Avient Corp (AVNT) 2007 Q3 法說會逐字稿

Good day, ladies and gentlemen. And welcome to the third quarter 2007 PolyOne Corporation earnings conference call. My name is Twalesha and I will be your operator for today. At this time all participants are in listen only mode. We will be facilitating 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 your host for today, Mr. Dave Wilson, CFO. Please proceed, sir.

Thank you Twalesha and thanks everyone for joining us this morning. As Twalesha said, I'm Dave Wilson, the company's CFO. On today's call, Chief Executive Officer, Steve Newlin, will make some opening remarks and then I'll follow up with an in-depth look at our financials. Afterwards we'll open up the line for questions. Because we would like to provide as much opportunity as possible for the investment community to ask questions this morning, we ask the questions from the media be directed to John Daggett at the conclusion of the conference call, and he can be reached at 440-930-3162. Also I want to point out that this morning we posted our third quarter earnings release within the investor relations section of our website and that also includes all of our past filings. We're also webcasting this call. In our discussion today, we will use GAAP and non-GAAP financial measures. The non-GAAP financial measures, are operating cash flow, operating income, net income, and earnings per share before special items and the per share impact of the special items, operating income excluding the vinyl business segment, gross margin as adjusted and gross margin excluding the vinyl business segment. The most directly comparable GAAP financial measures are net cash provided by operating activities, operating income, income per share and gross margin. A detailed definition and list of special items can be found in attachment five of the release, and in attachment seven and eight you will find a reconciliation of the non-GAAP financial measures to the most directly comparable GAAP financial measures and an explanation of how our management uses these non-GAAP measures. In addition I would like to discuss statements -- or will likely discuss statements or other information defined as forward-looking statements within the meaning of the Private Securities Litigation 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 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 in or implied by the forward-looking statement. I would like to recommend that you review the updated risk factors in this morning's press release because these factors could cause actual results to differ materially from what we expect. And with that, I would like to turn now the call over to PolyOne CEO, Steve Newlin.

Well, thank you, Dave. Good morning and welcome to PolyOne's third quarter earnings call. I am going to begin with some brief remarks on the quarter, point to a number of actions and initiatives related to the execution of our strategy and then as mentioned, Dave will handle the deep in-depth look at quarterly financial results. We will have some opportunity for questions and then some closing thoughts. The third quarter provides strong evidence of the continuing progress of our specialization strategy. We achieved significant gains in our non-vinyl segment that reflect our success at improving our business mix and executing our new commercial processes effectively. And we did this despite depressed conditions in the building and residential construction marketplace. Our operating income for our non-vinyl business is more than doubled. We further reduced our debt and leverage ratio during the quarter which are now at an all time low and in September we dedicated our new color plant in Poland to serve eastern Europe. Our customer focus intensified as we launched our No Surprises Pledge, that ensures our customers we will offer them safe and environmentally sound solutions. And during the quarter, we made a key addition to our senior management team. These are the few of the highlights that reflect the actions we are taking to strengthen our business and build shareholder value as we continue to aggressively position PolyOne for growth. We will go into a little more depth on these later. But, for now, let me address our financial performance.

Our third quarter sales were $665 million, essentially flat with the same period last year. We reported net income of $0.02 per diluted share for the third quarter. Excluding special items our third net income was $0.14 per share. Operating income for our non-vinyl businesses increased 116% compared with the same prior year quarter. As gross margins expanded 1.3 percentage points. This expansion is a result of early specialization benefits which have taken hold in a relatively weak business environment. Third quarter 2007 operating income for PolyOne distribution business was up 23% compared with the same period last year. And consistent with the first half of 2007, our international color and engineered materials business posted gains of 14% in revenue and nearly 28% in operating income year-over-year. As anticipated, our vinyl business segment suffered from very weak demand in the residential construction market which adversely affected both sales and margins. Operating income of $10 million was down $3 million from a year ago. We've taken steps to reduce costs to the degree practical in our vinyl operations including closing an underperforming powder facility with excess capacity that was not going to reach appropriate returns. Operating income for segments reported within all other was $5.4 million compared with the $1.5 million loss last year. Our North American color business was profitable for the second consecutive quarter.

Now, let me review some the strategic initiatives that underscore these encouraging third quarter operating results and set the stage for further advances. During the quarter, we significantly improved our balance sheet which gives us the flexibility to accelerate growth investments. As we reported in July, we divested our OxyVinyl's joint venture for $261 million. We feel very fortunate that the timing of this deal could not have been better. Particularly given the dramatic, more pronounced than expected, decline in the marketplace since we first inked that deal. In August, we completed the redemption of the remaining balance of the high yield, high cost 10.625 senior notes. This move reduced our debt to its lowest level in PolyOne's history, as our leverage ratio at the quarter's end was 2.4X EBITDA. We also realized the significant interest savings benefit beginning with a $5.7 million sequential decline in the third quarter. As a result of this improved financial profile, Moody's investor services and Fitch rating services upgraded the corporate family rating for the company and also raised the rating of PolyOne's unsecured debt.

In September, our new state of the art color plant in Kutna, Poland began operations. Extending our global reach in positioning us to provide value creating solutions to customers in eastern European markets. This facility also affirms our specialization strategy offering quick, convenient access to specialized material, services and solutions in a very fast growing and attractive region. This new plan is centrally located in Poland, with easy access to all major industrial regions in proximity to the main Berlin to Moscow transportation route.

Also during this quarter, we added a new liquid color production line to our plant in Hungary. And as I speak, we're showcasing a number of new product lines at the 2007 K-show. This is Europe's largest trade show for the plastics industry and it ends tomorrow. Among the new product lines we were highlighting, are our on flex thermoplastic elastomers, OnCap BIO additives and OnColor [PeCo] tint liquid colorants. These product solutions allow for soft touch applications, improved performance and appearance of biodegradable materials and deliver clear, bright colors under high heat and light conditions.

We recently unveiled our No Surprises Pledge. Which we proactively developed and adopted. Now, let me talk about that for a moment. You know, there's been a lot news lately about well recognized companies that sustain damage to their brands and their reputations because of contaminants in their finished products. At PolyOne, we believe customers want innovation and service but they also want dependable, ethical and trust worthy suppliers. Our bold No Surprises Pledge assures our customers they can feel comfortable when they deal with PolyOne. We pledge to our customers that the materials we produce contain only ingredients that conform to accepted legal and regulatory compliance guidelines. We think customers deserve that.

We are seeing increasing demand from customers for eco-friendly solutions and we are aggressively pursuing the opportunities. Let me give you an example of this. We have been working very closely with the company called Green Toys. Who selected our on color bio-colorants for their new line of environmentally friendly toys. These colorants are compatible with sustainable raw materials. We work very closely with them to develop customized colorants specific to their needs. Our rapid turnaround in in-depth regulatory compliance knowledge, helped Green Toys get to market quickly. We think this is just a great example of specialization and customer orientation at work.

We are innovating new products that upgrade our existing offerings to capture new markets or applications. We recently received regulatory certification for five grades of our on flex thermoplastic elastomers for use in drinking water systems. This means we are now certified to provide valuable solutions for manufacturers of drinking water components which is a growing market. Another example is the upgrade of our Geon HTX Ultra. A new line of improved PVC alloys for window profiles, fencing, decking, siding and other construction applications. This is a market that we project exceeds $200 million. This specialized, heat resistant technology, enables building materials manufactures to meet their customers emerging market trends by offering a wider range of dark colors that will not fade.

As mentioned in Q3 we made a note worthy addition to our senior management team. You heard me talk about the importance of operational excellence, one of our strategic pillars. And you've also heard me say that I'm not fully satisfied with our Lean Six Sigma deployment. We are very pleased that Tom Kedrowski has joined us as Senior Vice President of Operations. Tom brings to PolyOne, a very high level of senior expertise and operational excellence which will drive continuous improvements throughout our manufacturing, sourcing, logistics and supply chain organizations. Tom has a 24 year track record of diverse and highly relevant experience in this specialty chemical industry. He has held executive level positions both domestically and internationally. So, the addition of Tom further strengthens our senior leadership team at PolyOne. While we are on the subject of operational excellence, you may recall one of our success stories has been delivery improvement. We indicated previously that our 2007 year end goal was to reach 95% on time delivery in North America. And I'm pleased to report that we are ahead of schedule having already accomplished this in the third quarter. So, we were now broadening this initiative to Europe and Asia. In addition, in all regions we were holding our suppliers accountable for on-time delivery and challenging them to work with us to enhance our efficiency of delivering materials and solutions because our customers truly value on-time delivery. Finally, I want to highlight operational excellence in the form of environmental stewardship at our specialty residence plant in Pedrick Town, New Jersey. Which reached two noteworthy milestones. In September, the plant marked 14 consecutive years without a federal air permit exceedance or waste water permit exceedance. And obviously Pedrick Town began these record runs well before we launched our transformation. They signified long term strengths that we're building on as we execute our customer focus strategy and promote a culture of performance and accountability.

In closing, I want to point out that over the last three quarters, PolyOne has delivered positive operational results that demonstrate our strategic execution is gaining momentum. We continue to invest selectively and prudently in talented people and innovative technology to grow our business. We've added strength to our team and we've added discipline to our operations. We're a radically different company than the one I joined a year and a half ago. We're turning around traditional underperforming businesses. Our non-vinyl businesses are stronger today than ever before. And as you know, we have the strongest vinyl business in the marketplace. And we're holding our own in the most difficult market conditions seen since the 1990 to 1991 era. Without question, the same strong building and construction head winds you hear about that are impacting others are adversely affecting us, particular in this vinyl business. Now, we are not seeing the market conditions improve. But we do know this condition is temporary and we've taken steps to minimize our vinyl business costs and efficiently optimize our operation while preserving our resilience to grow rapidly when the building and construction industry rebounds. Many of PolyOne's businesses have incredible potential to grow even in the most challenging of business climates. We are demonstrating growth in our non-vinyl businesses and branching out into markets that are less cyclical, as we build a new foundation that will enable us to grow in good times and in bad. So, with that I am going to turn the call over to our CFO Dave Wilson, who will discuss our third quarter results and our near term outlook. David?

Thank you Steve. This morning I will discuss the following topics. Third quarter sales and earnings, third quarter cash flow and liquidity and then also cover briefly the outlook for our fourth quarter. As Steve said, we are encouraged by many aspects of our third quarter results considering the challenging North American operating environment especially as related to the building and construction market. Importantly, our non-vinyl operating segments in aggregate more than doubled their operating income contribution from a year ago propelled by strong year-over-year gains in gross margin. Our vinyl chain businesses on the other hand continue to experience the anticipated demand in margin pressure as a result of the depressed residential construction market. The exception in the vinyl chain was SunBelt which delivered higher sequential earnings on a base nearly comparable with a year ago. During the quarter, we recorded significant special items. I refer you to attachment five of the earnings release for a complete listing and description of special items and to attachment seven and eight where we provide reconciliations on non-GAAP financial measures. In aggregate, pre-tax special items were nearly $63 million. On an after tax basis, special items netted to $10.5 million or $0.12 per share. The special items this quarter were primarily associated with two events. The first was the divestment of OxyVinyls completed on July 6, and the subsequent use of proceeds to extinguish our high cost, high yield notes. The net special charge for the combined OxyVinyls related transactions, was a positive impact in net income of $25.5 million split between an after tax charge of approximately $6 million resulting from extinguishing the 2010 notes, and the $31.5 million benefit associated with the reversal of deferred tax liabilities in connection with the sales of business. The second event is associated with the Calvert City remediate obligations disclosed earlier this year. The impact from the recent settlements is a pre-tax charge of $45.6 million or slightly less than $30 million after tax. This charge on a pre-tax basis is almost $8 million less than our October 5 disclosure as a result of a negotiated settlement finalized very early this morning. Our reported EPS for the quarter was $0.02. Adjusting for the aforementioned special items, our net income from third quarter was $0.14 per share, somewhat above First Call or street expectations. I will provide greater detail on earnings performance later in my remarks.

Turning to sales, in the third quarter sales were $665 million, essentially flat with the year ago but down 3% sequentially. The majority of the sequential decline was attributable to the vinyl business as we stated in our mid quarter update, we anticipated continued softness in North American building and construction and automotive end markets compared to a year ago the 12% decline in vinyl business revenues was offset by gains from our other businesses as a result of closing more new business and building a stronger sales mix in North America and internationally. Sales have also been negatively affected on a year-over-year basis, by deliberate pruning of unprofitable or low margin accounts. Our international color and EM segment, continued to deliver strong revenue growth. In the third quarter of '07, sales increased 14% compared to the same quarter a year ago as a result of 15% growth in our Asian color business. Sales growth in Europe in the strong Euro, year-to-date sales have increased 16% compared with the first nine months of 2006. Taking into consideration the effects of FX, sales grew 5% for the quarter and 8% year to date. Also in the third quarter, demand for Asian engineered materials sold into the electronics market was adversely affected by what we believed to be a short-term inventory correction that we do not expect to continue into the near term. We are well positioned to serve emerging high growth international markets and will continue to drive mix improvements through growth and to higher valued applications in support of key global accounts. Moreover, as Steve mentioned, we continue to invest in additional resources both people and plants, to ensure that we are prepared to capture market opportunities and targeted high growth regions.

Now, let's turn to operating income. For the quarter reported operating income was a $23.6 million loss after consideration of $53.6 million of special charges. Operating income before special items therefore was $30 million in the quarter. Last year reported operating income was $36.4 million, or $42.1 after consideration of special charges. Compared to a year ago, operating income from our non-vinyl businesses was up $9.4 million or 116%. Largely attributable to 130 basis point increase in gross margins. This substantial gain, however, was offset by two primary factors. A $15.8 million reduction in OxyVinyl's income and the $6.8 million prior year one-time benefit. You will recall that OxyVinyls was divested earlier in the quarter. Nonetheless, even if O.V. had remained part of the portfolio, the challenging PVC resin market conditions would likely have resulted in a lower earnings contributions, as evidenced in the first half year-over-year comparisons that we discussed last quarter. As mentioned previously, our non-vinyl operating segments delivered a substantial earnings improvement compared to a year ago. These segments in aggregate, as I said, were up $9.4 million to a total of $17.5 million. This performance is particularly encouraging as it provides clear evidence that our specialization strategy is taking hold and having a material favorable impact on the quality and value of our earnings mix. Similar to last quarter, key milestone performance are imbedded in this performance. The four businesses including the all other group earned $5.4 million compared to losing a million and a half a year ago. These businesses are beginning to demonstrate that sustained earnings progress expected from effective strategy execution and as Steve mentioned, color was profitable for the second consecutive quarter. I also want to point out that both PolyOne distribution and the international segments grew operating income over 20% from a year ago. On the other hand, vinyl business operating income was down $3 million at 23% compared to the third quarter of '06. This decline was due to lower sales resulting from the previously mentioned weak residential building and construction market and higher feed stock and energy costs. Corporate and eliminations increased as reported $50 million compared to the third quarter of 2006. As presented on page 22 of our 10-Q, two factors drove this increase. The first was the combined impact from the recent Calvert City rulings and the second was net adverse litigation insurance settlements that primarily reflect benefits realized last year that were not repeated in the current quarter. Corporate and eliminations before special items were slightly under $9 million or about $1 million below the low end of our earlier guidance. Gross margin in the quarter for the total company was 11.6%, up 1.2 percentage points from a year ago. But down 0.7 percentage points from the second quarter of '07. Similarly gross margin and aggregate for our non-vinyl segments generally track total company performance. The improvement compared to a year ago, especially in North American businesses that traditionally had underperformed, largely reflects early wins we are achieving through specialization and under pinned by the new capabilities developed through our commercial and operational excellence strategies. Our selling and administrative expense as a percentage of sales were 9.5% and 9.4% for the quarter, nine months respectively reflecting our commitment to invest the build and strengthen the capabilities of our commercial organization. After adjusting 2006 spending for about $7 million and $26 million associated with net benefits that were realized last year in the third quarter, nine months respectively, the '06 S & A expense as percentage of sales would have been approximately 8.7%. Last year when we made our commitment, we stated that the result would be to raise S & A spending by approximately one percentage point into the 9.5 range and as you can see the 2007 metrics are in line with that plan. Also, as anticipated, our interest expense was down over $5 million compared to the second quarter and over $6 million from the third quarter a year ago. These savings reflect the benefit from extinguishing our high cost 10.625, 2010, senior notes. We should also realize an incremental reduction [in interest] expense of slightly less than $2 million in the fourth quarter.

Turning to net income, we reported income of $0.02 per share. Down from the $0.21 we reported in the third quarter last year. This decline is attributable to the operating income factors and special items already discussed as well as a change in reported tax liability between 2007 and 2006. Last year we offset our domestic tax liability by reversing a portion of the deferred tax allowance that was established at the end of 2003. This practice benefited third quarter '06 earnings by approximately $0.06 per share and as you will recall, we ceased this practice for 2007 financial reporting. On a pro forma basis, adjusted net income for special items, we earned $0.14 per share in the quarter, $0.03 above street estimates of $0.11.

Turning to cash flow. For the quarter net cash used by operating activities was $57 million. Principally driven by an $89 million decrease in our receivable facility drawings. Last quarter you will recall we used funds from this facility to extinguish $100 million of our high yield notes. This quarter, we zeroed these borrowings out, once we received the proceeds from the sale of OxyVinyls. Also, in the quarter we reduced networking capital by $16 million. And then net cash provided by investing activities was $235 million primarily reflecting the $261 million proceeds from the sale of OxyVinyls partially offset by the acquisition of the remaining equity balance of PVC powder blends and capital expenditures. Net cash used by financing activities ended the quarter at $161 million reflecting $142 million reduction in long-term debt associated with redeeming the 2010 notes and $18 million reduction in our short-term debt and $7.5 million premium payment on the early extinguishment of the 2010 notes. Total cash flow for the quarter was $261 million including net proceeds from the OxyVinyl's transactions. Adjusting for these proceeds operating cash flow for the quarter was $12 million. Year to date operating cash flow is now slightly positive and consistent with most years we would expect to generate significant cash flow from operations in the fourth quarter. We finished the quarter with substantial available liquidity and a debt to EBITDA leverage ratio of 2.4, the lowest in our history. With no direct drawings on either of our short term facilities plus an additional $10 million cash on our balance sheet in excess of the transaction requirements, available liquidity was approximately $200 million as of the end of September. Moreover, after redeeming the entire outstanding balance of our 2010 notes, our long-term debt now stands at $330 million.

Now, let's turn to the outlook for the fourth quarter and as we do I draw your attention to the outlook discussion contained in the earnings release in 10-Q, as well as to our forward-looking statements. Overall, as stated in our outlook we remain cautious, concerning the North American demand environment. We do not see signs of improvement in residential housing and expect it to remain at depressed levels. We also anticipate traditional seasonal slowing across most market segments both in North America and internationally. Nevertheless, as a result of overall gains made expanding our market position through the year and the benefit of a strong Euro, we anticipate total company sales to increase 5% to 7% compared to the fourth quarter of 2006. Reflecting these gains in the FX benefit, non-vinyl segment revenues are expected to grow in the high single digits. Gross margins for these businesses in aggregate are also expected to increase compared to the fourth quarter a year ago. In light of the persistent decline in housing demand, however, vinyl business sales are expected to be between 3% and 5% lower than the fourth quarter of last year. High raw material energy related costs are also expected to put significant pressure on our vinyl business gross margins. Due to this decline, total company gross margins in the quarter are not projected to increase on a year-over-year basis. For resin and intermediates, SunBelt joint venture earnings are expected to be down sequentially but ahead of a year ago as Chlor Alkali margins remain fairly resilient. And finally with the redemption of the high yield notes occurring in the middle of August, we project, as I mentioned just now, a sequential reduction in our interest expense of slightly less than $2 million. In summary, we anticipate it that the North American business environment will remain challenging through the fourth quarter especially as related to weak residential construction demand's impact on our vinyl business. Nevertheless, we are encouraged by the many positive results evident and re-enforced in the third quarter from executing our specialization strategy during the year. And we are confident that PolyOne is building strong capabilities globally to capture more attractive growth opportunities. We are demonstrating that we have the team resources and financial strength to expand our position in high growth markets and to deliver valued solutions and outcome to our customers which in turn will drive greater value creation to our shareholders. With that, I thank you and, Twalesha, we'll open the conference call up for questions.

Thank you. (OPERATOR INSTRUCTIONS) We do ask that you limit your questions to one question and one follow up question, and then re-enter the queue for any additional questions. (OPERATOR INSTRUCTIONS) And our first question comes from the line of Rosemarie Morbelli with Ingles and Snyder. Please proceed.

Good morning, all.

Good morning, Rosemary.

And congratulations on the process -- the progress you are making.

Thank you.

Could you address -- I have two questions. Could you talk about Western Europe. There are signs that things are slowing down there and are there any other geographies -- international, where you are seeing a similar kind of trend?

Yes, Rosemary, we were seeing real early preliminary indications of Europe slowing. It's been a good year for us in Europe and our management team there reports a little bit of caution in the air and we see that to some degree in orders. It's nothing that's alarming yet. But we have it on our radar screen and we have our antenna up. As far as Eastern Europe, we don't see any changes in that region. If you move on to Asia, we see continued solid growth with one exception and that is an occasional signal of softening in the business electronics marketplace. We saw a little bit of that in August. And we saw resurgence closed out September quite well. We are watching very carefully to see if there is going to be any consistency in those pull backs in those two markets. So, I think all in all, we've had a nice run in Europe. We would like for it not to be over and I don't think it is. But, I would say that the robust year that we've had there won't be replicated to the same degree. We will have to see how the economy plays out there.

And if I may, in the -- all others, you mentioned that North American colors was soft (inaudible) for the second quarter in a row and engineering material I am assuming continues to lose money. But, are they losing less sequentially? Or have they [plateaued] at a certain level and when do you expect it to turn around?

The answer to your last question is not soon enough. The engineer materials business is making good progress. We are seeing good improvement in this specialty nature of the business. We are closing more high value specialized applications and in that respect it's very encouraging. The plant that we opened last November is starting to fill. And so all of those signs are very encouraging. But as you correctly point out it's not yet turned the corner on profitability. It is making progress. And our expectation is that it's probably about 12 months behind the color performance because of the sales cycle difference between the two businesses. But there is a lot of work that the team has to do. As we've mentioned before, we have got virtually a whole new team. New leadership that is really driving a lot of excitement and progress into that business.

You know, for us it's easy to see the progress. Unfortunately it's not as transparent in financial metrics right now. There is a lot of really terrific activity going on in EM. The team is very talented. They are committed, they are after the right kinds of business and we are making some investment. It's one of those markets where we are adding staff. And we are adding training capabilities and we are adding R&D and innovation capabilities. So, I think we have to stay tuned a bit on EM. But, we have a high degree of comfort they are clearly on the right track and it's going to a much different business than what we traditionally had in the past.

Thank you. I will get back in queue.

Thank you.

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

Good morning.

How are you?

Good, thanks. Couple questions. One, I want to see if you can give us a little bit more color on the North American vinyl's business. And what your thought process is going forward with regards to the cost structure of the business. Whether you have to downsize it as you go into, you know, what could be a multiple year downturn due to housing. And then the second question really [flows through] the other way, which is trying to relook at the business on a total geographic basis, just to get a better handle on how much of the other segments outside of international color and engineer. How much of the other segment sales and cash flows are coming out of the international markets?

Okay. Well taking the second question first, most of the other businesses are North American. The international business is the vehicle for our international engineer materials and colors businesses. So, North American color in E.M. have very little outside. There is some in Mexico outside of the U.S. Some in Canada. The Palmer coating systems business is a global business. But here, too, 75% of that is North American. So, the vast majority of our other businesses outside of international, really is North American focused. In terms of the vinyl business, I will pass the Mike over to Steve.

As far as the vinyl business goes, we understand that we don't know how long the storm is going last and we aren't going to sit and wait for it to pass. So, we have taken actions. I mentioned earlier we closed a small plant where we felt like even upon recovery we weren't going to get the returns we need. But we are also being careful not to be foolish and be so reactive that we jeopardize that franchise long-term. It's just too darn good of a brand to be sullying through a rough period of economic conditions. So, we are working very hard to take out costs wherever we can in the supply chain. We are not adding commercial resources to this business at this time. We did add some last year and R&D front I think a couple in sales. But this is one of those areas where we just don't think it's prudent right now to be investing in. At the same time we aren't going to dismantle that what we have. We are careful about overtime. We have an ongoing process of looking at our plants to look at their efficiency. We have Lean Six Sigma, probably the most advanced -- not probably, it is the most advanced state in the company in our vinyl business. But, you know, at the same time, Lean Six Sigma doesn't always end up in cost removal. It does a lot of other things for us including, sometimes, it gives us capacity when we may not even need it. (There would be) bottle necks and freeze up capacity. With the addition of Tom Kedrowski, we will be looking constantly at that business to see if there is -- if they are on a long-term basis, is capacity that's not necessary. That hasn't come to light just yet. We don't want to get ourselves in a difficult position of having demand up turn and not be able to handle it. So, it's a really tough balance between keeping the franchise wholesome and at the same time trying to minimize the erosion that occurs in a downturn like this. This downturn that we all hear about and you know as much about it as we do, it is very deep. And it's really unprecedented in the last 15, 20 years. So, our people are dealing with issues and luckily we've got a pretty strong and experienced staff in there. But, they are dealing with some issues they haven't faced in some time and we are working hard with our customers to help them understand. We can't control when oil goes to $90 a barrel. But we can help them improve the quality of their finished goods or reduce the scrap they produce, et cetera. And in addition, we are still looking at this business on the basis of finding and developing little niches where we can get higher margins than the norm on these high volume application. It's a real delicate balance between minimizing costs today and still preserving a vibrant future and that's a balance I think we're striking quite well at this time.

Thanks, Steve. Just a final question, can you give us some thoughts on -- given the fact that we do see a downturn here and obviously, within a capital structure, I would think, have a lot more strategic potential than you had even a year ago to merge and consolidate the North American industry through this downturn.

That's a tough one for us to even comment on, isn't it Bill. To make a comment would be too -- would be inappropriate. I think we all have talked about, and the industry certainly has talked about, how fragmented the business is. And some of the challenges in North American environment. But we outside of what is published freely by the industry, we really can't address that.

That's great. Thank you.

And our next question comes from the line of Mike Judd with Greenwich consultants. Please proceed.

Yes, thank you for taking my question. I had a question about the distribution business. What sort of trends have you seen so far in October and I guess yesterday, Ashland reported and they discussed some of the trends in that business. I guess there is some concern that the prices for polymers are going up based on higher feed stock prices and the volumes are a little bit on the weak side. So I was just wondering if you could talk a little bit about that. And then I have a follow-up question on -- do you expect to make a voluntary pension contribution this year and then just lastly, it looks like the accounts receivable securitization went back to zero. Is that right?

Let me answer the first question regarding distribution. I will let Dave answer the last two. Fundamentally the distributions business that we have, we see a lot of strength. And I will tell you what it says to us. Our existing customer base business has some softening. There has been some slowing. So those customers that bought from us last year that are still buying from us are buying a lesser volume. But what's great news for us is we did invest in commercial resources. We added some talent. We gave them additional training. It's a well led, well run business and we believe we are building share. We are growing by getting new clients and new business that's on board. And so, this is, I think, a terrific example of how you can continue to drive a business forward even in tough economic conditions. And Mike [Rodamocker] who runs that business for us and his team, are doing a fantastic job of doing just that. So, distribution we see alive and well and robust. And, yes, there are some -- we certainly would concur that pricing makes it difficult on a lot of these molders. There is no question about it. And they are going to have to get pricing from their end use customers. But, the distribution business has always been a thin margin business. And we suspect it will remain so. For us it's a matter of getting to all those prospects and customers and taking good care of them and responding properly and helping them be successful with their business. And the more we can do that the more demand that we will see. So, we are very comfortable with the distribution track that we are on right now.

So, there is probably not going to be any sort of time lag issues in terms of margins in that business in the fourth quarter?

Well, you know actually for us in escalating price environment, we actually benefit a little bit for whatever stock we have on hand versus the end price. Because we have a pretty quick responding -- in distribution you have to be quite responsive in terms of your pricing cost end versus sales pricing , so if anything we would see that helping us a

And, Mike, just responding to your pension question we've already made a little less than $15 million contribution this year. We don't anticipate making any more. We would expect our '08 contribution to be in line with that. And you're correct. Our receivable facility is -- was wholly undrawn as of the end of the quarter.

And finally, just, what was the balance -- your share of the balance at SunBelt at the end of the quarter? The debt?

Oh, debt was $67 million. And it extinguishes $6 million per year in the fourth quarter. So, we'll end the year at 60.

Thank you.

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

Good morning, gentlemen.

Hello, Mike.

I know you have been working pretty hard on pricing discipline. I was wondering with specific regard to the vinyl business, what are you seeing in terms of the pricing environment there as raw material costs become a bigger issue for you?

You know, it's a tough marketplace for us. No question about it. And when you see energy escalating as it has and the moves in resin, it's really tough on our customers and we are empathetic but we still have a business that we have to run as well. So, it's trying to be smart about working with your customers. Trying to help them get to their customers and get the pricing that they need in many cases. We feel that we need to be out in front of these moves and help our customers see what's coming as early as possible so that they can brace themselves and get the necessary pricing from their end customers. But it's a tough marketplace right now, there is no question about it. We have this unique situation where we have soft demand and escalating raw materials. And so it puts us in a pretty difficult position. We have announced price increases and we've had I think reasonable good effectiveness in obtaining those price increases. But it's case by case and we certainly work every day at helping demonstrate to our customers that we are worth it. So, it's a battle. And we go out in the trenches every day and we work hard at it and we aren't going to stop that.

And then maybe if I can ask a question on distribution. Was just curious why we saw a sequential step down in operating margin there and maybe as we look out over the next few quarters where do you think operating margin goes?

Mike, the reason primarily for the step down in margin Q3 versus Q2 and it's a couple tenths of a percentage point, really was the challenge of the market, the summer months, the third quarter being a little softer than the second quarter traditionally. The distribution business as you know is a business that leverages its volume very effectively. And when it comes down, you see that adverse effect. I think, too, what we have in the distribution business is the challenge of the North American economy and the businesses battling to hold and it's penetrating in some areas but really the step down in Q3 versus Q2 is more a volume story. We do not anticipate that there is a structural change as Steve mentioned. If prices are going up in the fourth quarter we would expect to see margins rebound because you have to get the prices up. We believe that the distribution business is on a very strong course. You've seen good progress over the last three to four years. Clearly. And the business is going to battle to lift its operating margin from the 3 to the 4 range as we go forward.

Good. Thanks very much.

Uh-huh.

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

Good morning, gentlemen.

Hi, Chris.

Touching on the vinyl's business again. You had made the comment earlier on the call that you didn't want to see a demand upturn and not be able to handle it. I was just wondering, with the current structure you have in place in vinyls, are we to see some sort of ramping up period before demand comes on from your standpoint?

No, I think what Steve was really referring to is not imminent demand spurts, but it's being prepared and not taking a risk at jeopardizing the structure of the franchise itself. And so is that really where your question is, Chris?

Yes. Just wondering, just, you know, how much capacity you have taken out and whether -- whenever the slowdown comes to an end whether we would see some sort of buildup in front of that.

Well we have -- our capacity -- effective capacity is close to 90% to 95%. We have been able to scale down ships and lines to be able to balance our costs with demand from a total name plate capacity. We are operating closer to 65% to 70% of what we could do. And so we've got substantial capability to bring back demand rapidly. Plus the productivity improvements that we are seeing from the Lean Sigma is we are going to get more production out of the existing lines that we have. We would anticipate that the first sign of demand starting to turn is the inventory pipeline starting to fill. And so, there could be a one or two month push on demand prior to it being obvious in the marketplace that residential construction is starting to come back. But we're not projecting that at this point in time.

Thank you for your time.

We have time for one more question.

And our final question comes from the line of Ivan Marcus with Key Banc Capital Markets. Please proceed.

Hey, guys. Good quarter. My one question is, what is the main -- actually two questions. I will give them both to you -- as -- what was the main driver for the all other segment, the improvement there? And then the second question is, you talked a little bit in the beginning about the No Surprises Pledge. Are you seeing any business opportunities or wins as a result of that and what segment do you see those opportunities coming?

Okay. The all other, the primary driver was a market turnaround in the color business. But I would say that producer services and polymer coating systems was -- had very strong year-over-year performance as well. So, really it was -- it really was across the board in terms of sequential improvement and -- or not so much sequential improvement but year-over-year improvement. So, that was very encouraging. But the color business did have a very strong turn from a year ago. The second part of your question had to do with the No Surprise Pledge and whether we picked up any specific business that we can point to as a result of it.

Well, let me just say it's -- you know, this is fairly hot off the press and we developed this very recently and laid it out when a lot of -- there was a lot of high profile discussions about problems with contaminants. And I can tell you that it's opened several doors for us. I can't tell you specifically that we've nailed this account or that account. But we can say that we have had discussions with companies that we haven't done business with in the past and haven't even had opportunities to have the kind of conversations that lead to business growth. I would just leave it at that right now. I'm quite confident that it's certainly topic of conversation day. When you start talking about things that matter to customers, in the end if you do it right you win business and I believe we will.

Great. Thanks.

All right, that is it and I will turn the mic back to Steve for some concluding remark.

Yes, I will be very brief. But, just in closing, let me just say that we are bringing a lot of rigor and discipline to our business and we're adding come top leaders who know how to get things done and who expect to win, frankly. This mind set is permeating this organization. It's permeating PolyOne. With this new financial flexibility that we have and the strong team that we've developed and the motivational rush that you get that comes from significant early wins, we feel very confident about our direction and our future. So, I want to thank you all for your interest and your support. Thank you.

This concludes your presentation. You may now disconnect and have a great day.