Avient Corp (AVNT) 2006 Q2 法說會逐字稿

Good morning, my name is Toni and I will be your conference operator today. At this time I would like to welcome everyone to the PolyOne second quarter earning call.

[OPERATOR INSTRUCTIONS]

Mr. Dennis Coco, vice-president of Investor Relations, you may begin your conference.

Thank you, Toni and I thank everyone for joining us this morning.

I'm Dennis Coco, and in today's call we have our Chief Executive Officer, Steve Newlin, who will make opening comments followed by Dave Wilson, our Chief Financial Officer. We'll then open our lines for questions, and we would like to provide as much opportunity as practical for the investment community to ask questions this morning; we ask if you represent the media and have a question, please call me at the conclusion of this call. I can be reached at 440-930-1538. Of course, members of the investment community are welcome to call both Dave and myself after this call today.

Last night we posted the second quarter earnings release within the Investor Relations section of PolyOne website. It also includes our past financial filings. I should point out we've also had separate documents have been posted -- our reconciliation of non-GAAP to GAAP terms on that website page.

We are webcasting this call today. A replay of the call will be available in the IR section of our website for the two weeks after today.

Let me talk about non-GAAP financial measures first. In our discussion today we will likely use both GAAP, generally accepted accounting principles and non-GAAP financial measures. Non-GAAP financial measures are operating cash flow, operating income before specials, per share impact of special items and earnings per share before specials. A detailed definition of the and list of special items can be found in Attachment 5 on the release, as I said, on our website. And at Attachment 6 you will find reconciliation of non-GAAP financial measures to the most direct comparable GAAP financial measures and explanation of how PolyOne management uses these non-GAAP measures.

Next, I'd like to talk about Safe Harbor, and today in addition we will likely discuss statements or information concerning forward-looking statements, which in the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements give current expectations of forecast of future events and are not guarantees of future performance. They are based on PolyOne's management expectations and involve a number of business risks and uncertainties, either of which could cause actual results to differ materially from those expressed or implied by the forward-looking statements. I would recommend you review the updated risk factors in today's release as well as comprehensive risk factors in our recent 10-K filing, as the risks could cause actual results to be materially different from what we expect. With those comments, I'd now like to turn the call over to Steve.

Thank you, Dennis, and good morning, everyone.

Thanks for your participation today.

I am particularly pleased to report on our positive results for the second quarter. There are a number of key messages that I hope you take away from our conversation this morning. Specifically, this was PolyOne's best Q2 and first half ever, with revenue up 11% and earnings up 28% for the quarter. Our two key segments, performance plastics and distribution, showed outstanding results in the quarter, and have posted solid year to date sales and income improvements.

Our cash flow increased significantly. In year to date we are already nearly twice that of the full year 2005. And we're proud to say we now have the lowest debt and best leverage ratio since PolyOne was formed.

The news from all of our business segments is good. We've been able to take advantage of rebounding demand in both our North American and international markets, to capture sales growth and margin improvements.

So with that as a broad overview, let's fill in some of the details here.

Sales in Performance Plastics improved 11% and shipments in 36% compared to the second quarter last year. We saw strength across all geographic regions of our business. North American demand was driven primarily by strength in building products as automotive demand remained relatively soft. Our European team closed additional new business and we benefited from a general economic improvement within the region. In Asia, we continued to gain new applications for our products and realized very strong overall demand.

Our distribution business saw demands strengthen throughout the quarter culminating in the best June in distribution's history. This segment recorded substantial sales in income improvement in both the second quarter and first half compared with the year-ago period. Specifically, sales for the second quarter improved 12% while shipments grew 6%. Combining these results with first-quarter earnings, distribution posted its best first-half performance since the company's formation.

Our investments within the resins and intermediate segment continued to deliver excellent earnings in cash. Cash flow significantly increased compared to the first quarter, due primarily to stronger earnings and effective management of our working capital. We used some of this cash during the quarter to extinguish $15.8 million of long-term debt most of which was the repurchase of a portion of our high-yield bonds. I'm especially happy to report that we reduced our debt to cash flow ratio to 2.9, the lowest level ever for PolyOne and Dave will give you a lot more details about this in a few minutes.

This performance provides us with a firm financial base to make strategic investments that will drive new business growth. During last quarter's call, I emphasized that PolyOne has abundant opportunities to grow. At the same time, I stressed there is much more we can do and should be doing to provide greater value to our customers and ultimately to our shareholders.

We need to become much more customer-centric, and this means understanding our customers' businesses better, so that we can uncover more opportunities to help them be successful. We need to drive innovation based on the customer's current and anticipated needs. And as we succeeded this, we become an increasingly important and strategic business partner, and PolyOne will be viewed as premier supplier of specialized polymer materials, services and solutions delivering competitive advantage to our customers. Our mission is to do this better than anyone else in the business, and be recognized and rewarded by our customers for this distinction.

As I've discussed with several analysts and investors recently, we've identified key areas where we must make significant progress. These are: strengthening the commercial marketing and technical resources we need to succeed and win with our customers; moving from general commoditized markets to specialized attractive growth markets; continuing to expand and high-growth global markets; and reducing our high cost debt to gain the financial flexibility to invest for growth.

We're making progress in these areas. Let me give you a brief update on where we are with a few of them. During the quarter we hired Mike Kahler as Senior Vice President of Commercial Development. Mike is a proven leader with a very successful track record and is in the process of assembling a new team to improve our market intelligence and formulate our marketing strategy going forward. We're beginning the longer term process of bolstering and strengthening our sales teams with new hires to improve our reach to customers and markets. We just need more feet on the street and sales firepower to close the abundant new opportunities we see. I've asked each of our business leaders to develop commercial resource deployment plans that define timing and the incremental return committed from the new investments.

Our global expansion continues. Our new plant in China extended our presence in Asia and has turned to profit after less than a year of operation. In a few months, we're going to begin construction of a plant in Poland to serve the growing East European market and our customers who are migrating to that region. We'll continue to make the investments necessary to take full advantage of the growth opportunities in these regions.

We're stepping up our communications with customers and our visibility in the marketplace. The National Plastics Expo trade show took place just over a month ago and our active participation generated thousands of new sales leads and positive feedback from customers, suppliers and employees. We're following up on these leads and measuring our capture of new business.

We also used this forum to showcase some innovative new products. One example that's drawn a lot of interest is our new line of CPVC compounds, which can replace copper, particularly in high-temperature user plumbing applications. And I've already mentioned our debt reduction actions.

So just to sum it up, we have a lot of activity, enthusiasm and organizational energy that's focused around strengthening our company to drive performance and long-term sustainable growth. In the second quarter, in over the first six months, we developed some very good momentum.

All of these achievements are attributed to our people and just a sampling of what we can accomplish. We will build on this momentum and continue to strengthen our market position to seize the many opportunities available to us and to create value for our shareholders.

With that, I'd like to turn it over to our CFO, Dave Wilson, for a review of our second quarter financial highlights.

Dave?

Thank you, Steve.

This morning I will be discussing three topics: second quarter and first half earnings, second quarter and first half cash flow and liquidity and, of course, the third quarter outlook.

Our earnings in cash flow in the second quarter, and for the first half, reflect a continuation of strong performance and accomplishment. In the quarter, we earned $0.46 per share from continuing operations, up 28% or $0.13 from the second quarter last year. Year to date, we've earned $0.99 from continuing operations and increase of nearly 60% compared to last year. Included in these results are $0.17 per share and $0.37 per share of special items for the second quarter and first half respectively. A description of these special items is provided in Attachment 5 of the earnings release and by far the largest item for both periods is the tax allowance adjustment.

As noted in our release, our earnings this quarter were our best ever for a second quarter and our first half performance was a record.

Operating income for the second quarter was $63.5 million, up $10 million or nearly 20% from a year ago on sales revenue increases of 11%. Sales and earnings for each business segment improved compared to last year. On the first quarter call, we commented that in March and April we were experiencing a moderate slowing of shipments due to processor inventory corrects but we believed underlying demand remained sound and would be resilient and strengthened through the back half of the quarter. We witnessed this pattern with monthly shipments strengthening progressively through the quarter. The result was that both Performance Plastics and distribution delivered over 5% year-over-year volume growth.

Performance plastics segment operating income was approximately $29 million, up 10% from last year and also better than the first quarter. Importantly, we continued to deliver sequential return improvements on our return on sales. For the first half, we delivered 30% more operating income than we did through the first half of 2005.

Distribution operating income was $5.1 million in the second quarter and was ahead of a year-ago performance by 28%. Through the first six months, distribution has earned over $11 million. Resin and Intermediates earnings have remained strong at $29 million lagging only the first quarter record in aggregate earnings performance. We did see industry average PVC resin spreads decline modestly as lower quarterly average Resin prices more than offset lower ethylene and natural gas costs. Industry chloralkali price has softened modestly, even though the ECU continues to hold at near record levels. Benefiting from stronger volumes, SunBelt set a quarterly earnings record, exceeding the previous record set in the first quarter.

Now, turning to cash flow, which reflects an additional aspect of overall company performance. Our first half cash generation is already nearly double that generated for the whole of 2005. Net cash provided by operating activities was $46 million for the half. I refer you to Attachment 6 of the earnings release, in which we reconcile this value to our internal operating cash flow metric.

For the first half, operating cash flow stands at $51 million, an improvement of approximately $90 million compared to the first half of 2005. Including net proceeds from the sale of a business, year to date cash flow reaches $68 million. This performance is driven primarily by stronger earnings, which we've already discussed, and by continued improvement in working capital management across and throughout the company. As a percentage of sales, first half working capital, which for this internal metric we calculate by adding receivables and inventories and deducting payables, has averaged 13.7%, which represents a full point and a half better performance than a year ago.

Our day sales and receivable and days in inventory metrics, also reflect continuous improvement.

The strength of our cash flow performance positioned us to reduce our borrowed debt, including drawings on our receivables facility by nearly $27 million this year. The result is that we ended the quarter with the lowest level of borrowed debt since our formation in 2000. Moreover, the combination of stronger earnings and lower debt drove our leverage ratio under our 2006 year-end target of 3X having achieved a ratio of 2.9X at quarter's end. Similarly, this is the best leverage ratio since formation.

Steve mentioned the enthusiasm and energy being focussed around strengthening our company. This is a great example of just that. Achieving these milestones is the whole team PolyOne win, and is the direct result of the hard work and winning attitude being demonstrated throughout the organization across the company.

Now, let's turn to the outlook for the third quarter, and as we do, I draw your attention to the outlook discussions contained in both our earnings release and our 10-Q, as well as the forward-looking statements that Dennis commented on.

Overall, as our--as stated in our outlook, we're cautious about third quarter performance. We see our visibility, generally, to slow automotive demand and prospective softening in the building products industry. I also note, however, that demand development through July was by and large encouraging. Total company, we anticipate fairly flat sequential demand, but up a healthy percentage point compared to last year.

So all in all, our caution is related to the quarter not so much centered on the volume demand, but rather the risk of margin pressure due to the recent jump in natural gas costs and the potential impact that this escalation could have on energy derived raw materials and feed stocks. And, we would expect that this operating margin pressure would primarily be felt within the performance plastics and resin and intermediate segments. Higher energy costs would also pressure utility and conversion costs across manufacturing operations and within the R & I businesses. Publicly available industry sources project resin margins to narrow as announced PVC price increases may lag, realized and announced ethylene cost increases. Industry sources have also projected lower caustic soda pricing which, if realized, would adversely affect both OxyVinyls and SunBelt earnings.

Our outlook discussion in the release comments on expected sequential and year-over-year earnings outcomes for each segment, so I won't be repetitive.

Overall, we anticipate strong earnings growth compared to a year ago and for this comparison, we would not be considering the significant non-operational charge recorded last year. Compared to the second quarter, however, we're projecting an earnings decline with the level determined primarily by the pace, magnitude and sustainability of energy and energy-derived raw material price hikes. While we're taking a more cautious stance to our outlook, we know that it is incumbent upon us to implement the steps necessary to protect and expand our operating margins. Our performance through the first half benefited from the actions we took and the momentum we gained as we entered the year. We don't intend to give it back. And in that light, we remained absolutely committed to drive strong cash flow performance and continued to project cash flows for the year substantially seeing those generated last year, and first half performance is starting to form what the definition of substantially exceeding those generated last year.

With that, I thank you and I'll now turn the mike back to Dennis and open the conference call for questions.

Thank you.

Thank you, Dave.

I would like now to open the conference call to questions from the participants. Toni, would you give us the first question?

[OPERATOR INSTRUCTIONS]

Your first question comes from Christopher Miller of J.P. Morgan.

Good morning.

Congratulations on an outstanding quarter.

I want to follow up a little bit, particularly on the outlook. The lower caustic demand and pricing. Would you give us a little bit more color, particularly maybe what you saw over the course of July there?

We saw some moderate decline in--in the pricing, but, you know , it's a little early in terms of the quarter to really make that call. You know, our visibility is through our equity ventures and so, you know, our viewpoint largely is a reflection of that, plus what we read, as well as everybody else in the industry.

The comment on--on volume, is not so much reflected in July, but an expectation of, you know, we'll call it the clouds on the horizon, associated with energy-related economic softening, building product softening. Just, you know, the question mark concerning the general economy. And, you know, for that--in that respect, you know, it's not caustic-specific.

Okay.

And that goes along the lines, obviously, big quarter for cash distributions from the joint ventures.

Directionally can you give us any sense of your expectations for this second half of the year for those distributions, not trying to get a forecast or so much, but kind of flat year-over-year comparisons for distributions, is that an appropriate way to think about it?

I think on the distributions are going to track the earnings, and to the extent that our earnings and then we still expect, you know, on a certainly, on a historic basis, strong R & I earnings. My expectation is to continue to see strong distribution from OxyVinyls and SunBelt.

So far, that has been the pattern and I know nothing at this point where, you know, that would change my view.

Okay.

And then just on the natural gas, obviously, that kind of flows through there is risk of margin squeeze in a couple of your segments. Is there any way you can't hedge, or do you hedge, natural gas in any way or is it just a little too difficult to do?

What we do, and frankly our direct impact from natural gas comes through OxyVinyls, and we and they have had discussions on natural gas buying practices and frankly with them being the--the energy companies that they are, their buying practices don't include hedging as a norm and, you know, as we've benchmarked those buying practices, the practice does beat, you know, alternative structures, you know, buying daily as compared to, you know, you know, setting up the months in advance.

So, no, you know, we're not sitting here with natural gas hedge, but even so, and, you know, outside of the--we'll call it 60% spike in natural gas that we've seen over the last 10 days, you know, the forward strip for natural gas did have natural gas pushing into the $9 and $10 by the end of the year really tracking the heating season, and so there weren't all that many attractive, you know, forward hedge looks pre-spike, you know?

And now what we're seeing is the spike--the heat wave, you know, the fact that inventories went down when they were projected to go up a week ago, and, you know, how long is this spike going to last? And is it--is it here to stay?

But, still, even the forward look has got natural gas towards the end of the year still in that, you know, $10 range and so what we've seen is more of a, you know, a much steeper slope on the near end of the strip and so, no, we haven't--don't have it hedged and as we thought about it, as I say, you know, we work with OxyVinyls and their position has been largely not to.

Okay.

And one final quick question.

During the quarter you repurchased some of the 10-5/8 notes. Any expectations you can provide in the coming quarters for--is that just going to be purely a function of the timing of the cash flows?

What we have said and, you know, what we, you know, are holding to, is that it is our intention to use our debt--use our cash flows to reduce our high cost debt.

Last year in March, I believe it was, we talked about the fact that the high yield debt is callable in May of next year and our intention to drive cash flows to position us to be able to take some action. What we've also said is that we will look at opportunities to repurchase debt and make the right financial decision on a transaction by transaction basis, and so, you know, what I would confirm is that we will continue to make the right financial decisions going forward, and that our intention is to continue to reduce debt. Whether we do that near-term or closer to a call date, will really depend upon the financial markets.

Perfect. Thank you so much. I appreciate it.

You're welcome.

Your next question comes from Mike Judd of Greenwich Consultants.

Good morning.

A question about your Performance Plastics business. You know, when you're talking about higher natural gas prices and that potentially flowing through, are you really sort of alluding to higher PVC resin costs in that business and a bit of a lag in terms of being able to push through higher compound prices and also I guess you would be anticipating higher polyethylene, polypropylene and thallic anhydrite prices, is that the way to be thinking about that?

That is spot-on and in the other side is also the impact on conversion costs as natural gas pushes utilities.

But the raw material side really is downstream olyphyn and vinyl resin cost hikes and our ability to move our compounding prices across our different product groups appropriately.

In regards to that, you know, just looking at compounds, you know, if you can--PVC resin prices go up a couple cents or so, is it reasonable to expect, you know, 50% to sort of increase or penny up in compounds or what is the dynamics there in terms of the third quarter, as far as, you know, you know, what you've seen so far, anyway?

We can't comment on, you know, I can't speculate on price actions that could be taken.

Traditionally we've talked about a lag, but we also have talked more recently about the need to--shorten that lag because the volatility is just so the magnitude of the four increases of late has made it extremely painful to wait the typical quarter before the industry prices move. It certainly would be our intention to take the actions necessary. Whatever they may be, to not only cover the costs, but to maintain our margins.

Where do you think the typical lag would be? Is it a quarter?

At this point the more recent history says--says no. Longer term history would say a quarter and, in fact, you can go back into the 90's it was two quarters, but I think the relevant history is the most recent. And, you know, as I made in my comments, last year we took actions that provided us the momentum and the positioning for the success we've seen in the first half.

We don't plan to give that back, and so, you know, it is incumbent upon us to take the actions necessary to preserve our margins, our profitability and our market position, you know, regardless of what the industry throws at us.

Thank you. May I just add our businesses are on point here and they're watching very carefully the impact on their costs and they understand that they have an obligation to meet margin plans they have in the business plans they have and capture the costs that come through it that we can't offset elsewhere.

You mentioned that, you know, the volume trends in, basically, are sort of flat in July, and, you know, I guess that that bodes well, given, you know, the comments that you've made about the automotive industry and also the housing markets, but does that create a challenge in terms of, you know, basically recapturing that lost margin, if in fact, you know, volumes are a little weaker than we expect?

You know, the market nothing is taken away from the competitiveness of this market.

And I won't say that anything is easy, but what I will say we're accountable to our shareholders to deliver the performance necessary for us to, you know, drive value. And so, no, it's not easy, it never has been, probably never will be, but it's what we have to do. And it's what we will do.

Thank you.

Thank you.

Your next question comes from Bill Hoffman of UBS.

Good morning.

Steve, I wonder if you could talk a little bit about markets, both Europe and U.S. I mean, one of the things you guys indicated in your press release was potential softness in the auto side as well as construction. But it sounds like, you know, things are not really seeing it yet.

What I want to get a sense of, are you actually seeing some growth maybe pulled out of Europe?

Let me get to one point before we get into that.

When we talk about the slowness in automotive ability we're talking about the macroeconomics that we're hearing also. But also remember one thing, automotive only represents 10% of PolyOne's overall business, and building products is a bigger part of it.

Let me say generally in Europe we're feeling good about the direct of our business. We're winning some good business, improving our volumes and capturing opportunities to grow the business, getting proper pricing for our goods and services and we've got a strong team in Europe that's feeling--we had a meeting yesterday with our European business team and they're quite optimistic about Europe relative to the economic trends of the past. Some of that is general macroeconomics, some of it is our performance within that environment.

And Steve, one of the other things you also talked about is, you know, sort of evaluating your portfolio positively, looking for a potential acquisitions in places to tuck in additional business opportunities, any further thoughts on that now that you've spent some more time?

First of all, as you know, Bill, we couldn't comment if we did have something in our sights, but just from a philosophical standpoint, you know, we've realized that the best value we can create is through organic growth, and where opportunities exist, to make an acquisition that makes great strategic and sense and financial sense, we'll certainly be ready to go, but we're trying to drive our growth organically and pick up areas in, really, not bolt-ons in existing business space as much as opportunities for both in new arenas that we find highly attractive, places where we may have a technical gap, we may not have a market presence right now.

So as we come across those opportunities and we're always on the prowl for these, we'll certainly, you know, we're in a good position now to make--to make deals if it makes sense. But really we're not going to have a growth strategy that is focused around acquisitions and scaling up in our current marketplace. It will be new niches, new technologies, new opportunities or maybe geographic areas where we don't have enough presence, and buying something gives us a lot of speed to get there faster that we believe we could leverage up.

Thank you.

And last question just has to do with, you know, one of the other things you indicated was the need to hire more feet on the ground, is the way you put it, I think. You've obviously added a few senior people, have you started hiring more on the sales side of the equation and do you have a sort of plan in the second half of the year for that?

Let me address that. That is a great question.

We have added so far, and this is a small number, we've added 10 people. We have open reqs for another 15.

Those numbers will scale up as we -- we're trying to be strategic about this. A few of the locations and markets we're adding are very straight forward. Others we're trying to understand a little bit, get more marketing intel about specifics and marketplaces so we can strategically place people in the right spots.

The process, pace of the process sort of works out that way anyway. You can only bring people on board at a certain rate, if you're looking for high quality sales professionals. So we have an active search under way, 15 open reqs, it will scale up towards the end of the year but we're really settling in on extracting the business teams for what that investment will get us and they're actively working on those plans as we speak.

So I would say, you know, by the end of the year I would guess it would be up 25 or so. I would guess, it probably will--looks like this long-term is going to be investment of people over the next couple of years in the range of 100 to 150.

Perfect.

Thank you.

Your next question comes from Roger [Sneed] of Merrill Lynch.

Hi, guys.

On CapEx, you've given a 2006 guidance of $45 to $50 million. It looks like you would need to ramp up the second half to $33 to $38 million from the 12.5 from the first half. Is this high rate of spend for capacity expansion or have you been starving the businesses in the past?

No, it's a--it is generally just the ramping up of projects, an example would be Poland project that we've already announced, the spending will be in the second half of the year. The engineered materials expansion that we're putting in, Avon Lake, even though we're progressing with construction and expect it to be operational, in October, the spending is largely going to hit in the third and then carry a little bit into the fourth quarter. It is more of a seasonal. I note your point.

We're, you know, our spending pattern so far through the first half is below, say, you know, an average quarter and we've gone through the businesses and we are not, one, we are not starving the businesses for capital, you know, as you can see, the liquidity of the company has never been stronger and it is imperative for our businesses to make sure that they're operating as well as they can so that we're capturing all of the demand growth that we're getting, and not falling behind the curve in that respect.

So we are funding appropriately, you know, there are some projects that we may have put into the capital plan that we may defer to 2007 just because you know it is not necessary or the spending will be pushed out. But we, you know, we're not running into capacity constraints versus planned capital spending, and certainly we're not--we're not doing anything to impair the ability of our manufacturing assets to meet demand as effectively and with as high quality as possible.

Okay.

What should we think about, then, sort of run rate going forward on an annual basis?

Well, you know, I think that we probably, in light of our first half spending is, will be at the low range at the end of the year. So and I think assuming that it's basically even between the third and fourth quarters, is--is an appropriate model assumption as you would need to make.

Actually I meant beyond 2006.

I'm sorry. No, I think the $50 million is a planning number that we've talked about and that we believe we can hold to.

Our D & A is a little bit above that and, you know, the nature of our businesses is such that we can continue to invest roughly 50% of our capital in strategic growth projects, and use the other 50% to maintain the plants and, so, you know, the $45 to $50 million provides, you know, really good flexibility for us and that is as we know is just about, you know, 90% or so of our D & A.

Okay.

And your cash balance was $75 million at the end of the quarter, which is a bit higher than the sort of a $40 to $50 million of your typical cash balance. Should we think about that as since you've gotten rid of your small revolver that you might maintain a higher level of cash now for should we think of this more as a transitory level?

No, I think you should think of it as a transitory level; that is cash that's available in time to take out debt. And we've eliminated the revolver but what we put in place is a guarantee structure, that in fact does give us frankly more access to liquidity, just not the guaranteed liquidity that, say, a revolver would provide.

So in fact, you know, that new structure is--strengthens our near-term borrowing capabilities.

Great.

Thank you very much.

You're welcome.

Your next question comes from Ray Kramer of First Analysis.

Good morning, gentlemen.

Good morning, Ray.

Couple questions for you. One, with these new hires that you're talking about and it looks like that may accelerate--is it better now?

Yes.

With those new hires looking like there may be some acceleration there, what should we look for in terms of SG&A as the year unfolds and into next year?

Should that go up accordingly or are there offsets?

Well, the expectation is, and that is why we're wanting to cement the plans is that this is a pay as you go, we'll make modest investment, there will be a slight increase in our SG&A as a percent of sales, but, you know, we have to get the pay-back and if there is--bit of a lag and it can range depending upon the business, could be 12 months, could be 18- month kind of outside edge of this, but with the business growth that we're driving, I think it is going to be hard, really, to find it over a period of time. So I would guess, you know, we're running in that 8% range, that is probably roughly where we'll try to keep it, and if we find that we're getting rapid accelerated returns, we'll invest more and I think we'll make everybody happy. So we always try to find that balance between, you know, the investments that we make and returns that we get and obviously want them as quickly as we can achieve them but with sales and investment it is a year, generally a year.

Okay.

And then just lastly, you know, looking at your spread in terms of what Q3 could be, could you give us maybe a range, let's say natural gas stays high where it is, how low could it go, if tomorrow it's, you know, back down, how high could EPS be?.

Well, we don't give an EPS range, guidance or anything. But what we do do, is we provide high leverage variable analysis which provides really any of the investor, the financial impact from a change in those variables, and so if natural gas were to go up, say, $3 over the course of a quarter, that would have roughly a $3 million impact on us compared to the quarter before.

So that, you know, in essence we're buying or have the economic equivalent of buying 11 million BTUs on an annual basis, and I would refer you, if you don't have it handy, because it is important, because with these swings in the commodities, you know, clearly those impact our earnings or have the capacity--capability of impacting our earnings, you know, we have that high leverage variable input analysis as an appendix for our presentations and you can find it on our website.

Okay?

Okay.

I assume that factors in no price increases to offset natural gas.

That--yeah, yeah. I mean those, what the analysis does is shows what the cost impact would be; dealing with those cost impacts is management's responsibility and accountability.

All right.

Thanks a lot.

Sure.

Right.

Your next question comes from Saul Ludwig of KeyBanc.

Good morning, everybody.

Good morning, Saul.

First, a couple knicks and knacks --- the $2.4 million of special that you carve out include in your specials, but where is that in the--in the segment numbers as part of the 63.5? Which bucket of those 4 categories has $2.4 million special gain in it.

It's about $1 million in Performance Plastics and the rest is in corporates.

All right. So in corporate, we had the 1.4 there and you also, which we didn't include in earnings per share, you did have the $6.4 million of the legal expense which gets you what?

About $0.04 a share help?

Yes.

You would have earned about a quarter a share if you didn't have the legal help?

But if we, you know, there were other costs that offset it--

Such as?

As we look at employment costs, relative to a year ago, I mean, the pure number is, you know, is right. I mean, it was roughly a $0.04 impact. But there is the buying back the debt, which had $0.01 impact.

There are, you know, higher--you know, higher comp costs, there is just, you know, there is a variety of, you know, call it "non-scheduled impacts" and what I do is I refer you to our [10-]Q where we talk about S & A and what we do there is we guide--guide you to a view that the year-over-year S & A is in fact up several million dollars. That is also driven by some compensation cost increases, bonuses this year versus last year type accruals. But if you pull that out, and view that as variable to earnings power, you know, that $6 million gets whittled back to about 2.5.

Okay.

Next question, could you give us the swing from the first quarter to the second quarter, this would be an OxyVinyl question, in ethylene chlorine and natural gas?

As we look at it, the industry numbers and, you know, Saul, we don't provide anything specific on OxyVinyls or SunBelt, but the industry view would be that ethylene has come down $0.03 to $0.04. Natural gas overall was down in the second quarter compared to the first. PVC was down.

How much has that come down?

Little over a buck.

I'm searching for a number -- under $5? Under $6?

No, no, first quarter was over $7.

What was that?

First quarter was over $7. So sec quarter was not under $6. I wish it were.

Okay.

And PVC was down $0.03+ overall but that was more reflection of declines in the first quarter and then just being flat in the second. So that is where the quarter to quarter average dynamics were.

The ECU overall came down a little bit, not much, you know, hence the comment that SunBelt volume improvements offset that slight decline.

Okay.

And then finally, the one really surprise in your quarter was the 15% volume increase in the Performance Plastics sector, that was really impressive. And I would say that was the good news. Maybe the bad news is given 15% volume increase--

Saul, that is 15 and 6%.

What?

That 's 15 and 6%.

What do you mean 15 and 6? Says Performance Plastics volume up 15.1%.

Well, if it says that, it is an error, Saul, and I apologize for that. It is 6%.

See where I'm looking?

Yeah.

Well, I know what the answer is, Saul. But 6%--but 6% is, you know, is still pretty good improvement and so, yeah, go ahead.

Okay.

So, well, my question would have been with a 15% volume increase, with the profit increase where it should have been, but if it is only 6% increase, and this is a typo in your release, then my question doesn't apply.

Okay.

And then your total volume for the quarter would have been up how much? And distribution was up 5.6. That's correct, correct?

Yeah.

So the total would have been like 5.9 or something like that.

It is 6%.

Okey-doke.

I tried to move away from the points.

Okay.

I understand.

Okay. Very good.

Thank you very much.

You're welcome.

Your next question comes from Rosemarie Morbelli from Ingalls & Snyder.

Good morning all. Would you give us a better feel for what is happening in your optimistic, are you seeing a pickup in both Eastern and Western Europe or is it mostly Eastern Europe carrying the day?

No, I would say Rosemarie, and Steve will add, we're seeing it broader. We're seeing in Eastern Europe demand improvement. We talked about it, the rationale behind putting the Poland plant up. We're seeing a migration of some of our customers who have been in--in Western Europe moving to Eastern Europe and then, you know, we're building capacity to meet our customer requirements.

But, you know, the commentary on Europe is really, you know, more broad than that. It is not east versus west. It is really both. Although the rate, you know, on an actual basis, the rate in Eastern Europe would be up some, but the commentary on Europe is, you know, is strong both sides.

Okay.

So lots of growth in eastern, but still some growth in western, even though some of the customers moving over to the east?

Correct. Bear in mind, too, and I don't have the percentage. But the vast majority of our European business is still in Western Europe.

Okay.

Is there a large difference in profitability. I'm assuming there is some in difference in possibility in western and eastern, is it a substantial number or is it just marginal? It needs to be there because the volume is going to be sold into that region.

No, it's marginal.

I mean, there is differences in every country, as you go around Europe, as you know, there is nothing distinctive about east versus west. Our expectations are comparable for, you know, Eastern Europe, Western Europe, as well as Asia.

Okay. And then if we could look at the people you are adding, are you also, well I guess to say it is a harsh word, but I cannot think of anything else. Are you also firing some people and, therefore, net-net, you are not adding the 25, you are kind of upgrading the quality of the sales force?.

Rosemarie, we're doing both.

The number I gave you is--those are net numbers. Those are net increase head count additions. And I think just in the course of doing our business and in changing expectations, we are always upgrading talent,and that is an ongoing process. But the numbers we're giving you are incremental net head count additions.

And, since the talent is higher, I am assuming that the compensation is higher, so the cost to the addition to SG&A would be a combination of more people and then higher-paid people? Or is there a compensation difference?

You know, I think that's--you know, I hope they make a lot of commission. Okay?

I hope we have to pay them a lot of commission because they grow our business very well and I'll be very happy if that's an outcome. We deal with competitive rates in the marketplace and what's necessary to attract the talent that we think affords a great return on investment for us, and can complement our team and add to what we have already in our company. We're always trying to be competitive and not cheap about it, because you don't usually do very well when you get on a "Gee I can get this person for 20% less than the other". It is market-driven more than anything else.

And then we try to put our people in a position to have enough variable compensation that they're incented and rewarded and excited about growth and profitability growth. That is sort of what the mission is, and on average I can't tell you if they'll -- it may be up average cost per new person might be a little bit but I don't know that. It is market-driven.

And just following up on that, you just said it again and you've said it in your prepared remarks, that you are picking the areas where additional people are needed.

Could you give us a feel as to which markets are really calling for more people, and more talented people, for lack of a better word?

Well, I would be careful about that publicly, just because we try not to expose all of the moves we're making out there because we might have a competitor trying to listen into this call and I really don't want to get too specific.

But I would say to you that we find sizeable opportunities across several of our markets and wherever it makes sense we're trying to be intelligent about our choices here and where it makes good sense and we see business opportunities and we see gaps, based on our current deployment, that's where we tend to go.

Okay.

And you also talked about raw material costs going up, that economy is most likely going to slow, if it hasn't yet. So you may have difficulties in getting prices to offset those raw material costs, and yet, you say that you want to maintain margin and end market share. How do you combine both? Don't you usually lose market share at the expense of margin and vice versa?

We recognize the challenge, but we have to do both and as I said earlier it is not easy, never has been, but we need to maintain our market position and we need to maintain our margins and expand our margins and we need to do that simultaneously and it's part and parcel why we're putting more investment into our commercial resources, so that we can identify more market opportunities, opportunities where we have greater opportunity to differentiate our products and also more sales people, so that we can be making more sales calls and so, you know, that is part and parcel how we're going to attack that, you know, that dilemma, but in the end, we have to do both.

And also we're changing a mindset here and we're trying to get our people focussed on the kinds of customers that appreciate what we have to offer and we'll stick with it through thick and thin and understand that when energy prices go up, it is beyond our control and they'll stick with us, and that is a sales process. It is you never get thanked for increase, but you can be appreciated for what you bring in total to the customer.

Okay.

And then just quickly, interest expense in Q3, does that change due to the repurchase of the high notes and by how much? And then for Steve, could you give us a little more details and timing on these strategic investments, when can we expect to see impacts from it?

Okay.

The first question is, does the $15 million of high yield debt, it's roughly 10%, so it's going to be around, you know, $400,000 per quarter and it ought to flow right to the bottom line in that respect.

Okay.

With regard to the strategic investments, you know, you all want the return to be as quick as possible but realistically as I mentioned earlier the time to productivity for new sales rep depends upon a lot of different things, depends on the skillset they bring, depends on their years of experience, either selling and another industry or in this one, depends on now quickly they assimilate and understand our business and understand PolyOne and how quickly they can go out and begin to build relationships and give customers reasons to do business with us. So it's quite--variable.

But I will tell you that it generally, and in an industrial business like this, it is generally in the 12th to 18th month time horizon and that is why we find that we have to be careful in balancing this investment and not making it all at once and have it all impact our SG&A costs immediately. And, frankly, you can't be as effective in your training when you do it en masse like that, metering it in at the pace that we're looking at is the right thing on all fronts.

So, I guess answer your question, it is probably a 12 to 18-month process of investment to really showing up on the P&L. Learning the business, making the calls, getting the customers signed up, and seeing invoicing and billing show up on the P&L.

This is only linked to the additional hires; you must be making strategic investments elsewhere in other parts of the company which will have different profile in terms of timing.

Well, of course, no, I mean, for example, our plant in China, plant is one year old and making profit. So it is case by case and we run them out and before we make the investment, we have an expectation, we have a financial case, we have a management case, and we have an understanding about how long the payback will be and it is just highly variable.

The hardest one is, frankly, R&D, because you bust some projects sometimes. If you're smart about it, get some good paybacks but you can't always assess the duration or outcome of some of the innovation development that you're trying to get. Plants are generally a lot easier and sales force is easier to predict.

On the R&D, if the new products everybody has been working on for the six months, is that--does it do anything? Is that when you kind of stop it?

It is really a very case by case review. We don't, you know, I guess we reach a point of understanding that, you know, we're pouring money at something and doesn't look good. If we do--lot of this has to be done on the front end and we use the stage and gauge process, and if we do that properly we have a clear understanding of the potential reward, duration, cost, amount of time to invest, et cetera and it takes discipline to adhere to this process. And we are instilling that discipline in our organization now.

But to predict, you know, we followed the process, keep the projects on track but everyone of these has a different pay back and everyone has a different development time.

Rosemarie, we're a little over the hour and I know you have more follow-up, but we can certainly take those later.

I know Steve has a couple conclusion remarks he would like to make and conclude the call today.

I would just like to thank all of you for your questions and interest, and I really enjoyed the opportunity to meet several of you over the past few months, and we're going to continue to meet with shareholders and potential investors in the months ahead.

I'd say, most of all, I've enjoyed telling the story of PolyOne and prospects for the future. We have opportunities that we're actively pursuing at PolyOne and going to be relentless in capturing them. And as we do, we'll deliver competitive advantage to our customers and greater shareholder value to our investors. I hope you agree with me, it is really an exciting and rewarding time to be part of that story. So I'd like to thank you all very much.

Thank you, operator. That concludes our call today.

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