Avient Corp (AVNT) 2006 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth-quarter 2006 PolyOne Corporation earnings conference call. My name is Nicole and I will be your coordinator for today. At this time all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (OPERATOR INSTRUCTIONS). I would now like to turn the call over to Mr. Dennis Cocco, Vice President of Investor Relations. Please proceed.

Thank you, Nicole, and thank you, everyone, for joining us this morning. I'm Dennis Cocco and in today's call our Chief Executive Officer, Stephen Newlin, will make some opening comments followed by Chief Financial Officer Dave Wilson. We will then open up the lines for questions.

Because we 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 that you please call me at the conclusion of this conference call and I can be reached at 440-930-1538.

Last night we issued our fourth-quarter earnings released as posted on our Investor Relations section of our PolyOne website and of course on the website we also include all our past financial filings. We are webcasting the call today.

I'd also like to point out a couple other things. In today's call we will be likely using -- and I'm sure we will -- generally accepted GAAP accounting principles and non-GAAP financial principle measures. These non-GAAP financial measures are operating cash flow, operating income before specials and per-share impact of special items and earnings per share before specials. A detailed definition and a list of special items can be found in attachment 5 of last night's release. In attachment 6 you will find a reconciliation of non-GAAP financial measures to the most directly comparable GAAP financial measures and an explanation of how PolyOne management uses these non-GAAP measures.

In addition, we will likely discuss statements or other information defined as forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements give current expectations or forecasts of future events and are not guarantees of future performance. They are based on PolyOne's management's expectations and 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 would strongly recommend that you review the updated risks in today's press release because the risks could cause actual results to materially differ from what we expect. With that, I'd now like to turn the call over to Steve.

Thank you, Dennis. Good morning. We're glad to have you with us for PolyOne's fourth-quarter earnings call today. To stay on schedule and allow sufficient time for your questions I'm going to leave the quarterly review to our CFO, Dave Wilson, and use my time to discuss the actions we're taking in pursuit of our strategy.

When we spoke three months ago I set fourth our vision, to be the world's premier provider of specialized polymer material services and solutions. I also outlined the four key components or pillars of our strategy and the financial goals we plan to achieve by 2010. I'd like these components to become the focus of discussions about PolyOne because, frankly, that's what's guiding our path forward. I've organized by comments this morning around our strategy and I hope that over time our dialogue with you will center on this because it's what will drive our results.

In the fourth quarter the management team continued to roll out our vision, strategy and goals throughout the Company. These concepts and plans are now clearly understood by our associates. They know what's expected and they understand that in this game we need everyone on the field for all four quarters. The strategy has become real now because it guides our actions to increased growth within our operating businesses and improves the mix of our earnings, which I also spoke about last time we were together.

Let me give you a brief progress report. I'll start with commercial excellence. Through this strategic component we continue to build our leadership team and upgrade our commercial organization with more sales, marketing and technical firepower. Earlier this week Dr. Cecil Cappelow joined our management team as Vice President of Research and Innovation and Chief Innovation Officer.

Cecil has an established and esteemed track record of leading global technology organizations at two renowned corporations and created innovations in both products and services. His impressive combination of business, scientific and engineering experience makes him well qualified for this position. At PolyOne Cecil is charged with accelerating our global innovation of technologies and services while leveraging PolyOne's synergies and global reach.

I hope you'll recall that last quarter we talked about new leadership at our North American color and engineered materials businesses. We are assembling a first-rate team that knows what success looks like and is determined to achieve it at PolyOne. We've added 52 people in sales, marketing and R&D as we work toward our goal of roughly 100 commercial additions over an 18-month period. This is much more than a numbers game because we're seeking top talent and we're very pleased with the caliber of the people we've taken on.

We're now putting the commercial organization through in-depth training and value-based selling which will accelerate PolyOne's strategic shift to a high-value added customer focused company. Our people will become adept at leveraging the advantages of our offering through a deep understanding of customers' businesses and their needs.

We talked about another linchpin of our strategy which is specialization. Specialization demands that we differentiate PolyOne through innovation and new product development and we're picking up the pace here. In 2006 we submitted 25 patent applications, which is more than double our total in the prior year. To give you one view of what's going on here; let me spend just a moment discussing the biopolymers market which we've targeted for further exploration.

We see biopolymers as the wave of the future, and really of the present in Europe and areas of Asia where governments and consumers are pushing for biodegradable or bioderived alternatives to conventional plastic polymers. But they face some hurdles. For example, these polymers made of renewable resources like corn are very hard to color in an eco friendly way. So PolyOne has developed a series of colors and additives that are compatible with these new generation plastics.

These ecologically compatible products help our customers to expedite acceptance of biopolymers and allow our customers to offer a broad range of echo friendly consumer products to comply with prevailing standards. We're selling colors for starch-based applications in Europe and we've developed transparent colors for biodegradable bottles. We're helping our customers and in doing so we think we're securing a foothold for PolyOne in a changing world. We estimate the biodegradable polymers market opportunity today at $600 million and growing at strong double-digit rates. So there's a lot of upside potential here.

Moving to another subject that's near and dear to me, on-time delivery. This falls under the banner of operational excellence, another element of our strategy. We've been benchmarking our delivery progress against competition, customer requirements and historical performance. We launched this initiative in March after hearing from our customers and I'm very pleased to say that through the end of 2006 we improved our delivery performance by more than 7 percentage points, exceeding our 2006 goal and reaching a level where we are distinguishing PolyOne's capabilities from competition and improving our customer relationships.

Also during the fourth quarter we rolled out lean Six Sigma across the organization and it's having an impact, empowering our people to identify and fix problems that have hampered efficient customer service for years. Again, on this front we're piling up some early wins. Let me just cite one example for you. We had a team of people at our plant in Texas that found a solution to counter high humidity levels which had increased the manufacturing time, particularly in the humid summer months. By applying lean Six Sigma principles this team saved roughly $1 million, increased production, improved quality and advanced our progress in on-time delivery.

Now to our fourth key strategic front, globalization. We've been quite active here as well. We're very pleased that our international color and engineered materials business posted a full-year sales improvement of 14%, reflecting the soundness of our global growth initiative. Last quarter we announced on our pending acquisition of the assets and operations of Ngai Hing PlastChem company which include a plant in Dongguan, a city in South China. We're eager to enter this market where we'll support global customers in China as well as Chinese producers making products for export.

PolyOne has really enjoyed some great success in South China where we're also expanding capacity of their Shenzhen plant which makes plastic compounds and colors. This plant opened in mid 2005 and we're already developing plans to add two new lines this year to meet surging customer demand. We're adding capacity at our color compounding plant in Thailand where we're installing two additional lines in response to growth.

Toward the end of last year you'll recall we announced the opening of a sales and business development office in Mumbai, India. It's early and we're testing the waters, we're dipping our toe into this high-growth market where we see many of our global customers migrating, customers such as Whirlpool, Daimler Chrysler and Procter & Gamble.

In yet another part of the world work proceeds on our new color plant in Kutno, Poland with an anticipated opening this summer. Along with our plant in Hungary, this new facility strongly positions us to support a rapidly growing customer base in Central and Eastern Europe. Finally, we're adding in line to manufacturer low smoke halogen-free compounds at our Pamplona, Spain facility. This is another high-growth market in Europe where legislation requires specialized highly flame retardant plastic compounds in wire and cable end use applications.

My closing comments this morning concern our 2007 key performance indicators. Beginning with the first quarter call we'll be reporting to you on some of the same indicators we are using to measure our performance internally. They gauge our progress in terms of gross margin improvement; our vitality index, which charts business growth from new products, services and markets; global expansion; delivery performance; and financial measure such as our debt to EBITDA ratio and working capital as a percentage of sales.

Why are we doing this? Well, we're thinking about ourselves as a different kind of company and we really want you to do the same. This also demonstrates just how serious we are about achieving our vision and our strategy. Improving the performance of our core business is integral to everything we're doing at PolyOne.

You know, 2006 was quite a year of change for us. You've heard us talk about the new PolyOne and we mean it. We're driving change throughout the organization. We are reinvigorated with the addition of top notch talent. As I visit with existing and potential shareholders I'm very gratified to hear that they agree with our path forward.

2007 will be a year of continued change, one in which we expect our strategy to begin to bear fruit and I'm really looking forward to reporting to you on our progress. Now I know you're very eager to discuss the financials, so I'll turn it over to Dave Wilson who will review our fourth-quarter and full-year results and near-term outlook. Dave?

Thank you, Steve. This morning I'll be discussing the following topics -- fourth-quarter and full-year earnings; fourth-quarter and full-year cash flow and liquidity; and as well as our outlook for the first quarter of 2007.

I also want to point out that our business segment presentation has been modified from the third quarter to reflect a single vinyl business segment. This is the final foreseeable change in our segment reporting structure, but I also remind you that future adjustments could occur based upon the specific requirements outlined within the segment reporting guidelines. In this regard, attachment 7 of our earnings release provides quarterly segment sales and operating income for the three-year period 2004 through 2006 in order to facilitate your understanding and analysis of our businesses.

Now moving to current operations. Full-year total company earnings and cash flow were both records. Year-to-date we earned $1.33 per share, an increase of $0.82 per share compared to last year. In the quarter we earned $0.15 per share, down $0.09 from the fourth quarter last year when we earned $0.24 per share. Included in our results are $0.12 per share and $0.48 per share of special items for the fourth quarter and full year respectively as presented in attachment 5 of our release.

In addition to those items, charges associated with premiums on the early extinguishment of our high yield notes and with the amortization of debt issuance costs were $3.8 million and $5.2 million in the fourth quarter and full year respectively as well. The principal special item in the fourth quarter was the $15.8 million non-cash benefit associated with the reversal of the remaining balance of our tax valuation allowance. As of the fourth quarter 2006 we are back to a three-year cumulative earnings position with an outlook for continued profitable operations. Consequently we will begin recording tax expense on our P&Ls as of the first quarter of this year, 2007.

As we transition back to this tax reporting treatment however, it's important to remember that this will not change our cash tax paying status. We still carry about $270 million of net operating losses that will be utilized to shelter cash tax liabilities on our U.S. earnings. Year-to-date the largest special items are related to the tax allowance adjustment and, as I just mentioned, for 2007 this adjustment will no longer be presented.

Operating income for the fourth quarter was $22.4 million, down $15.6 million from a year ago. The principle driver of this decline was the $16.7 million precipitous drop in resident intermediates income as foreshadowed during our third-quarter conference call and then reinforced in our December mid-quarter update. Both OxyVinyls and Sunbelt were down significantly due to a combination of margin contraction and low industry operating rates reflecting the downturn in the construction and building materials market.

During the quarter industry PVC resin spreads narrowed due to PVC price declines that more than offset the benefit derived from monthly reductions in ethylene costs. Chloralkali margins also lessened as caustic pricing moderated. Noteworthy, however, was the performance delivered by our operating businesses. The aggregate of our core operating reportable segments demonstrated double-digit income growth primarily reflecting higher margins as overall gross margin improvement plans continued to gain traction and rose over 2 percentage points to 11.2% compared to the fourth quarter 2005.

Highlighting certain segment performances, international sales grew 24% in the quarter or 16% on a currency adjusted basis. Asian sales were up 21% and Europe's were up 14% and again on a currency adjusted basis. International earnings were $3.6 million, up approximately $4 million from the loss reported a year ago. And the currency impact on earnings in the quarter was immaterial at about $0.2 million.

For the vinyl business segment earnings were up approximately 50% as margin improvements more than offset the adverse effect of a construction industry related 20% decline in sales. PolyOne distribution income of $3.6 million was down from an uncommonly strong fourth quarter in 2005 when we experienced near peak product margins and a demand surge through year end as processors rebuilt after the third-quarter 2005 hurricane shocks. The income improvement demonstrated by the all other segment was driven primarily by the North American color and producers service segments. And as noted in our release, the decrease in corporate largely reflected higher nonrecurring benefits being realized in 2005.

For the year each of our recordable segments delivered income improvements, but for PolyOne distribution which nearly matched the 2005 earnings record. Importantly, and as Steve mentioned, our international segment demonstrated a meaningful earnings rebound from 2005 in line with the 14% sales growth.

Now turning to cash flow where we also performed at record levels in 2006. Net cash provided by operating activities was $110.5 million for the year compared to $62 million last year. I refer you to attachment 6 of the earnings release where we reconcile this value to our internal operating cash flow metric. For the full year operating cash flow was $86.5 million, an improvement of approximately $55 million compared to 2005.

Including net proceeds from the sale of the business -- our engineered films business -- full-year cash broke through $100 million. This performance was driven primarily by stronger earnings, which we've already discussed, and by improvements in working capital management across the Company partially offset by higher capital investments. As a percentage of sales working capital, which for this internal metric we calculate by adding receivables and inventories and deducting payables, averaged 14.3% which represents a 0.7 percentage point improvement from 2005.

The strength of our cash flow performance enabled us to reduce our barrowed debt $66 million compared to year-end 2005. During the year we purchased approximately $59 million of our high cost, high yield notes with approximately $44 million of these repurchases occurring during the fourth quarter. The combination of stronger earnings and lower debt drove our debt to EBITDA leverage ratio to 2.6 X this quarter compared to 2.8 last quarter and 3.7 a year ago. We are at our lowest and best level of both borrowed debt and debt to EBITDA leverage ratio since formation.

Now let's turn to the outlook for the first quarter '07 and as I do I draw your attention to the outlook discussions contained in the earnings release as well as to our forward-looking statements. Overall, as stated in our outlook, we anticipate that demand will pick up seasonally in the quarter but remain below the strong demand levels experienced in 2006. We expect both automotive and construction-related end-market demand in North America to remain sluggish compared to a year ago, but improve sequentially through the quarter, reflective of a more typical seasonal pattern.

Leading building and construction indicators, on the other hand, are generally encouraging and point to growth rebounding a quarter or two out. We also believe that lower energy cost if sustained will strengthen consumer spending and confidence and augment this outlook. Even though we anticipate difficult North American sales comps versus 2006 we do expect overall sales to rise between 11 and 14% sequentially with each reportable segment demonstrating double-digit growth. We also anticipate that gross margin should increase a percentage point or so from the fourth quarter to a level largely comparable with the first quarter 2006. Consequently we expect each reportable segment to deliver a meaningful income improvement sequentially.

Compared to the first quarter of '06 however, the most challenging earnings comps are associated with our vinyl chain businesses as we rebound off the by far the weakest quarter in 2006 to compare performance against the strongest. In addition to lower building and construction demand, publicly available sources indicate that industry PVC resin spreads are expected to be approximately $0.03 per pound lower than a year ago. Chloralkali margins are also projected to decline versus the first quarter of 2006.

Another key factor compared to last year, as noted in the earnings release, is that in the first quarter of 2006 we realized a benefit of approximately $9 million from nonrecurring adjustments. And even though they're difficult to forecast, we do not anticipate benefiting meaningfully from similar items this quarter. Overall we anticipate income to improve sequentially, but be below the first quarter of 2006 largely due to lower vinyl chain business earnings and the lower nonrecurring items, as already explained.

We recognize that we remain in a challenging operating environment; nevertheless we're already achieving important wins in support of our specialization and globalization strategies. We're gaining traction from our gross margin improvement plans. We're adding new talent, as Steve mentioned, that will strengthen our organization and accelerate higher value new business sales growth and innovation. Our international business is growing at robust rates and our business teams are energized by delivering greater value to our customers as we roll out our lean Six Sigma operational excellence initiative.

We've already commented that it's early and that we have much to do, but we're making progress and gaining momentum and we'll leverage this energy as we drive performance improvements in the days, weeks and months ahead. With that I thank you and I'll turn the mic back to Dennis and open the conference call to questions.

Thank you, Dave. Before I ask the operator to instruct you on how to ask questions, I would like to remind everyone that we would appreciate you keep to a primary question and one follow-up. In this way we'll be able to communicate and accommodate more of you on this morning's call. And of course, if you have additional questions I'll be available after the call today, as will Dave, to take additional questions. So with that, Nicole, I'd like to open this up to questions.

Mike Harrison, First Analysis.

Good morning, everyone. Just a question kind of on the new strategy. In terms of new product development, can you talk a little bit about overall market conditions and whether conditions have created opportunities or whether they've made it more difficult for you to transition toward a more specialized and higher value added product mix?

Well first of all, I'd say that we're always looking for new emerging opportunities in business and that's just how companies operate in this day and age. At PolyOne we've got our people looking for new markets for us, new applications within markets as well as leveraging our existing technology. So we see some dynamics at play here in the industry, such things as high metal costs help us we believe. Such trends as we talked about -- I spoke earlier about bioderived biodegradable products.

These are new and it requires new technology, it requires new-found knowledge to understand how to take these base resins and put the right additives and allow them to have some of the properties that we have in the more traditional plastics. So we see a lot of upside in changes that are going on in the marketplace, hence the reason behind our strategy of bringing in new talent for R&D and investing some resources in this area for us.

Okay. And if I can just follow-up on kind of a separate issue. We've heard from a number of companies that they've seen customers buying only what they need, taking down some inventory as long as they see resin prices declining. Is this something you've seen in the marketplace as well? And if so, have you seen any signs of a return to more normal buying patterns here in January or do you sense that customers are still buying on more of an as needed basis?

I think our comments there would be it's a really tough one for us to measure, but instinctively we would say we concur with what you're hearing. I think it's just logical, customers are smart and if they anticipate the price of something is headed south they're going to minimize to the bare bones their inventory. And I would say that what we do see in the field supports that, but it's really difficult to put data points and facts and figures around that.

Okay, thank you very much.

Mike Judd, Greenwich Consulting.

Good morning and thanks for taking my question. About 15 years ago or so there was a big movement in biopolymers and polyethylene, I guess there was a trend at that point mixing starch into polyolefins. And I guess on a cradle to grave type of analysis it was determined that a lot of this material ended up in the landfill anyway where there's not much oxygen, so consequently there wasn't actually any real breakdown of the polymers. Is this something new that you have and maybe you could just provide more information in terms of what polymers, what are some of the additives and why this is different than last time?

Mike, this is Steve Newlin. I'll take a crack at that and then I'll let some of these veterans of the industry take their shot at it -- because I wasn't here 15 years ago to have gone through all that. But I'll tell you what is different this time. This market that we spoke about is very real. It exists today. This isn't a mirage; this is $600 million worth of business today. And what's different -- and I think it's hard to see it in North America because we're sort of relying on our environmental conscience, if you will, versus legislative drive or regulatory drive.

We do see the regulations that have emerged in Europe and starting to emerge in Asia, Japan specifically for example. So part of this is this is beyond just being about image and being good corporate citizens. There are actually regulations that are demanding that certain products have specific content of bioderived or biodegradable product. So I think based on my resurrection of what went on 15 years ago and my limited knowledge of it, I would say that's quite different from the past. But let me ask Dave or Dennis to remark.

If you don't mind I'll shine on just a few comments, Mike. It is -- the technology is different than what you may recall when we were just adding starch to a base material. This is technology based on bioderived material, so it is bioderived from the very beginning, there is no material derived from ethylene per se.

Secondly, the legislation has gotten to the point where they've actually developed specifications for how quickly materials need to biodegrade. So there are standards and requirements now that we can develop too that didn't exist 15 years ago. And quite frankly, the landfill issue that existed 15 years ago is more prevalent in those countries that Steve mentioned in Europe, particularly in Japan where landfill is really at a premium -- land space is at a premium.

So this is technology that's going to continue. There's another aspect of this too, it's not just biodegradable materials, it's just a whole world of bioderived materials in that we're using renewable resources to develop organic material. So there's a whole other aspect of it which we have not really approached yet, but it's something that people are looking at also.

You know, it's less -- in Japan it's less about even landfill than it is looking at alternative sources of energy and reducing the demand for energy via any routes that are feasible and this certainly is one. So I think there are some pretty substantial differences this time around from whatever went on 15 years ago.

Okay. I'll just ask a quick question on the interest expense. You're indicating that it should be down around $12 million. What does that imply in terms of -- now that you've paid off some of the high yield debt here, what is the underlying interest rate that we should be using and what are your assumptions in terms of year-end '07 net debt I suppose?

We don't forecast or project year-end '07 because that would be tantamount to telling you our cash flow projection which we don't. But we do expect to -- as you're aware, the high yield note is callable in May. We have talked about the fact that we're driving cash flows to be able to take down as much of that as possible and to be able to replace some of the high yield debt -- the high cost high yield debt with short-term bank facilities. We've talked about the fact that we've put many of those in place.

And so, to the extent that we take the debt out we'll be saving 10 5/8%. To the extent that we replace the high yield with lower-cost more bank oriented type debt, we'll be saving about 3% or so based on today's rates. I'd also caution people and remember that when we take the high yield notes down there will be a premium, but as we've discussed, that clearly is outside of our operating performance and we will discuss it in that way.

It sounds like it's more back end loaded then basically since the notes aren't callable until May?

In that respect, yes. Although come May, that's the trigger month for taking action. We can't project that we will, but that's the first month when the opportunity is there to do a call.

Thanks. I'll get back in queue.

Roger Spitz, Merrill Lynch.

Good morning. You said you took out about $44 million of the high yield notes. Did you draw about $10 million on the AR during Q4 to finance part of that?

No, what we did was in our acquisition of DH Compound we put an $8 million longer-term note in which will be payable over three years. And so the net doesn't come up to that number if that's what you're looking at. But no, the AR facility ended the year with nothing drawn and through the fourth quarter there's been nothing drawn.

And you're suggesting you might take out some of the remaining amount of high yield notes with some bank debt. I guess do you have facilities in place? I presume it would be secured debt and that suggests that -- how much room do you have given the negative pledges on some of your other debt?

Roger, we work that balance very carefully. In terms of secured debt, new facilities would come under the baskets, but the AR facility does not come under that -- under those covenants. And as a consequence, since we haven't drawn on the AR facility, there is a portion of that that would be available for us to use to replace the high yield. But you are right; in terms of any new facilities there is that balance that we have to monitor carefully. And too, cash flow next year.

But I'm assuming that on the AR you probably take out roughly 80% of your accounts receivables probably can do an AR securitization, possibly increasing the AR securitization facility?

We have the capability to increase the capacity of the AR facility. The key for us -- and you'd appreciate and everybody on the call would appreciate -- that when you take out long-term debt with your short-term facilities you've got to be very careful about your projected liquidity going forward. And so we will maintain a conservative cautious stance on that.

All right, thank you very much.

Rosemarie Morbelli, Ingalls & Snyder.

Good morning all. Could you talk a little more about the new products at this stage, what do they represent as a percentage of sales and then what your goal is in the future or what is realistic?

I'll start with our goal of what the target is which is 25% of our revenues being derived from -- and a higher percentage of our gross margin being derived from products and services that are less than five years old. We're still trying to wrap our arms around where we are right now, but we're roughly in the mid single-digit range and we're I would say in the 5 to 7% range, so we have a long way to go. It's a new metric for us; it's a new area of focus for us. So we haven't been tracking it to the degree we should have been in the past. But we're gathering these numbers from around the globe and I will tell you within a whisker of 5 to 7%.

So you can see we've got much work to do and things like biopolymers where you have a $600 million market that's going to $1 billion in the year 2010, that's one of the reasons we're in that space, that's one of the reasons we're in electronics which is a dynamic market with a lot of growth. We've got to get into these markets were we can drive the innovative products applications and get to that 25%. And we'll revise that target upward perhaps, but that's our minimum established goal for this time. did that answer your question?

Kind of. This $600 million going to $1 billion market, are you saying -- what is being sold? I mean I am assuming that people are looking at possibilities and saying, okay, if we sell every pound into that particular market based on regulations and so on it can be a $600 million market today. How much is actually being sold into this market today?

Actually, Rosemarie, the market is $600 million today. There are people like NatureWorks and others making material -- bioderived materials both here and in Europe. It does exist already, it's not a market that's going to be in the future, it's going to grow quite rapidly, but our participation, quite frankly, is still small yet.

What we're doing -- to look at where PolyOne is adding value, we have products such as on color bio, these are color concentrates that are eco friendly. We have OnCap -- these are additives that might include slip, antiblock slipped and agents, UV barriers, optical brighteners, etc., the kind of additives that we know how to formulate into products that can go and be applied in these bioderived or biodegradable products. So that's our application zone and we are fairly advanced -- we're fairly advanced in Europe, moving quickly in Asia.

So when you look at your application zone -- you are planning in taking marketshare replacing some existing products? I'm assuming that everyone using those biodegradable plastics already are coloring them one way or another with appropriate additives.

There's some of that, Rosemarie, but there are also challenges -- there have been challenges in getting this done. And for example, they'll take something very simple, trash bags used in Europe. They came out, these bio trash bags came out and they were biodegradable but they didn't look very good. They aesthetically weren't very pleasing and maybe they're only trash bags, but people like to have some color to these or grocery bags -- whatever you may choose. So the inability to color those properly was limiting their acceptance and we now have means to add color so you're going to see more colorful handbags and trash bags and carry bags in Europe as a result of this technological advancement just to give you one example.

I can't wait to see the trash bags. If I may add one more question. On the intermediate -- Resin and Intermediates, they generated about $9.6 million in the fourth quarter. Are you expecting, based on trends and all of the negative comments that you have made, that this is kind of a high quarter compared to what is looming on the horizon in '07 on a quarterly basis?

No, I wouldn't say that at all. I think that we saw -- at particularly the end of the quarter we saw industry operating rates drop into the 70 or below and we would anticipate that there would be a rebound. I would not anticipate that the fourth quarter is reflective of our expectations. For averages in '07 we would expect it to step up. We expect in the fourth -- in the first quarter rather to see volumes -- really volume pick up driving earnings improvements in R&I for both OxyVinyls and also Sunbelt.

So no, we would say that we're coming off the bottom. The challenge is, when we compare ourselves in the first quarter last year, it was an absolute peak earnings in the history of for both OxyVinyls as well as Sunbelt and so sequentially we expect improvement but the year-over-year comps are just very, very difficult.

Thanks, that's helpful.

Saul Ludwig, KeyBanc.

Good morning, guys. This is a corporate expense SG&A question. You commented that last year in the first quarter you had $9 million of some special gains; I think there were some legal settlements in there. But I also seem to recall that there were some special expenses that muted the special gains to some degree. Could you comment on that and what number should we be thinking about on a corporate expense line on a go forward basis? And does that answer in some way tie into the 25% increase in SG&A expenses that you incurred in the fourth quarter this year versus the fourth quarter last year?

A lot of questions in there, Saul.

We're allowed two, so I started with one good one.

I guess we didn't talk about the semicolons in between. The S&A as a percent of sales in 2007 overall was about 7.7%. We are -- or 2006 was 7.7%. We are anticipating in 2007 as a result of greater investment to increase our commercial capabilities to improve the innovation, the initiatives that Steve has outlined that we would expect to see S&A as a percentage of sales to increase at least a percentage point. Some of that will be reflected in corporate, some of that will be resident within the businesses.

So we would expect that the base going into 2007 will be increasing through the year. When we look at the corporate and other for the year-to-date number, Saul, there's a $22 million improvement compared to 2005. I would hasten to say that that corporate eliminations line includes specials as well. And so the bulk of that was a $23 million adjustment associated with OxyVinyls write down of the Deer Park chloralkali facility in the third quarter of '05.

But then as you go through it there are about another 10 items that net out to about zero. Corporate spending in 2006 was up as we started to put in place more commercial resources. The implementation of 123R as well as improved performance caused our incentives to go up about $7 million year-over-year. In terms of what we've a called benefit from non-recurring adjustments to operating reserves and legal settlements, the '06 versus '05 when you add everything together was about $5 million favorable in 2006 compared to 2005. That also includes some asset sales in '06.

This year we didn't have restructuring of about $5.5 million that we had last year. And then we had some other adjustments in terms of a write-off of a software program for a couple million dollars, net higher environmental remediation costs, favorable LIFO, some changes in our intercompany profit eliminations, things of that nature to come up with the $22 million increase. When you compare fourth quarter to fourth quarter, there were just more onetime benefits last year than this year. We comment on that that but for those our operating businesses in fact demonstrate strong double-digit earnings growth. The operating businesses even with those were up about 7%.

And so, Saul, looking quarter to quarter there are a lot of puts and takes, but I think the main take away is expect that our S&A as a percentage of sales, which we drove down intentionally but have been talking over the last six months of increasing, should be up over a percentage point. Now I'd also hasten to say that even with that investment in commercial resources we're projecting that our operating businesses should demonstrate double-digit growth in 2007 compared to 2006. So we are expecting to get a benefit and realize improved margins and new business closes and new products being introduced as a result of the investments that we've started to make and will continue to make through 2007.

Thank you for adding clarity to that question. The other question I had is generally when PVC prices go up -- and of course you're buying the PVC from OxyVinyls -- there's always a lag and you get squeezed on your margins in your compounding and specialty resins businesses. Now we're seeing PVC prices come down and I would assume that you are seeing the benefits of that. And maybe is that the reason that you had better gross margins? In other words, did you have better gross margins because you sort of fell into it because PVC prices came down or did you have better gross margins because there was a true controllable operational improvement?

You have to say it's a bit of both, Saul, but I would say in our market environment, the rules of a quarter or two quarters' lag when resin prices went up before you could catch up on compounds really went out the window with the market spikes that we've seen over the last two years in commodity prices. And so it's a lot more -- it has to be a lot more same-day.

And so even though resin prices came down, holding compound prices and maintaining margins is not a dunk shot by any means. And so yes, there's some tailwind when your costs are going down, but believe me, there's a lot of hard work and a lot of customer value has got to be created and demonstrated to be able to hold margins in that environment.

And just a quickie -- tax rate this year?

Tax rate this year for 2007?

Yes, please.

37ish plus or minus a point.

37, okay. Okay, great. Thank you.

Bob Goldberg, Scopus Asset Management.

Try and get my semicolons in order here. So my serious question is the first quarter of '06 in the operated businesses I think you had revenue of about $570 million. And using your guidance I guess you're assuming what, about a 5% decline year-over-year in revenue in the first quarter of '07, is that right?

In the North American businesses, yes.

So the guidance -- I have two questions. The guidance is for similar margins 1Q '07 versus 1Q '06, is that right or am I not understanding that?

Yes, my comment was that our expectations is that as our gross margin programs continue to kick in we would expect to see a sequential improvement of about a percentage point which would bring it up to about where we were last year. Now you go through business by business, which I don't think would be appropriate, you'll have some variations, but overall that's about right.

Okay. What we're comparing to is about $32 million or so, 32 or $33 million of operating income in 1Q '06 in those operated businesses? I'm looking at attachment 7, $20 million in vinyl and $6 million each in international color and distribution.

Yes, it's around $30 million.

It's around $30 million, okay. Where is the $9 million? That's not in the operating -- the $9 million, that's from (multiple speakers)

That would be reflected in the corporate and eliminations column.

Got you. And my semicolon question, the spread on PVC resin from 4Q to 1Q, are you assuming any expansion, contraction, flattish or where was the sequential improvement coming from in OxyVinyl from 4Q to 1Q?

Principally volume. The volumes that, as you no, follow in the industry, the volumes in the fourth quarter just weakened sequentially and the expectation is that there will be a pickup. I think there's not a strong call for margin. Margins moving one way or the other is pretty tough to call at this juncture. PVC prices in January are under pressure, ethylene is coming down. How much will it be? Caustic appears to be going up, so chloralkali margins should be showing some rebound from the end of the fourth quarter, but I'd be cautious. My view is that the improvement in R&I that we're expecting is really volume driven and it's volume coming off a very low base in the fourth quarter.

Okay. So does OxyVinyl see any rebound in its order book so far -- or you're just expecting as we move through March that there will be seasonal improvement?

It's more the latter.

All right. Thank you.

I can't comment that they are or aren't, it's just our expectation is more the seasonal trend.

Sure, I understand. Thanks.

Christopher Butler, Sidoti & Co.

The first question is sort of going in a different direction. The capital expenditures for the fourth quarter were higher than what we've been looking at. I just wanted to get an idea of how much of that is timing, how much can we expect going forward. And there may be some areas for growth -- it sounds like Asia and Eastern Europe are some of the areas that you're looking at.

That's absolutely correct and more of it's timing in the year. We finished the year $41 million or so and we're projecting that our CapEx next year will be -- or this year rather will be 45 to $50 million. And you pointed out, capital for the Polish plant will be occurring, capital for expansions in Asia will be primary uses of strategic capital. There are a couple North American programs to assure reliability. But overall, similar to our pattern over the last couple years, roughly or close to half of our capital is directed to support our global business. And from a total Company perspective, about 60% is strategic compared to say maintenance.

And the quick follow-up question is on SG&A. I'd have to assume that with the rollout of your new strategy and some of the hiring that's going on within sales and marketing, especially that in SG&A there are probably some up-front costs associated with these practices that may not continue as we look forward. Just wondering if you could speak on that a little bit?

Certainly we have acquisition costs when you hire professional recruiters to find people, but we see that as ongoing. We expect to keep growing so we're going to always be in a search for talent to add to these areas. I would like to comment though, we keep calling it SG&A. Let me just tell you, the lid is on hard on the G&A side in our company. The Company worked hard to get that down and in control and we're going to keep stressing the organization on the G&A side so that we can fuel our investment on the sales, marketing and R&D side.

So there were some training costs, but we're going to keep training people as new people onboard as we elevate the level of training to a higher level of sophistication we will incur those costs. So I would really not look at it as onetime events because they will be repeating albeit maybe with different groups. I would also say to you our plan is to have cover for those expenses through margin and growth expansion as well.

Thank you very much.

Bob Amenta, JPMorgan.

Good morning, guys. They are very short -- to one word answers probably. The $30 million pension contribution cash, what is the non-cash number that runs through the income statement in '07?

About $12 million.

$12 million, okay. And then the last one, Sunbelt, do you have an updated amount of debt that you guarantee as of year-end yet or no?

Yes, it's $67 million and comes down roughly $6 million per year.

$67 million, down -- so it goes for another 10 years? Okay, that's all I had. Thanks a lot, guys.

I want to thank everybody today for their participation. Both Dave Wilson and I will be available for the balance of today for your follow-up questions. This concludes today's quarterly conference call. Thank you very much.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a good day.