene Hampton a call at 440-930-1522 and I'm sure she'd be glad to help you. We are webcasting this call this morning. A replay of the call will be available on the IR web section after today for approximately two weeks.

In today's discussion, we will likely use both GAAP and some non-GAAP financial measures. These non-GAAP financial measures are operating cash flow, operating income for specials, per share impact of specials, and earnings per share before specials. A detailed definition and a list of special items can be found in attachment 5 of yesterday's release and attachment 6 you will find a reconciliation of a non-GAAP financial measures to the most directly comparable GAAP financial measures, an explanation of how PolyOne management uses these non-GAAP financial terms.

In addition, we will likely discuss statements today or other information defined as forward-looking statements within the meanings of the Private Security Litigation Reform Act. Forward-looking statements give current expectations or forecasts of future events and are not guarantees of future performance. They are based on our PolyOne management's expectations that involve a number of business risks and uncertainties, any of which could cause actual results to differ materially from those expressed or implied by the forward-looking statements. I strongly recommend that you review the updated risks in today's press release, as well as a comprehensive list of factors in our recent 10-K filings, because these risks could cause actual results that we discuss today to materially differ from what we may be discussing.

With those brief comments, I'd -- I would like to now turn the call over to Steve Newlin, our new CEO.

Thank you, Dennis and good morning. It's really a pleasure to speak with you for the first time since joining PolyOne about two and a half months ago. During my years at Nolco and Ecolab, I had the opportunity to meet a few of you, but to those I don't know I look forward to talking with you in the near future. Dave and Dennis are putting together some travel plans so that I can begin meeting existing shareholders, as well as those who may be interested in investing in PolyOne. As much as my schedule will allow, I plan to maintain open and regular communications with shareholders.

Today I'd like to share with you our view of our current performance, particularly here in the first quarter. In addition, I have some early observations about PolyOne and our overall opportunity that you might find useful. Not surprisingly, much of what you will hear will focus on the commercial opportunity for growth. But first, we are very pleased with the first-quarter results. As noted in our news release, PolyOne had record quarterly earnings. In addition to a solid sales increase compared with first-quarter 2005, our operating income increased 52%. Every one of our segments contributed to this improvement. And while good earnings drive cash flow, our efficient asset utilization was outstanding and added to much better than anticipated results. So we're clearly moving in the right direction. And just as exciting, we believe opportunities for continuing these improvements exist across our business platforms. These opportunities can help us achieve the common goal of sustainable, profitable growth that rewards our shareholders.

Now, let me take a little time to talk more about the first-quarter accomplishments and, in particular, our efforts to restore acceptable spreads across our product platforms. Those are paying off. The price increases implemented at the end of 2005 helped strengthen our spreads in the first quarter, and, as a result, our Performance Plastics segment return on sales was 5.3%, a significant improvement over the fourth quarter. Our general managers and their teams within this segment clearly understand the need to continue to improve the earnings performance. As further evidence of our momentum, shipments from our international unit improved 10% this past quarter compared with the 2005 first quarter. Accelerating growth and enhancing our presence in emerging developing economies is key to our long-term success. We are beginning to realize the benefits from our latest investment in South China. I recently visited our Asian team and I can tell you they understand the importance of capturing growth in this attractive region. Our market development people there have been doing a terrific job of rapidly filling up plant capacity. And I am looking forward soon to their request for additional expansion. Going forward, we recognize that we will have to be willing to invest in the most attractive global markets that hold the greatest potential for sustainable, profitable growth.

Our working capital metrics in the first quarter were the best ever. As a result of our growth and successful management of working capital, we reduced required working capital investment $40 to $50 million versus a year ago, and Dave will talk more about that later on. You know, traditionally our first quarter is a significant cash consumer because we invest cash to gear up for the second quarter. That's our historically strongest sales period. So I'm very pleased to note that efficient working capital management processes are embedded throughout our organization and are really producing measurable benefits. In addition to improved working capital, our cash flow benefited from strong earnings and the sale of our engineered Films unit. We ended the quarter with essentially nothing drawn on our borrowings and more than $170 million of available liquidity. By any measure, these results clearly speak to our financial well-being and that's an important factor, as we drive to improves growth.

We look beyond the first quarter, I am absolutely convinced that this Company has tremendous opportunity for growth and upside potential for an improved stock price. Let me describe some of the reasons behind my views on this opportunity. First of all, at PolyOne we possess a wealth of in-depth knowledge about polymers, formulations and polymer processing. We believe more than anyone else in our industry. Our charge is to strategically focus this know how on targeted markets to bring more high value applications to our customers. There are regions in the world where the demand for our products and know how is growing rapidly. And this growth is coming not just from our North American and European customers migrating to these regions, but also from rapidly growing infrastructure needs within these areas. So we will continue to seize the new global market opportunities, with particularly emphasis on Asia followed by Eastern Europe.

And we have many bright talented people who are eager to participate in the creation of a high performance culture to drive profitable growth, earnings per share and stock price. And this management will help focus and lead this talent toward improved execution. Based on our first quarter results, we're on the right track, but we really believe we can do much more to deliver shareholder value, and that's why I'm excited to be here. I expect us to generate profitable growth in the long term, because we're going to do a better job than any of our competitors at executing our strategy and serving our customers. And that, to us, means listening to what our customers tell us, act on what we hear and measuring how well we do. it means investing in commercial resources to drive new business. It involves a fresh strategic look at key markets and the role that innovation can play in differentiating our offerings. It mean strategically targeting specific market segments, where our value proposition is most compelling. And, of course, it means retaining discipline to hold the gains in cost reduction that everyone at PolyOne has worked so hard to achieve.

So just to bring this to conclusion, we have a lot of work to do. But I wouldn't have joined PolyOne if I didn't believe we have abundant opportunities to grow. Clearly, this will take some time, but as our current quarter demonstrates, we're starting from a very solid base. We have the financial strength to be successful and to create sustainable value for our shareholders. I look forward to continuing this conversation with you in the coming weeks and months.

And with that, I'd like to turn the call over to our CFO, Dave Wilson, for a review of the first quarter. Dave?

Thank you, Steve, and thank you, everyone, for your interest and attention to PolyOne. As we have mentioned, in the first quarter we did set a record at $0.53 earnings per share for our continuing operations. This compares very favorably to the $0.27 we did last year first quarter and $0.22 in the fourth quarter of -- of last year, as well. And we also generated positive cash in the quarter, when we combined our results from our operations with the proceeds that we received from the sale of our Films business. From operations, this represents about a $60 million swing from a year ago and when we add the divestment proceeds, that swing jumps to about $80 million. So in terms of both earnings and cash flow, we started the year with very strong performance and, moreover, as we stated in the outlook section of our earnings release, we anticipate continued strong earnings and cash flow performance as we go into the second quarter.

Now, let's go back to earnings. And first, let me tell you that my comments are going to focus on continuing operations, basically only, since with the sale of the Films business we no longer have any businesses that we report as discontinued. Second, my comments on earnings are going to focus on the GAAP as reported earnings, so the $0.53 from continuing operations, because, frankly, that is a -- a more fair representation of the cash power or the earnings power or the cash earnings power, really, of the Company. We have talked about an adjustment for a tax allowance and that provides a level of comparability, but it's very important for everyone to remember that we have a substantial NOL position and, so, the domestic tax provision that we pro forma have put in is really non-cash. And that, as we move through the cumulative loss situation that has us not reporting a tax adjustment on our face of our income statements, you know, as we -- as we go into a cumulative gain -- or -- or cumulative earnings position, you know, we will start to report a tax adjustment, and it's then as important as it is now to remember that that cash or that the cash associated with that will be negligible and associated solely with our international operations. So we can go more into that, you know, in the Q & A if there are any.

But as I have stated, we had record earnings of $0.53 in the quarter. This performance reflected the positive volume and margin momentum that we came into the quarter with and that we ended last year. Sales of $675 million were up 10% compared to the first quarter last year, and were up about 11% sequentially. Both our Performance Plastics and Distribution segments reported strong gains compared to either of those comparative quarters. Overall, volume shipments were up 1% compared to a year ago and 7% sequentially. And even though Performance Plastics volume was flat with a year ago, it was up 6% sequentially and, as Steve mentioned, there were pockets of real growth that we saw in our businesses, particularly the international and North American Color businesses. For our Distribution segment, we experienced strong growth in terms of volume, 6% and 12% respectively for the first and fourth quarter of last year. From an operating earnings perspective, or an OI perspective, all of our reporting segments demonstrated market improvements compared to both the first quarter last year and the fourth quarter of last year, as well.

Performance Plastics, primarily driven by margin improvements compared to a year ago and volume and margin improvements sequentially, rose 60% versus the first quarter and nearly seven-fold compared to the fourth quarter. As Steve mentioned, our return on sales was about 5.3% in our Performance Plastics business. This is up markedly from either the first quarter or the fourth quarter, but also, when we compare it to last year average, you know, we're up basically 200 basis points moving from 5.3 compared to 3.3%. And this is a reflection of the strong margin position that we were able to gain in the fourth quarter and it's this type of improvement that we need to demonstrate consistent improvement in our quality of earnings. Our Distribution earnings, as we stated, of $6.2 million was a quarterly record. And the return on sales for that segment was squarely between 3% and 3.5% of sales. Our resident intermediate earnings at $36 million was also a record. Both Oxyvinyls and SunBelt demonstrated the strength of their respective earnings capabilities. You know, compared to a year ago, industry PVC resin spreads were up due to the fact that resin pricing increased more than the combined effect of higher ethylene and natural gas costs. As compared to the fourth quarter, however, it was really resin volumes and lower average energy costs that paced the improvement.

Now, if we move to cash flow --we've made comments on this -- we're very pleased with the performance here, particularly when we compare it to a year ago. When we think about the $60 million improvement that we've talked about, you know, we're looking at earnings contributing about a third of that. On an absolute basis working capital contributed about a third, but as Steve mentioned, the performance in working capital control and the improvement in the metrics really drove substantial cash benefit to us. A year ago our working capital as a percentage of sales was 15.3%. This quarter it was 13.5%. That 1.8% differential on today's sales represents a $50 million improvement compared to where we would have been last year. In terms of DSOs and DSIs, our internal measure for receivable turnover and inventory turnover, we again continued to show good improvement. Compared to a year ago, we were 1.3 days lower in our days sales outstanding for receivables and we were nearly five days lower compared to last year in terms of our inventories.

And so as we see the results of our -- of our working capital management, you know, it's clear that we are seeing focus working capital, control processes being engrained through the business teams at all levels spreading across the business units. At the end of the fourth quarter and reiterated today, we stated that we wouldn't be achieving this level of performance were it not for the people throughout each of the business teams working diligently and being focused on the detail. You know, this performance improvement then, as is now, is truly reflective of a broad PolyOne team win. We also, in terms of the cash flow, our accruals showed an improvement, about $14 million, if you look at our -- our cash flow statement. And this is largely due to personnel costs and incentives that were on the books at the end of '04 compared to where they were at the end of '05. And then, our depreciation compared to our capital expenditures versus the first quarter last year was $6 million greater. When you add all those components, you come to about $60 million of improvement compared to the first quarter last year. Then when you add the proceeds from the sale of the Films business, we add another $20 million. And so we show the $80 million improvement.

And at the end of December, we commented that we had $7 million drawn on our receivable facility. We ended the quarter with nothing drawn and, in fact, a net cash position of around $7 million. In terms of liquidity, we ended the quarter with $172 million available. And, importantly, we demonstrated good lowering of our leverage ratio, our debt to EBITDA. We finished the quarter with a ratio below 3.4 X. That compares to a ratio of 3.7 at the end of 2005. And, clearly, we are demonstrating a continuous improvement in the financial profile. And in terms of our leverage ratio, we remain committed and certainly got a good start in the first quarter to bringing that below 3 X by the end of the year.

Now, if I can, let me turn to our second-quarter outlook. I think in our earnings release we provide, you know, the highlights of it. If we look at Performance Plastics, you know, we've stated that our anticipation is that sales will generally be in line with the first quarter. That would be basically up 5% or so compared to the second quarter last year. We also would expect to see our margins improve modestly. You will notice in the R&I section we talk about some modest softening of our margins in the Chlor-vinyl chain. That will translate to benefit in our Performance Plastics businesses and so we would expect to see some incremental improvement on a return on sales in Performance Plastics. And as I mentioned before, that's a key indicator in terms of our quality of earnings demonstrating a continuous improvement. For Distribution, here, too, we believe sales and volumes will generally be in line with the first quarter. And that would be up really strongly compared to the second quarter last year. We state that we expect that our operating income, as a result of that, will be up compared to last year, but in light of the fact that our Distribution segment set a record in the first quarter, we may not quite match it. Frankly, the key driver for our Distribution business is -- will be the change in the margins between the periods and, remember, that Distribution margins are directionally consistent with material price trends. So, in other words, as plastic product prices increase, so do Distribution margins and vice versa.

For resin and intermediates, it's always difficult to anticipate changes in the high leverage variables that can impact the Company, but clearly, we do anticipate that we will have continued strong performance. Potentially not quite as high as what we saw in the first quarter but certainly still at well above normalized levels. We would anticipate that seasonal strengthening and volume will largely offset what we anticipate to be modest softening of PVC resin and Chlor-Alkali product spreads. We anticipate that both PVC resin and ethylene will fall in prices on average in the second quarter versus the first. And, frankly, this average decline largely reflects the difference between where we started the second quarter and the average first quarter, so a lot of the decline that we would expect to see quarter to quarter on average has already occurred. Here, too, it's difficult to guess. We've seen in the past month natural gas prices float up and then float back down and so the question in terms of the resin and intermediates will be key drivers on the level of demand improvement for PVC and how that affects pricing for both PVC resin and chlorine, and then, also, what happens to energy costs, how that drives our utility costs throughout our businesses and certainly in R & I, but also how it may underpin increases or decreases in ethylene and other hydrocarbon feeds.

You know, I would also -- moving away from R & I, draw your attention to our common cherry on the legal settlements and other nonrecurring costs. We do say that we would not anticipate to see a comparable benefit that we saw in the first quarter, but we would anticipate to see some. It's just difficult to call those specifically. And, you know, I think that -- overall, I think we're looking at a second quarter, as we've said, to be continued strong performance. There are some high-leverage variables that, as market dynamics unfold, will be difficult -- or difficult for us today to comment on with surety, but I think these are largely transparent to the markets. And with the -- you know, with the understanding of how those leverage variables impact our overall Company earnings, we should be able to track those fairly well with you and have discussions on that. And then the last point I would make is that we do anticipate that we will see good cash flow generated in the second quarter and that our expectation for the full year is the cash generation will be substantially above what it was in 2005.

And so with those comments on the quarter and our viewpoint for the second quarter, open it up to questions and turn the mic back to Dennis.

Thank you, David. Zendra, let's go ahead and take questions from the participants.

[OPERATOR INSTRUCTIONS] And your first question comes from Ray Kramer's line from First Analysis.

Good morning, Ray.

This is Allan calling wi --

Good morning, Allan.

Congratulations everybody who contributed to this. I'd like to understand a little bit more about the dynamics in North America. If I read between the lines on the information you provided, it sounds like the biggest driver of improvement is the spread of selling price versus raw material. And if that's correct, how much of that is driven by the market dynamics? Where a major player across state from you finally decided after ten years to start earning money in North America?

Well, I think, you know, reading between the lines, the margin improvement which was an absolute necessity, particularly when you look at what the return on sales for our Performance Plastics business was last year, you know, it was certainly the order of the day. And, as we talked about at the end of the fourth quarter, we went out and did what we needed to do to improve the margins. And at the time, we talked about the necessity of getting prices to a point where the market trends, the anticipated start -- starting the decline of raw materials would enable spreads to move from slightly under normalized levels to maybe normalized levels. We saw that trend occur.

Clearly there's downside pressure on pricing but it's important that we -- that we're focused on maintaining the value that we sell. We also saw in the first couple months of the quarter a good demand then, as the market started to see or anticipate that commodity prices were going to start to tip over. We saw destocking and lower volumes that one would anticipate for -- for March. By and large, that continued through to April. But as we do comment in our outlook, it would appear that underlying demand is resilient, that we do not anticipate that the inventory corrections that we have been seeing will be as deep or as long as they were a year ago, and that, as demand starts to pick back up, we will be catching on at higher levels than we were a year ago with a much stronger margin position.

And so I -- I think the margin improvements that we're seeing are more a function of what we did because we needed to in the fourth quarter last year. And now we're continuing to do what we need to do on the top line to be able to hold those gains, almost regardless of what the market does. If costs start to go back up, we know what we need to do. Clearly improving the return on sales of our core business is a job one for us. We demonstrated good improvement in the first quarter compared to just about anything you could compare it to in 2005, and we're going to work hard to keep those gains.

By implication, you don't operate in a vacuum. It sounds like not only are you doing a good job, but your customers are, if you will, more accepting, which seems to be across the board, and your competitors, is it fair to say they're taking a more similar than different approach?

No, I can't -- I can't comment on what our competitors are doing. Just -- you know, you know we're in a very competitive market,place. I think what we're seeing is -- is us, more -- and I really can't comment on -- on that. We work with our -- with our customers to help them understand the dynamics. And, frankly, to help them be able to be more competitive in -- in their market space because, you know, clearly we need them to be successful for us to be successful and our mission is to -- part of our mission is to -- is to help our competitors be competitive and to provide value to them so that they win and we win, too.

Thank you very much.

I'm sorry, our customers. I'm sorry, our customers win. [LAUGHTER] That's why we have helpers here. To correct me when I go astray.

We know what you meant. Thank you.

Take care, Allan.

Your next question comes from Mike Judd's line from Greenwich Consultants.

Also congratulations on a great quarter.

Thank you, Mike.

Now that we're in May, I'm looking at your comment here about processor inventory corrections in anticipation of lower product pricing. But is it -- hasn't that pretty much played out at this point? Inventory levels are -- are -- I guess people are generally thinking they are at pretty low levels and are you starting to see a pickup in demand from your customers?

Yes. We'd like -- you know, we would -- we would like that to be true. I mean, we do not see the same dynamic as we saw a year ago where, you know, the inventories we thought the industry had run out of continued to be depleted. And we are starting to hear price increases be put into the marketplace for May. It's too early to comment on whether or not those industry moves will be -- or have been successful. Mike, I think it's fair to say that the scenario that you painted is one that we believe to be accurate. I wish I could give you a strong sense that absolutely we see it. We don't yet, but we also don't see it declining to the point where we saw last year this time.

I mean as you look forward, I mean it -- I guess anything can happen, I suppose. But I mean it seems like the economy is growing well and the demand should come back, especially if there is a concern about higher prices coming into the marketplace this quarter.

Yes.

So if it doesn't happen in May but -- any thoughts about June.

No. We absolutely expect the scenario that you painted to play out, that as -- as the market starts to turn, the inventory correction will end. As we mentioned, we believe that the underlying demand is stronger than it was last year and so, once the process or correction plays out, we will come back and we will see demand that gets back up on a trend that we saw earlier this year. So we are anticipating that, and it's, you know, part and parcel why we anticipate strong performance in the second quarter, you know, and then we'll see what happens, particularly on the R & I side, as we drive through the rest of the year. But we certainly anticipate that underlying demand is still quite good.

Okay. From a raw material perspective in terms of things like polyethylene and polypropylene, PVC, et cetera, are you seeing price -- are you going to be accepting price increases in the May time frame, or is that more likely a June event?

Well, I mean if the market doesn't go, we're sure not going to accept them. We're not going to accept them even if the market goes, but we'll see what by can do. At this point, I think it's -- all kidding aside -- I think that key for the success of any of those increases is volume picking back up. The cost push that I think underpins some of the earlier announcements, I don't believe drives pricing. It requires strong volume. The magnitude of the improvement will really determine the magnitude of the increases. But I think we see a reflection and expectation in the raw material suppliers that demand is picking up, which from that perspective is certainly a good sign as well.

Thank you very much.

Thanks, Mike.

Your next question comes from [Phillip Baberra's] line from Banc of America Securities.

Hi, good morning.

Morning, Phillip.

I had a question on settlement of legal disputes and adjustments to litigation reserves. I was wondering how is that allocated between the Performance Plastics segment and the Distribution segment?

It's primarily in other.

Oh. It's in other?

Yes.

Okay. And you mentioned that you expect this to be a smaller benefit in the second quarter, do you think that that will recur in the third and the fourth quarters, as well?

We -- we can't -- we can't project that. You know, my commentary is in a Company our size, costs are flowing in and flowing out, and we just don't think it would be prudent for the Street to anticipate a benefit of similar size to what we saw in the first quarter going forward. I commented that, in the second quarter I would anticipate that there would be some benefit, but that's because I can -- I can see a little -- a little better the second quarter than I can the second half. Obviously, we will endeavor to do what we can to drive our costs and continue to have cost improvements in the second half of the year, but these types of nonrecurring adjustments we just don't have -- we just don't have visibility to it at this point for the second half.

Okay. And right now you don't have that much bank debt left and you plan on generating more free cash flow this year than you did last year. What would be your plans for that free cash flow? Would you consider putting in a dividend or maybe repurchasing the 10 and 5/8% bonds or have you not thought about it?

Oh. Be assured we've thought about it. And -- and the first thing we've done is our -- my treasurer reminds me is first we've got to generate the cash so we have something really to think about. But we're doing that now. And we have said that it is our intention to continue to take down debt. We've also stated that as -- as the right investments come, we will selectively make those to continue to drive our strategy. But fundamentally, we're looking to take our debt to EBITDA down below three. We said at the end of this year our target for an operating range is between two and 2.5, and so that presupposes that we will be working both on the debt reduction and as well as improving our earnings. It is an intention for us to be very mindful of the call date of the 10 and 5/8 bonds that are out there and position ourselves to -- if it's financially prudent, to take out as much of the high-cost debt that we have on our balance sheet. So I think that's, you know, pretty clear as to what we intend to do.

All right. Thank you.

Your next question comes from Rosemarie Morbelli's line from Ingalls Snyder.

Good morning, Rosemarie.

Congratulations for a very good quarter. When you talk about the comparison of the second quarter versus last year's second quarter, are you looking at the $0.19 from continuing operations? I am assuming that since we no longer have any discontinued operations, the $0.24 is out.

Yes. Yes. Although I can't say that I was thinking specifically about that. It's our expectation that we will be moving, you know, compared -- compared to last year, yes, we are looking for earnings improvements and our focus is on the continuing operations. And so from -- yes, so the $0.19 would hold, yes.

And while you are looking at the $0.53, however, if we really want to compare, you know, sequentially or versus last year, we really have to look at the $0.33. That makes sense, doesn't it?

Yes. And, frankly, if you look at the $0.33, you know, there's -- there's some -- some level of the nonrecurring benefit that we -- that we disclosed. So you got that kind of a range, as well. And, you know, I think our guidance for the second quarter is when we -- when we adjust -- adjust for that, that we're anticipating that our operations should continue to demonstrate improvement. But without the same level of one-time benefit, the overall may not be there but the -- but the underlying operations are.

Okay. Now, when I look at the improvement on the Performance Plastics volume was flat. I am assuming that you decided not to do business with those entities which were not profitable, so you went for price increases as opposed to volume, which is, obviously, the right thing to do given your margins. But if -- you also mentioned that international was up 10% in volume. So what actually happened in North America? How much down were you?

We were down -- frankly, I don't have that number. But when we look at the volume business by business, you know, the margin improvement is -- you know, helps to -- where we're down in volume helps to explain why the margin, as you intimated. The fact is, we are down in big chunks of volume where our largely general purpose or commodity-oriented product lines. And so it's the type of mix improvement that -- you know, that we're starting to see, and clearly there's a lot more to do. But it's the type of mix improvement that we would like to see. There was another area where last year there was a -- you know, basically a special situation in the marketplace where we were able to drive some volume that came off this year because the market's more back to equilibrium. But it's, you know, by and large, Rosemarie, we look across. You know, the vinyls was up, Color was up, international was up, so substantially as we talked about. And so we are seeing the growth where we had hoped to see it and we're down a bit on the more general purpose. Overall, North America is down about 1%.

Not more than that. Is -- is western Europe done as well?

No. Our improvement in international was across the board. We saw pickup in our European business, both margin and volume. The economies in particular, France and Germany, showed some improvement. But, also, as we've mentioned, the Asian businesses were up dramatically. And, as you will recall, the -- the split between Asia and Europe is about 80/20 as we currently have, at about $100 million in sales in Asia versus 400 or so in Europe.

And that mix improvement is -- is that long term? In other words, let's say that the demand does not pick up as you expected, will you go back to filling those marginally profitable accounts, or are you out of them permanently?

You can never say never, but clearly a focus is to continue to drive the value-added sales and to not take volume for volume's sake, but to drive profitable growth with our volume improvements. And so we're looking to drive volume. We're looking to drive margin.

Rosemarie, we really do want to get our margins improved on a sustainable basis and really continue the -- an upward growth trend. And we're going to be more selective in terms of the applications and the accounts that we pursue. So there's direction that's going to the business organizations to put less focus on the volume and we -- of course we want them to grow, but we want them to grow in the right places with the right mix.

Could you elaborate a little more on that? You made comments about the fact that you were going to be pursuing the best market segments. Could you give us an idea as to what those areas are?

Well, there are clearly a lot of differences, even across business units, but also within the businesses. When you look at the skew of margins, and we have some very attractive applications where the customers value very much what we bring and we're -- we're differentiated. We have other applications that are, as Dave spoke of, are -- are commoditized or closed to commoditized and we think the best place we can help our customers and our shareholders is to pursue those with the attractive ones. So we aren't going to map them all out externally but we're working on that internally, and we see some pretty dramatic differences when we -- when we begin to dissect these markets. And so the direction for the sales organizations and the businesses is to go out there and help our customers where we're needed most and where we can be most rewarded.

So I guess you are not going to give us any examples as to which --

Rosemarie, let's remember our engineer material strategy, where we're creating in North America a mirror image of the value-added application development that we have in Asia, and we're deemphasizing the more general-purpose side. So those -- that would be a general example. But as you've said, we're mapping out specific applications that, at the appropriate time we will be bringing that forward. But as we put our plans together, I think it would be premature.

Yes, I think I'd also say we'd love to -- if we had it all mapped out right now, we would like to be able to share it with all of our investors. At the same time, I'm not eager for it to get into competition's hands, so we're just going to have to leave it at that for now.

I appreciate that. And one last question -- one last question, if I may. If my memory serves me right, last year you expected the inventory correction not to be long and not to be deep. What makes -- and then it turned out to be a disaster. [LAUGHTER] What makes you [inaudible] -- the price of crude price of fuel, price of gasoline? Don't you think that the consumer's going to start feeling the pain at some point and that you may be a little enthusiastic or optimistic, I should say, in anticipating that this year won't be the same?

Well, Rosemarie, you know, there's -- we've all been through probably more of these cycles than we like and we all know that the market has a great ability to go deeper for longer than we would like. But, you know, we remember last year very much. We saw what some of the dynamics were, and, frankly, this year the underlying demand appears to be better. Clearly -- clearly we could be mistaken, but I think that we and our viewpoint is representative of a general view, which is reflective of what we hear from the customers as well as what we hear from -- from our suppliers. So we take the best information we can, as much of it as we can, and go forward with that. But clearly, there are risks and -- and we don't for a minute forget that fact.

Okay. Thanks a lot.

Thanks, Rosemarie.

Your next question comes from [Roger Schmitz'] line from Merrill Lynch.

Hello, gentlemen.

Morning, Roger.

A few questions, first on SG&A. It looks like, after you strip out the legal settlements and litigation reserves on that benefits, it looked like Q1 '06 was about 57 versus 40 in Q4 '05 and 51 in Q1 '05. How much is the rest is sort of a one-time recruiting hiring cost versus, perhaps, a new level, in part due to FAS 123(R)or whatever that is?

Oh, well, whatever that is, if you read our Q you can get three pages of whatever that is.

Yes, I got all three of them. [LAUGHTER]

There's -- there were -- there were -- as I was -- as I've been watching our costs and you'd understand that I would, there's about $3 or $4 million that I don't believe will recur in the second quarter. But I think in terms of our S&A to sales, you know, we've been tracking in the seven range. And if you pull out the one-time benefit, I think that number was about 7.5. But, you know, as we've looked at our organization, we looked at the opportunities we have, we fully intend to continue to invest, particularly in our commercial side, to improve our sales capabilities, to expand our sales capabilities, to put more market development capabilities in growing geographies, to increase investments selectively in technology. So I think that, from an absolute dollar perspective, I think people should expect us to -- to see those dollars increase, because we're going to be investing for our growth and we believe that we've got some great opportunities, you know, to penetrate markets. Steve mentioned those facts, but for us to succeed we need the right level of resources, both in terms of sales, technology, and marketing to be successful.

Now, I would also tell you that even though the absolute level would be increasing, the percentage, you know, we expect to see some growth from those investments. And so there's going to be a mitigating factor there, which at this point I can't say what it is. We've worked diligently to get our S&A costs competitive. We recognize that there are some areas where we need to invest in; we'll make those investments. But be assured, we will be absolutely prudent on the general administrative side of S&A and we will be focused but make investments on the sales and technology side.

Okay. Thanks for that. In terms of vinyl compounds, have you been able to get the spread back to pre-Q4 '04 levels yet?

Yes. Oh, Q4 '04.

Talking about Q4, '03.

Oh. Before -- before the ethylene spike in the fourth quarter?

Right. Right.

You know, I'm not looking at that information. My belief is that we are moving to that level, if we're not there now.

Yes.

I mean, we -- you know, as we talked about the fourth quarter, we were able to -- to improve the spread from -- from really at the beginning of the fourth quarter, true trough level, to somewhat below normalized. At this point, we're at normal to slightly above. And without looking at the numbers, the '04 third quarter probably was just about at this level, more of a normalized level. Nothing special. It's just relative to the fourth quarter looked pretty good, in hindsight. So, yes, we've made -- you know, I would say relative to what we talked about last year at this time, about needing to recover our margins, I would say where we are today is we're back.

Okay. And in terms of the specialty resins, is the bloom coming off that rose a little bit? You referred to lower volumes and increased import competition. I know that the businesses have been doing extraordinarily well. I'm wondering if it's just coming down a little bit now?

We don't get that specific on a specific business unit. The margins -- you know, the competitive intensity of that business is still high, the comments that we made in terms of imports, filling the void are there. But I -- but I would also point out that one of the issues that we faced last year towards the end of the year was the dislocation in energy costs in North America compared to the rest of the world and that was largely natural gas versus oil, as [inaudible]. And subsequent to the fourth quarter, we've seen that balance shift more in our favor. And so, some of the competitive intensity on the margin side from a cost push, at least, would seem to us to be mitigating, but it still remains a competitive marketplace.

Okay. The last one is are you able to tell us how much cash is -- at the end of March was sitting at Oxyvinyls?

No, because I don't know.

Okay.

I suppose I could, but I just don't. Now, if you -- [LAUGHTER]

No problem.

Yes, the -- you know, and I'm sure what that really reflects is, are we going to expect to see a distribution in the second quarter and third and fourth quarter? And my expectation is yes, OxyVinyls -- you know, the earnings, you know, that they're turning in are substantial and the -- the mission of OxyVinyls remains, as it has been, to generate cash for the parents. And so, you take out the first 25% of the distribution to reduce OxyVinyls' debt -- and we talked about that last year -- but I am expecting that we will see distributions in Q2, 3, and 4. And I should also note that in -- for SunBelt, which holds back cash sufficient to be able to amortize the debt that they have on their books, they earned through that level and we did, in fact, start to see distributions in the month of March.

I saw that. Thank you very much, gentlemen.

You're welcome.

Your next question comes from Andrew O'Connor's line from Wells Capital Management.

Good morning. Nice quarter, guys.

Thank you, Andy. How are you doing today.

Fine, thanks. Dave, is there a specific debt reduction goal that PolyOne is committing to at this point for 2006? I heard your comments about a desire to get the leverage ratio down to three times at year-end. What dollar amount of debt would equate to that?

It depends on -- on what you assume to be our EBITDA. And so we -- we have not put out a -- you know, specific yearly targets for debt. What we've -- you know, what we mentioned at our analyst meeting last year -- and frankly it's the game plan that we still have -- is that over '05 through '07, that three-year period, we would generate somewhere in the neighborhood of $300 million of cash through a combination of operations, as well as divestment proceeds. And that that cash would largely be used to bring down debt, and the focus of our debt outside of the '05, '06 and '07 maturities is to bring down and call the high-yield bond. We recognize it would have a stub level of debt at the end of '07, because we had something like 370 maturities if you include the $300 million call.

Okay.

And -- but that our intention there was to be able to fund those with short-term facilities so that we could take that debt out, if that made sense, in 2008. What I -- what I would caution everyone is that we've also stated that we will make the financially prudent and correct decision. And so, if we generate cash this year and it just simply doesn't make sense for us to use that cash to take down debt because it's too expensive, we won't. We will wait. But we'll get it down. Okay?

Okay. Thanks for that. And then secondly, related to Performance Plastics. Can you elaborate or can you further elaborate on the processor inventory corrections in anticipation of lower product pricing that you foresee?

Andy, you know, as we've talked many times in this call. It is extraordinarily difficult for us to give you any -- any granular or quantitative information on inventories. I mean all we can do is get very qualitative perspectives on this. And I -- we just don't have an answer. Our customers don't share with us and there's no -- board accumulates that measure for us to measure it. It is more a sense. It's a direction we know from historical perspectives that, as commodity prices move up and down, inventories tend to move in those directions. So I can't give you -- I can't give you a specific.

Okay. But it's your sense that inventories are being drawn down by processors as we move through the second quarter?

Yes. And -- and it was a -- it will actually, you know, as we saw towards the end of the first quarter we believe some inventories were being, as Dave said, in March. And maybe even early April, there was some [inaudible] because there was anticipation that prices were going to go up. There has been a lot of price announcements for April and May and it -- commodity prices, not our prices but in the -- in the marketplace. And so I think if those things -- if those things take place, you'll see that inventory destocking go behind us.

Thank you. Again, nice quarter.

Thank you, Andy.

We'll take one more question. We're over the hour but I do want to take the last question and then -- for the day so let's go ahead, Zendra.

Your next question comes from Bob Amenta's line from JPMorgan Asset Management.

Thanks. Good morning, guys.

Hi, Bob.

Just a couple follow-ups. I guess on that last question regarding your answer of depending on what your EBITDA figure is, what -- definitely, what do you guys do? I mean are you looking at EBITDA being your EBITDA plus including equity earnings or do you just include the cash distributions as opposed to equity earnings? What are you considering?

,We look at the cash distributions, not the equity earnings themselves. And so when we talk about our leverage targets, it's consistent with the definition that -- that are in our -- our -- frankly our bank covenants and whatnot. But it is a -- a cash EBITDA number. And so you've got to take a haircut on reported equity earnings, because those don't equal the cash distributions, primarily because of debt reductions that are occurring at both SunBelt and OxyVinyls.

Okay. Now, obviously there's a lag on the Distributions, but are there anything unusual in terms of major CapEx programs environmentally or either -- at either of those JVs that would cause, you know, a difference between kind of percentage-wise. Last year they had equity earnings of X and you got distribution earnings of X. I'm kind of looking ahead. You guys are way ahead on earnings. You're plus $13 million for one quarter, not that that's going to continue per quarter, but is there anything unusual at those entities that would prevent money from coming back?

No. Nothing unusual that would prevent money from coming back. The one -- the one aspect that's a fact that you can't take a direct ratio from years past, is that as performance improves, you start doing some of the capital that you may not have been doing when -- during some of the lean times. So capital itself at the equity investments could be up, but not -- you know, but not a change in strategy, see change type of differential between the years.

And just a couple other cash flow items. The asset sales, other than that $6 million note, they're pretty much done now?

Yes.

Okay. Yes, we have no -- we have no -- well, what we have is no other discontinued operations. We still have redundant assets that -- you know, plants that -- that are -- that we aren't using now that we're attempting to sell, and that I think we -- we ,put in the K that we were targeting around $10 million and we got about a quarter of that in the first quarter. But, you know, that's -- you know, that -- that's where we are in terms of -- you know, those types of -- of things.

Okay. So there may be another $5 million or so, potentially, from miscellaneous items in the rest of the year?

I -- I'd hope it would be a little higher than that. I'm looking at our person who -- who's going to bring it home for us and I'm sure we'll get a little better than five but not -- not materially more than that.

Okay. And then just lastly, cash reorg costs. I mean you talked late last year or early this year, ,5 million or so for the year, is that reasonable? And were there any -- in the first quarter are they buried somewhere in the cash flow statement or is there not a way I could see those.

No, I -- I don't think our cash restructuring cost are anticipated to be much more than a million or two at the most. I believe in our -- our cash restructuring in the first quarter, was -- you know, basically negligible. I mean, it was -- it was small enough that a reversal on one of the accruals caused it to be plus in terms of earnings, I believe, by $100,000. So it's not much.

Not material.

Okay. And then just lastly, working capital last year, I mean just looking at the first quarter and just taking the four basic components off the cash flow statement;receivables, inventory, payables and accrued expenses, kind of negative 30 versus negative 60 last year and last year you ended up for the year being negative 45 with essentially all of that being in this accrued liabilities. Is there -- for the year working capital, do you have -- have you said what you hope to get out -- or -- or spend on that?

Yes; The -- we have not given an absolute number because, you know, my hope is that we'll have higher sales in the fourth quarter. But what we have said is that last year our working capital as a percent of sales was about 15.3%. Our target was 14.5. Now, the first quarter we did 13 -- you know, 13.5 and -- so my expectation is that we'll do better than our target. So maybe we should lower that 14.5 down some. And really it's important that we remember that when we're -- when we refer to the working capital this way, I'm referring to our receivables, inventories, and payables and the accruals are just out there.

Okay. Well, great quarter and I hope you didn't turn the game off with a minute and a half left. [LAUGHTER]

No, we didn't. Thank you.

We didn't.

All right. Take care.

All right.

Thank you.

Thank you.

Folks, thank you very much for joining us, everyone, this morning. We thank you for your time. Dave and I will be available through the balance of the day. Thank you.

This does conclude today's PolyOne earnings conference call. You may now all disconnect.