Avient Corp (AVNT) 2007 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter 2007 PolyOne Corporation earnings conference call. My name is Carol and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded for replay purposes. I would now like to turn the call over to Dennis Cocco, Vice President of Investor Relations. Please proceed, sir.

Thank you, Carol, and good morning to everyone. I'm Dennis Cocco, and today's call are our Chief Executive Officer, Steve Newlin, will be making opening remarks and that would be followed by our Chief Financial Officer, Dave Wilson. We'll then open up the lines for questions. Because we would 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 you please call me at the conclusion of today's conference call. And I can be reached at 440-930-1538. Last night we posted the third quarter earnings release within the investor relations section of the PolyOne website and it includes all our other past financial filings. And of course today we are webcasting this call. In our discussion today we'll be using both GAAP, generally accepted accounting principles, and non-GAAP financial measures. The non-GAAP financial measures are operating cash flow, operating income, or loss, before special items and a per share impact of special items. Operating income excluding the final business segment, gross margin and earnings before OxyVinyls divestment and debt premium charges and gross margin excluding the vinyl business segment. The most directly comparable financial measures are net cash flow by operating activities, operating income and income per share and gross margin. A detailed definition and a list of special items can be found in Attachment 5 of the release and Attachment 7 and 7A will find a reconciliation of the non-GAAP financial measures to the most directly comparable GAAP financial measures, an explanation of how PolyOne management uses these non-GAAP measures.

In addition today, we will likely be discussing other information defined as forward-looking statements within the meanings of the Private Securities Litigation Reform Act of 1995. Forward-looking statements give expectations or forecasts of future events and are not guarantees of future performance. They are based on PolyOne's management's expectations that involve a number of business risks and uncertainties, any of which could cause actual results to differ materially from those expressed or implied by the forward-looking statements. I would strongly recommend that you review the updated risk factors that are in yesterday's press release because these risk factors could cause actual results to differ materially from what we expect. And with that opening, I'll now turn the call over to Steve. Steve?

Good morning and welcome to PolyOne's second quarter earnings call. I'll start this conference call with some overall observations and then comment on our second quarter performance, the OxyVinyls transaction and several initiatives under way to support our strategy. Our CFO, Dave Wilson, will follow with an in depth look at the quarterly financial results. We'll then open it up for your questions and I'll close the call with some final thoughts.

Considering the tough business environment and weakness in the North American building, construction and automotive end markets, I'm encouraged by our operating results for the second quarter of 2007 and year-to-date. The Company generated positive signs during the quarter that show PolyOne's specialization strategy is gaining traction. We took aggressive steps to rebalance our portfolio and reduce our exposure to the volatility in our earnings. We significantly reduced our debt, freeing up cash for value creating opportunities. We're improving our offerings and value proposition for our customers and I'd just say the bottom line is, PolyOne made some solid progress during the quarter. As reported in our mid-quarter update, we knew our year-over-year comparisons would be difficult against the exceptionally strong results during the first half of 2006 while encountering softness in the North American markets this year. For the second quarter of 2007, our sales reached $689 million, up 5% sequentially from the first quarter and flat compared with the same period last year. As state in our news release, we reported a loss of $0.06 per share during the second quarter. Adjusting for several items pertaining to some very positive actions, such as the OxyVinyls divestiture and debt redemption, our second quarter 2007 earnings were $0.10. Dave Wilson will go into a lot more detail on this later in the call.

Operating income in aggregate for the Company's non-vinyl operating segments increased 33%, or $4.8 million compared to the second quarter of 2006. Reflecting progress from the specialization strategy, aggregate gross margin as a percentage of sales for these non-vinyl businesses improved 1.2 percentage points or 120 basis points to 12.7% compared with the same period a year ago. This is really very positive news and it's particularly encouraging because it's occurring at a time when the marketplace is much tougher than it was last year and our results are happening earlier than we had predicted. During the quarter, we reduced our debt by redeeming $100 million of our 10-5/8 senior notes and retiring 20 million of our medium turn notes. Tomorrow, we complete the redemption of the remaining balance of 141.7 million in senior notes, using net proceeds from our divestiture of the OxyVinyls joint venture.

I want to take this opportunity to elaborate on the OxyVinyls joint venture divestiture which was announced on July 6th,, right after we closed our second quarter. This was a significant milestone in our Company's evolution. Let me make sure that everyone understands that we retained our long-term supply agreements on PVC and VCM through the year 2024. These agreements will ensure that we continue to have a strong business partnership with OxyVinyls, have access to consistent cost effective raw materials, and be competitive with anyone in the industry. We will continue to build upon our existing market leading position in vinyl compounding. This business is a work horse for us and we're committed to it. We know this business is operating in a tough external environment that isn't likely to change in the near term. We've maintained our competitiveness and continue to pursue our strategy of providing value creating product and service solutions to our customers. By selling our stake in the OxyVinyls joint venture, we eliminated a major source of earnings volatility and reduced our exposure to the building and residential construction end markets. On numerous occasions, I've said that we would seriously explore ways to reduce the wait that the cyclical resins and intermediates joint venture income carried in our existing portfolio and the OxyVinyls divestiture does just that.

As I just stated, we're paying off the remaining balance of our high yield bonds with net proceeds from the sale. We will save approximately 25 million in interest expense comparing 2008 versus 2006 and we'll begin seeing nearly $5 million of those benefits during the third quarter of this year. This debt reduction will significantly improve our balance sheet and upon redemption of the bond, our debt levels will be at an all-time low. Our financial position now allows us the flexibility to explore new opportunities and new technologies that compliment our expertise and value creating avenues that support our strategy as well.

I'd like to spend just a few brief moments talking about how we are continuing to strengthen our position and build the capabilities to differentiate ourselves through the development of specialized new products, technologies and services. We've greatly accelerated our patent activities over the last 18 months with the filing of 35 new patent applications. During the second quarter, PolyOne crossed a milestone when we filed our 100th new patent application since our formation in the year 2000. Our new plant in Kutnow, Poland will be dedicated in late September. With this new state-of-the-art facility and our existing plant in Hungary, PolyOne is well positioned to serve our growing eastern European and Russian based businesses. Those plants give us a strong foothold in these important growth regions. We opened up a new specialized color design center at PolyOne Assesse, Belgium. It's a location that is where our corporate headquarters for Europe exist right now and this happened during the second quarter. Our new facility there specializes in serving the eastern European packaging market. We're using this facility to invite customers to see firsthand our expertise in color and polymer technology and how we can develop unique colors for their specific applications.

At PolyOne today we're concentrating on selling value, not just products, to deliver competitive advantage to our customers. We're no longer just selling what our products are. Today we are communicating what our products can do for our customers to improve their operations and profitability. And I recently attended our international sales meeting in Budapest, experiencing myself, firsthand, the enthusiasm of this group. And I saw our new commercial tools and in-depth value based sales training we're providing. I got to tell you, these sales teams are focused and we've got a game plan to capitalize on the abundant opportunities in both Europe and Asia. Since our decision last spring to invest in commercial resources, we've added a net 85 professionals to our sales, marketing and R&D organizations, so we're right on track with our goal of 100 by year end. As you've heard me say before, on time delivery continues to be a priority for us and we're making solid gains as we strive to provide best in class service for our industry. Through June, our North American on-time delivery performance rose to over 93% and that's up more than 12 percentage points from our launch of this initiative in 2006. Our new goal is to advance our delivery performance to 95% by the end of this year and we're going to get that done. So that's where we are on just a few of the initiatives we have in place to make our Company better.

Before I turn the call over to Dave, I want to be perfectly clear. While we're encouraged by our progress to date, we know we still have much work to do. We're still in the early stages of our evolution into a specialized value added global growth company. I would caution that we face headwinds in some external end markets but we are driven by our relentless pursuit to deliver improved earnings performance and growth rates quarter after quarter. We're working to build a culture where both discipline and rigor are a way of life. Our employees are applying energy and drive to everything they do. We're being disciplined in our approach to doing business, making sure we are prepared, understanding our customers, and anticipating their needs. As we compete in this $20 billion plus market with a world of opportunity, we're executing our game plan with determination and passion. And on that, I'll turn the conference call over to our CFO, Dave Wilson, who will review our second quarter results and our near term outlook. Dave?

Thank you, Steve. This morning I'll be discussing second quarter sales and earnings, second quarter cash flow and liquidity and also our outlook for the third quarter. As Steve said, we're encouraged by many aspects of our second quarter results, considering the challenging North American environment. Importantly, our non-vinyl operating segments in aggregate, delivered double-digit operating income growth as well as sequential and year-over-year gross margin increases. Our vinyl chain businesses, on the other hand, did continue to experience demand and margin pressure from the weak residential construction market. A recent highlight was the July 6th announcement that we had divested our OxyVinyls equity interest and acquired the residual 10% interest in PVC powder blends for approximately $250 million net proceeds. As Steve mentioned, this divestment has key strategic implications, fundamentally changing our portfolio to enable less volatile, more consistent and sustainable earnings growth.

The proceeds also enabled the complete redemption of our 2010 10-5/8 high yield senior notes, directly lowering annual interest expense approximately 25 million, and we'll begin to see these savings start in the current quarter. Special items related to these transactions, which include an impairment charge, in anticipation of the third quarter divestment and the combination of call premiums and the write-off of note issuance costs equated to $0.15. Consequently, our reported EPS for the quarter was a los of $0.06. Adjusting for the aforementioned OV and note redemption related special items and other special items, our earnings for the second quarter would be $0.10. I refer you to Exhibit 5 of the earnings release, where we provide a summary of special items and I'll be providing greater detail on our earnings performance later in my remarks.

Turning to sales, in the second quarter sales were $689 million, up 5% sequentially and flat versus a year ago. As we stated in our previous update, we anticipated softness in the North American building and construction and automotive end markets. Sales have also been negatively affected by deliberate pruning of an unprofitable business but positively affected by successful penetration of new, higher value applications and driving a stronger sales mix. Additionally, our international color and EM segment has delivered strong sales growth. In the second quarter of 2007, sales increased 17% compared to the same quarter a year ago. On a year-to-date basis, we're up 18%. Taking into consideration the effects of foreign exchange, sales grew 9% for both the second quarter and the first six months. We are well-positioned to serve emerging high growth international markets and we'll continue to drive mix improvements through growth into higher valued applications in support of key global accounts. Moreover, we continue to invest in additional capacity to ensure that we're prepared to capture market opportunities in targeted high growth regions, as Steve mentioned, our new manufacturing facility in Poland will be operational later this quarter. This plan is strategically positioned to capture growth and serve our customers as they migrate operations from Western Europe to the east. The Polish facility also augments our existing color business in Hungary, cementing competitive advantage.

Now let's turn to operating income. Operating income for the quarter was $12.4 million, compared to 63.8 million a year ago. This decline is primarily driven by two factors. First, significantly lower chloro-vinyl chain earnings from resident intermediates and to a lesser extent, the vinyl business due to the previously mentioned weak residential building and construction market and to higher feed stock and energy costs. And second, the higher costs within corporate and eliminations. Specifically, R&I earnings dropped $17 million in the quarter compared to a year ago. Of this reduction, OxyVinyls accounted for over $14 million. The vinyl business segment earnings were down nearly 7 million. Corporate and elimination charges increased approximately 32 million compared to the second quarter of 2006. Three factors drove this increase. The $15.9 million impairment charge, that we've already discussed, in anticipation of the OxyVinyls divestment, an $8.9 million net benefit from insurance, legal settlements and adjustments to related reserves that were realized in 2006 and then a $3.7 million increase, mainly attributable to investments in commercial resources and capabilities as well as, although to a lesser extent, higher employee base and incentive compensation and benefit costs.

On the other hand, our non-vinyl operating segments delivered strong earnings performances. These segments in aggregate delivered over 30% more operating income than a year ago for an increase of nearly $5 million. This performance is particularly encouraging in light of the challenging North American operating environment. Embedded in this improvement were key milestone performances. the four business included in the all-other group delivered an aggregate 60% operating income improvement in the quarter. North American color and additives was profitable for the first time since formation. PolyOne distribution income was up 28% and set a quarterly earnings record and our international segment continued to deliver double-digit earnings growth. Gross margins for the quarter for the Company in whole was 12.3%, down 0.2 percentage points from a year ago and as well as 0.7 percentage points from the first quarter of '07 and both of these declines were due to lower vinyl business gross margins. Conversely, gross margin and aggregate for our non-vinyl segments improved 1.2 percentage points from a year ago and 0.8 percentage points sequentially. This improvement reflects the early wins we're achieving through specialization, underpinned by new capabilities developed through our commercial and operational excellence strategies.

Our selling and administrative expense as percentage of sales were 9.6 and 9.5% for the quarter and first half respectively, reflecting our commitment to invest to build and strengthen the capabilities of our commercial organization. After adjusting 2006 spending to correct for the 8.4 million and nearly $19 million associated with net benefits from insurance, legal settlements and adjustments to other reserves, realized in the second and first half respectively, the S&A expense in 2006 as a percentage of sales would have been approximately 8.5%. A year ago, when we made our commitment, we stated that the result would be a raise in S&A spending by approximately 1 percentage points to roughly 9.5% of sales and as you can see, the 2007 metrics are in line with that plan.

Turning to net income, we reported a loss of $0.06 per share, down from the $0.46 we reported in the second quarter of '06. This decline is attributable to the operating income factors already discussed as well as the change in reported tax liability between '07 and '06. Last year we offset our domestic tax liability by reversing a portion of our deferred tax allowance that was established at the end of '03. As you will recall, we reversed the entire balance of this reserve in the fourth quarter, based upon our level of expected profitability. As a result, in 2007, we're recording a tax liability associated with domestic earnings. This change, which does not affect cash flow since domestic earnings remain sheltered by existing NOLs, has the effect of increasing 2006 earnings by approximately $0.15 per share. On a pro forma basis, adjusting net income for special items, we earned $0.10 per share, in line with first call or Street consensus of $0.09. Again, I draw your attention to attachments 5 and 7 in the earnings release where we define special items and reconcile our pro forma earnings to net income and earnings per share.

Now let's turn to cash flow. For the quarter, net cash provided by operating activities was 97 million, principally driven by an $89 million increase in our receivables facility plus an $11 million decrease in working capital. Net cash used by investing activities of 13 million represented capital expenditures in the quarter. Net cash used by financing ended the quarter at $108 million, reflecting a $121 million reduction in long-term debt. The majority of which was the $100 million redemption of the 2010 10-5/8 senior notes and the retirement of $20 million of medium term notes. These were partially offset by new borrowings in Europe of roughly $17 million. Adjusting for the drawings made on our receivable facility, operating cash flow for the quarter was the use of $11 million. Year-to-date, operating cash flow was the use of 10 million, and I'd refer you to Attachment 7 of the earnings release.

Now let's turn to the outlook for the third quarter and as we do, I draw your attention to the outlook section contained in our earnings release as well as our forward-looking statements. Overall, as stated in our outlook, we remain cautious concerning North American demand environment which we believe will remain challenging and reflect only modest improvements sequentially. We expect North American residential construction and automotive market demand to remain weak and as a consequence, would expect vinyl business sales to be generally flat compared to the second quarter and down up to 10% compared to the third quarter last year. On the other hand, we anticipate aggregate non-vinyl business sales to increase between 6 and 9% compared to the third quarter last year. Solid demand is anticipated in most of our international markets, driving continued growth in sales and earnings, even though we are beginning to see some pull-back in the electrical electronics demand in Asia. Overall, reflecting early benefits being achieved through specialization, we anticipate gross margins for the Company increasing compared to the third quarter of '06. For resident intermediates, SunBelt joint venture earnings are expected to be flat sequentially and decline modestly compared to a year ago. Our outlook comments on the 6.8 million net benefit realized last year that we don't anticipate being repeated this year, but also in light of the variation between quarters one and two this year, I want to draw your attention to our projection that corporate and eliminations in the third quarter, excluding special items, should approximate the first half average of roughly $12 million. Our outlook also comments on anticipated third quarter benefits from the OxyVinyls divestment as well as the change in our tax reporting for domestic earnings. And finally, with the complete redemption of our high yield notes in the quarter, we project a $5 million sequential reduction in our interest expense.

As stated, we completed the OxyVinyls divestment early in July. We received net proceeds of approximately $250 million, which were fully sheltered by existing NOLs, plus the remaining 10% balance of the Powder Blends joint venture. These proceeds were deployed to extinguish the entire balance of the high yield 10-5/8 senior notes. This significant reduction in debt drove our leverage ratio to below 2.5 times and resulted in our bond rating being upgraded one notch by both Moody's and Fitch. And even though the terms of the divestment were fairly straight forward, the accounting treatment was complicated by the transaction extending past the end of the second quarter. Consequently, both second and third quarter earnings are affected. Aggregating the P&L impacts from both quarters and also considering the premiums and issuance via write offs from the redemption of the entire $241 million balance of our senior notes, the total impact of the combined set of transactions is an overall net book gain of approximately $11 million or $0.12 per share.

In summary, we anticipate that the North American business environment will remain challenging through the third quarter, especially as related to weak residential construction demands impact on our vinyl business. Nevertheless, we are encouraged by the many positive results driven by our specialization strategy during the second quarter and are confident that PolyOne is well positioned globally to capture attractive growth opportunities. We're demonstrating that we have the team, resources and financial strength to expand our position in high growth markets and to deliver valued solutions and outcomes to our customers. With that I thank you and we'll turn the floor back over 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 want to remind everyone that we would really appreciate if you keep to one primary question and then one follow-up. This way we'll be able to accommodate more of you on this mornings call. And Carol why don't you go ahead and get the questions started.

Thank you, sir. [OPERATOR INSTRUCTIONS]. Please stand by for your first question. Your first question comes from the line of Mike Judd with Greenwich Consultants. Please proceed.

Good morning. A question about SunBelt. At this point it doesn't look like there's a strategic reason for you to own 50% of that business. Can you talk a little bit about what the strategic alternatives are for that business and also as a follow-up to that, on the acquisition side if you could talk about your thoughts along those lines, is the timing right? Are you looking for things internationally? You know, blah, blah, blah.

Mike, first of all it's clear, I think our specialization strategy is we would not view SunBelt as a strategic asset for our Company, given where we're taking the organization. At the same time, I have to tell you, it's currently performing at above normalized level and we will evaluate SunBelt just as we would any other investment when we look at the intermediate and long-term returns. We really find a world of attractive opportunities out there to help us move farther down this specialization path and we don't comment, as you well know, on any specific investment opportunities or acquisition opportunities, but I can tell you that we're combing over the marketplace and looking really in a few cases a little bit beyond broader borders than perhaps we have in the past, things that can elevate our specialization strategy at a fairly brisk pace. So there's a lot of activity going on and that's really all I could comment on with regard to SunBelt or any other M&A activity.

Okay. Just as a follow-up to your comments on SunBelt, basically you've done a great job paying down debt. The balance sheet is in great shape. I guess there is some new capacity coming on in chloro-vinyls towards the end of the year if not the beginning of next year. The latest consensus thoughts are that earnings could potentially peak in the third or fourth quarters in that business. Is it realistic for us to expect, given the strategic direction that you've indicated, that there could be some sort of that that divestiture could be completed by the end of the year, I guess?

[ LAUGHTER ] Nice try, Mike. Very good. That was the best question I've heard. We just can't comment any further on that. Thank you, though for the question.

All right. Thanks.

Your next question comes from the line of Roger Smith with Merrill Lynch. Please proceed.

Thanks, good morning.

Hi, Roger.

Hi. You talked about acquisition opportunities that you're combing over. What target leverage would you be comfortable with?

We've stated that our target leverage is to operate around 2.5X, where frankly we are. But frankly, for the right opportunity that would drive our specialization strategy, we would be willing to take leverage above that, Roger. The key is for what period of time. The expectation would be that it could go up but we would expect to be able to bring it down. I think it's also important to note that as we think about leverage and we think about acquisition building our specialized business base and the leverage that would come from that, the earnings base associated behind the leverage, the EBITDA, if you will, is much stronger than we would have had in the past. And so a 3X, if you will, tomorrow, would be much different than the 3X we achieved coming down last year, if you will. But we are committed to maintaining the strength of our balance sheet. We have brought the leverage down. It has been an objective for us. We intend to continue to exercise good financial discipline. The 2.5 is an ongoing target. But for the right opportunity, for a period of time, we would allow it to drift up.

Would you think about these things you're looking at as principally bolt-ons or could we be, or should not be surprised to see a potentially major transforming acquisition here?

We can't comment specifically there. What we have talked about, and it really depends on one's definition of a bolt-on. The acquisitions that we look at are generally to provide a new technology base for us, or markedly improve an existing base that we have, to get us into new geographies or to get us a set of customers that could be leveraged around the globe. If those are the primary criteria that we're looking at, and I suspect for the general definition, those would be more aligned with bolt-ons than otherwise, but they clearly can be supplementing or complimenting our existing portfolio of either customers geographical footprint or technologies.

We like to look for platforms that can be leveraged through our global position, which we think is very strong, we can expand an offering that might be out there where we have maybe not necessarily a hole in our market offering right now, but certainly not the strongest position and if there's something better out there that we can get a reasonable price and leverage it, it makes great sense. Other acquisitions that have more of a bolt-on characteristic would require a good bit of synergy for it to make sense for us. That's kind of how we're viewing it. Technologies, platforms that are leverageable or other acquisitions that would give us sizable synergy opportunities.

Great. Thank you very much.

Your next question comes from the line of Bill Hoffman with UBS. Please proceed.

Hi, good morning. Dave, I wonder if you could just walk us through the cash flows after the sale, besides taking out the higher bonds. Do you expect to pay down the debt on the AR facility and what else are we doing with the cash at this point?

Yes. The second quarter, when we redeemed our first traunch of the high yield, the 100 million, that was largely done through our short term facilities and so when we got the 250 million of cash, we used it to pay down the 141 that was a residual balance of the high yield notes and then also pay the premium, of course, and then extinguish the receivable facility. So my comment on the 2.5 was really based upon balance sheet debt in the range of about 340, $350 million, plus the 60 million or 67, it'll be 60 by the end of the year guarantee with SunBelt, essentially no drawings on the receivable facility.

Great. Thanks. And then just a question for Steve. On your personnel build-out globally, can you just talk about what steps are you going to take in the second half of the year?

We stated our goal of roughly 100 and we're going to hit that goal. Whether we go over that or not will really largely depend on our success in the second half of the year. We're not going to waiver from that specific goal and we're almost there. As we continue to see momentum in margin improvement, we're going to position people where we see opportunities to provide us with a great return. And I'll tell you the majority of those we're adding some staff in North America but the vast majority of those 85 adds are outside the U.S.

Okay. Thank you.

Your next question comes from the line of Christopher Butler with Sidoti and Company. Please proceed.

Hi, good morning, gentlemen.

Good morning, Chris.

Seems that you've had a few questions on the value creating opportunities that are acquisitions. I was hoping you might be able to give us an idea of other value creating opportunities that you're targeting at this point.

Clearly, our organic growth portion of our specialization has been the headline and here we're expanding our presence internationally in the second, third quarters. We would expect to be putting on up to seven new lines internationally, about half in Europe, half in Asia. There's the technology and the innovation pipeline that under Cecil Chappelow, our new Chief Innovation Officer, is putting together, working hand in glove with the marketing team. We're finding new opportunities for new products to be introduced. As you know, that pipeline wasn't robust as we started this process but it is filling and over the course of the year, we would expect that we would be talking more about products that aren't commercialized. As you know, we've set an objective for 25% vitality index by 2010 and that's going to require significant innovation on our part. So there's a lot of initiatives and frankly, most of our initiatives are driven towards creating value in an organic way. I commented that a portion of our sales in 2007 reflect the fact that they aren't there. We have pruned unprofitable accounts where we couldn't change the relationship. We'll continue to do that and we continue to train our field force up in terms of being able to sell value and solutions to our customers.

You know, Chris, we can -- we're limited in what we can say about acquisitions. But I want to take this discussion beyond this and be very clear. We believe -- I believe that the best way to create value for your organization is to get a lot better and what you do and grow faster and grow more profitably. And acquisitions can make sense for us. But, the most value creation that we're going to do for our shareholders is by getting a lot better at what we do in our core right now. We are certainly looking at acquisitions and ways to grow where they make sense. But we will be prudent. And our primary focus is on improving our execution and following our strategy. And we're going to get better and better at that.

And jumping off of what you said about new products, I probably missed the vitality number if you gave it before, but more importantly, how do the new products break out across your segments currently and where would you like the that to be down the road?

I mean, we have those metrics by business unit and it's probably more relevant than it is by segment. We won't get into the specific details of that except to say that obviously there's more energy in our businesses that have opportunities to be more distinct and more differentiated. And our all other segment is an example of where there's a lot of emphasis right now in color and EM to develop and drive new business. That's not to say we're ignoring anything in vinyl. Vinyl has a very robust technology group. But really what we're doing now that's different from the past, is we're starting with the end markets. We gained market intelligence in electrical and electronics. We gained market intelligence recently in the medical field and we're doing segmentation analysis in those markets and understanding the business placed and looking at opportunities for growth where we will see really profitable opportunities. So we don't launch any new projects now without a rigorous process of understanding what kind of -- how big the prize is. What size is it in terms of market potential, what kind of margins do we expect we can get and what would be our position relative to the competition. So there's an awful lot more thought that's going into the process and a lot more discipline. And we are looking to kill projects early. We're getting this array of opportunities and we're making faster decisions about what we're going to put our muscle behind and where we're going to halt the process. So that's sort of what's going on. There's a lot of work and each business has it and it's overlaid with a leadership role that's conducted by Cecil, Dr. Chappelow who's come from the outside and really brought some tremendous discipline and process to our overall innovation pipeline activities. So we've got a lot of work to do in filling the pipeline up. But I'm not pleased with where we are but I'm very pleased with our approach and optimistic about the future and what's going to come out of that pipeline.

Thank you for your time.

Your next question comes from Saul Ludwig with Keybanc. Please proceed

Good morning.

Good morning.

A little accounting question here. On page 12 of your release, you indicate that the special items and the continuing operations pretax were 23.9 million. You identify that 15.9 million of that amount that was the related to OxyVinyls. What was the other 8 million and in which bucket of line items was it in?

Okay. The primary bucket was costs associated with the extinguishment of the debt, Saul.

And that was shown below the operating income line today, wasn't it?

Yes, but this was a reconciliation of special items that gets you to EPS, not just operating income. Okay?

I'm just trying to -- you have 12.4 million of operating income which included 23.9 million of special of the 23.9 special, 15.9 was OxyVinyl write-down. What was the other 8 million?

Saul, in the operating income, the primarily number, and you go to Attachment 5, and that is our pretax number, not the operating income number. And so as we look at the -- I guess my question,Saul, is your source for the 23, because the 23.9 that we identify is an earnings before tax and you find it on Attachment 5.

I'm looking at Attachment 7, Dave. That 23.9 is a component of the 12.4 in op income that you report on Attachment 6.

Right.

Okay, so back to my question. Attachment 5 doesn't reconcile with Attachment 6 and 7.

Saul, I'm going to have to take this offline with you and do the reconciliation for you.

Okay. That would be fine.

The special items in aggregate were $0.16, the majority of which were the $0.15 associated with the combination of OV impairment, as well as the cost associated with the premium on the extinguishment of debt.

Okay. We'll circle back on that. In the corporate expense number, of the $34 million, the special item that you carved out was the 15.9 million of the OxyVinyl write-down. So that would suggest that the corporate expense number X the special then was like 18, $19 million. Why was it so high?

It was high for a combination of reasons, Saul, part of which had to do with the increase that I talked about in terms of some of the commercial resource increases. Some of it was quarter to quarter shifts in terms of costs hitting in the second quarter, compared to the first. That's why I wanted to highlight the fact that there has been variation between the first and second quarters and that to provide a sense of what our expectation was for Q3, I believe that we're on track to have Q3 and Q4 spending be at a level where the average between Q1 and Q2 is. Because as I say, the difference between Q1 and 2 was timing of certain expenses that hit and in Q3, I don't anticipate that we're going to have those kind of timing dislocations. But the overall, Saul, on a non-special item adjusted is around 24 million in aggregate. Q1 was low and Q2 was just a bit high.

Your next question comes from the line of Mike Harrison with First Analysis. Please proceed.

Hi. This is Allan Cohen helping Mike out.

You're not allowed to do that.

A broader question on your biggest business, which is the vinyl area. I certainly understand the end markets have been tough, but you've now been there long enough to gain an assessment with your segmentation market research of moving it towards higher value. Where are you at in your assessment and progress in the extreme case, have you done the assessment and there's not much you can do with it in terms of getting real value added, just operating better all the way, are there whole segments that you're just not active in and a bolt-on acquisition would be a great way to get there?

Allan, first of all, we have done the assessment in vinyl and it's clear that vinyl is more challenging to specialize and to move upstream than some our other businesses. That said, they have found some attractive markets but they're -- and they're pursuing them. We are pursuing them. But they're smaller markets and the rate of getting in there is somewhat set back by a lot of work that's going on dealing with raw material costs and pricing that our teams are fighting with right now. So we've had to put a lot of energy and effort into getting pricing through where we've had raw material cost increases and frankly haven't had as much time as I'd like to see being on the offense, making calls on some of these more attractive marketplaces. I would also say to you that it's going to be in vinyl more of an incremental improvement process rather than some of the more dramatic progress we're seeing in places like North American color and engineered materials and our PCS business.

Let me just in follow-up, when I've looked at the more attractive niches in vinyl, typically they share the characteristic that there's a significant qualification, whether it's a building code, ultimately by the customer, a medical approval of some sort and when I look at the suppliers, they tend to be in that arena for multiple decades and unless somebody really screws up, the customer doesn't readily switch and so at least if you have a similar view, an acquisition is perhaps the only way to be effective in penetrating. Maybe, can you share some thoughts about that?

I mean, I think it does vary by segment. But you're right, I mean, some of these businesses where specifications are established and working, there's not always a lot of motivation to make change. That said, as we continue to push products out the innovation pipeline, CPVC would be a good example, our job is not only to sell to the converters and the extruders and the molders, it's to get in and work with the specifiers and the OEMs. And that's a longer sales cycle. There's no question about it. It's certainly not decades. But from that first call until you get the final specification written, it can be 18 months or you may not succeed in it. You certainly won't succeed if you don't start making the calls. This applies to our engineered materials business as well. And I think that's one of the reasons the pace of EM turnaround is going to be a little slower than the pace of the color turnaround where you don't have that same sort of specification embedment that's in there with those existing customers. It's tougher in vinyl. And if we find an acquisition where somebody has specs and a really good reputation in place that it would be a better financial decision for us to make that acquisition and to go build it out ourselves, we certainly have no aversion to doing so.

Appreciate it very much. Thank you and keep on chugging.

Thank you.

Your next question comes from the line of Chris Dayon with Schroders. Please proceed

Morning, guys. My question's largely been answered. But just sort of a tack-on. If, just hypothetically, SunBelt were to be sold, would there be a tax shield on those proceeds?

We anticipate that at the end of 2007, we would have roughly $40 million of NOLs.

Perfect. Thank you much.

Your next question comes from the line of Bob Omento with J.P. Morgan. Please proceed.

Bob, you're going to be our last question of the day, so let's make it a good one.

Does that mean I get three or four?

Don't ask about the quarterback today.

No, I won't. I was going to use Brady Quinn as my name. Couple questions. One follow-up on the Oxy sale. I've talked to you guys before about trying to back out the cash kind of you got from that in terms of EBITDA or dividends, if you want to call it that. Last 12 months, as we stand now, it looks like total dividends from equity investments were 450 roughly second half of last year, 10 first half of this year How much of that 60 has been, would you say, related to OxyVinyls that I should back off to get a pro forma last 12 months?

The last 12 months and that would have been all in the second half of 2006, were around $23 million, Bob.

23 from Oxy?

Yes.

Okay. And then the other question was a working capital, the various items seem to add up to about a negative 30 first half of this year. Second half of the year, what do you expect from working capital? Kind of neutral, positive, negative?

We would anticipate that it'll be within $10 million of being neutral. I would tell you that we're intensively -- we continue to put the press on working capital. We're balancing with our specialization strategy but working capital still remains -- clearly is a priority for us and so we would be bringing the working capital back down as you'd anticipate in the second half of the year.

And CapEx is still 45, 50 for the year?

Yeah.

Okay. Thanks a lot.

Steve, you like to make some comments?

Thanks. Well, first, I just want to thank you for your time and your interest in PolyOne. We're pleased with the progress our Company is making as we're delivering some tangible results on our vision 2010 objectives. We rebalanced our portfolio, we reduced our debt, we're freeing up cash and I think this opens up the door to numerous value creating opportunities for us. I really want you to leave here understanding that at PolyOne we are changing our Company's culture. We're changing our way of doing business and we're improving our image in the marketplace. And when I think when you consider the overall North American market challenges and weaknesses in residential construction, I think we're accomplishing a lot. And it's all encouraging to us, but we're really barely out of the starting gate. We're looking at this as a long distance race. We're going to pursue and execute those action items that make sense for the long-term as we continue to build value for our shareholders. Thanks for your continued support. And with that, I'll turn it back to the operator.

Thank you for joining in today's conference. You may now disconnect and have a great day.