Avient Corp (AVNT) 2008 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q1 2008 PolyOne earnings conference call. I will be your operator for today. We will conduct a question-and-answer session towards the end of this conference. (OPERATOR INSTRUCTIONS)

I would now like to turn the call over to Mr. Dave Wilson, Chief Financial Officer. Please proceed, sir.

Thank you, and thanks, everybody for calling in this morning. I'm Dave Wilson, PolyOne's CFO. Joining me on today's call is Steve Newlin, our Chairman, President and Chief Executive Officer, who will open the discussion with remarks pertaining to our first quarter operating performance. I'll then follow with a more in-depth look at our financials before opening 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 members of the media who have questions to please contact me after the conclusion of the conference call.

Last night, we released our first quarter earnings report, which is posted on the Investor Relations section of PolyOne's Website. We also filed our Form 10-Q. If you didn't receive our release and would like to be added to our mailing list, please do give me a call or e-mail me and I'll see that we take care of your request. I want to tell everybody this call is being Webcast. In our discussion today we'll use both GAAP and non-GAAP financial measures. I refer you to our earnings release where we describe the non-GAAP measures and our reconciliation of them to the most comparable GAAP financial measures. A detailed list of these special items can be found on attachment five of the release. And then, in attachment seven through nine, we provide reconciliations of non-GAAP financial measures to the most directly comparable GAAP financial measures and an explanation of how our management uses these measures.

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

Well, thank you, Dave, and welcome to all of you participating in PolyOne's first quarter 2008 earnings call. Let me begin with a brief summary of first quarter performance and strategic progress. And then Dave will provide you a more detailed review of our financial results and near-term outlook before we open up the call for your questions. Now, to avoid any confusion to historical references that we might make during today's call, I want to first briefly comment on the recent renaming of our two business segments and one of our platforms during the quarter. First, we introduced specialty engineered materials as a new reportable segment, giving you better visibility into this important business. This move reflects the strategic shift towards specialization that our North American engineered materials business has undergone, including the GLS acquisition and focused investments in commercial and innovation resources.

Second, we changed the name of our vinyl business segment to Geon performance polymers to further build upon Geon's renowned global brand, which is synonymous with excellence, quality and reliability. And in a similar vein, our general business platform is now known as performance products and solutions or PP&S. This new name more effectively describes our mandate to understand customer needs and provide them with unmatched value-added services to help them succeed. The PP&S platform will better reflect our value proposition within these businesses. Of course, our two other strategic business platforms are specialty and PolyOne distribution.

Now, let me turn to our financial performance for the quarter. Our first quarter results show that we're making significant progress with our transformational strategy despite tremendous external challenges. Sales increased 8.5% from a year ago to $714 million, reflecting the benefit of acquisition growth and foreign currency translation. First quarter 2008 net income was $6.5 million, or $0.07 per diluted share versus $0.08 per share last year same period. Excluding special items in both periods, first quarter 2008 earnings were $0.08 per share, in line with Street consensus estimate, compared with the $0.09 per share last year.

Adjusting 2008 performance for the $1.6 million or $0.01 per share one-time accounting charge associated with the GLS acquisition, earnings were flat with prior year first quarter. And while flat earnings are not normally something we'd be satisfied with, we are pleased with our results considering the severe market challenges we've faced and our ability to offset a $13.3 million drop in Geon performance polymers segment income. Overcoming these obstacles in the face of an unprecedented economic environment clearly signals the dramatic upgrade in our earnings quality and sustainability. For the first quarter, our specialty platform earnings exceeded 40% of our total base earnings. Importantly, that is up from only 14% just one year ago and compares with a mere 2% for the full year of 2005.

And percentages are one metric but perhaps the strongest proof statement that real change is occurring is the magnitude of our specialty income growth in absolute dollars, which nearly tripled to $14 million from $5 million same quarter last year. This was driven largely by a gross margin improvement of 300 basis points. Excluding the benefits from the GLS acquisition, our specialty platform delivered stand-out organic growth performance as operating income more than doubled compared with the first quarter of 2007.

One of this year's highlights has been our acquisition of GLS, which we completed January 2. The addition of GLS, a North American leader in TPE's, has had a major impact in transforming the earnings base and profitability of this segment. By achieving our target ROS margin of 10% for the specialty business, GLS drove the majority of the $4 million improvement in specialty engineered materials segment profit compared with a year ago. The more we see of GLS, the more enthusiastic we become. Our integration process is on schedule and moving ahead effectively and we remain confident that GLS will be accretive to earnings in 2008.

Our international color and engineered materials business continued to register strong year-over-year performance, as operating income grew by nearly 30% to $8 million. Excluding foreign currency gains, operating income rose a solid 15%, reflecting new business gains and greater penetration of specialized applications. Of particular note, our color business in Asia increased revenues by 18% year over year. And our eco-friendly LSFOH, which is our low-smoke zero halogen compounding business in Europe, grew revenues by 28% from a year ago.

PolyOne distribution enjoyed another strong quarter, leveraging 9% sales growth into a 20% increase in operating income to $5.5 million. This performance resulted from our diligent execution of multiple initiatives. Each individually having a small benefit but collectively, making a big difference. The effectiveness of our PolyOne distribution sales team remains evident as we continue to capture new business in difficult operating conditions. In addition to our segment businesses, you know that we report an all other category. This includes North American color and additives, specialty inks and polymer systems, and producer services. The all other category reported a 5% sales decline year over year, yet operating income nearly tripled to $4 million as we pruned unprofitable accounts and improved our mix. The majority of this income improvement was delivered by North American color, which turned profitable on a last 12 months basis for the first time since PolyOne's formation.

Specialty inks recorded a 40% increase in income. Consistent with recent quarters, our Geon performance polymer segment continued to take the brunt of economic head winds that are caused by the depressed housing market. While this segment's income substantially declined from a year ago, we more than doubled income on a sequential basis from the fourth quarter of 2007 because of actions we've taken in the marketplace and internally. We are taking aggressive actions to increase efficiencies and reduce costs in this segment. We continue to adopt and follow lean principles throughout our operations to improve our position for substantial earnings growth once the markets start to recover. We're also driving mix improvements and exercising market discipline to strengthen our margins.

Another recent highlight that reflects the market's confidence in the strength of our financial profile and the positive trajectory of our operating performance was the successful issuance of $80 million to our existing 2012 senior notes. This action represented our final step in securing long-term financing associated with the GLS acquisition. We were able to raise this capital because of the market's favorable reception to our name. It's a testament to the many actions we've executed effectively throughout the Company to strengthen our operating and cash flow performance.

Although our industry continues to face challenges, I'm pleased with and highly encouraged by the performance of our specialty and POD operations. While corporate America faces uncertain economic times for the near term, we continue to position PolyOne for powerful earnings leverage when the economy recovers and/or inflationary pressures abate. However, please understand that we're not just holding out for an economic recovery. Two of our three business platforms are exhibiting strong double-digit earnings growth even in this challenging environment. In our earnings release I commented on the importance of stepping up our efforts to close new business and to manage escalating costs effectively in order to realize profitable growth this year.

We also need to help our customers through these difficult and trying economic conditions by being a value creating collaborator that provides much more than plastic pellets. We've equipped our sales and service team with tools and knowledge to help improve our customers' outcomes in their markets and the initial results of these efforts are very encouraging. When we rolled out our strategy, we emphasized that we invest focused resources to drive profitable growth in the target markets of healthcare and electronics.

And just to give you an example, in healthcare, targeting high margin sustainable applications we grew sales 31% in 2007, which carried over to 24% year-over-year growth in the first quarter of this year. Annualized revenues for this market now exceed $150 million. Some examples of new healthcare applications include soft touch surgical instruments, radiation shielding, catheters and pipette tips. Our international expansion continues. In February, we announced the opening of our third color development center in the city of Tianjin to facilitate more rapid commercialization of new products in north China and Korea. This will strengthen our ability to provide value-added solutions to customers in such fast growing industries as food and beverage packaging, cosmetics and personal care packaging.

Across the Company, we've intensified our efforts to accelerate new business closes and our people have responded admirably to this challenge. Through March, aggregate new business closes outpaced reported lost business by more than $100 million annualized. Importantly, the gross margin associated with our new business closes is above the average margin for each business, reflecting the strength of our specialized value propositions. Stated simply, our specialization strategy is bearing fruit, as illustrated by the fact that gross margins on specialty new business was approximately 27% versus our corporate average in the first quarter in the low teens.

In the area of operational excellence, we've continued our improvements in delivery performance this quarter and achieved over 95% on-time delivery in North America. Europe has made substantial delivery improvements as well, achieving over 90% this quarter from a 74% base at the end of 2006. We're successfully converting customers into believers of PolyOne's new capabilities.

Now, let me just make a few closing remarks regarding our positioning. In recent weeks, I've had the privilege of attending many one-on-one institutional investor meetings across the U.S. And the feedback tells me that our story is resonating with investors. As one sell-side analyst report recently stated, and I quote, "There's been a significant pickup in investor inquiries we get about PolyOne," end quote. I would simply reinforce to you that today, our product portfolio, our culture, our strategy, our business mix, our management team, our balance sheet and our performance are radically upgraded. In fact, the word "change" can't even begun to describe the depth of our transformation. PolyOne is fundamentally different from two years ago. We've demonstrated performance gains across key value drivers as never before and these gains have not yet been reflected in our equity valuation.

To be very specific, we have a clear and consistent strategy and aggressive profitability targets, through which we are substantially upgrading the quality and sustainability of our earnings base, as witnessed by our ability this past quarter to offset the decline in our performance products and solutions platform. We're executing that strategy and outperforming the competition in key markets. We've significantly strengthened our leadership team and instilled a performance-based culture of accountability and urgency as evidenced by the dramatic income improvement in our specialty business. We've invested in and lifted the skills of our global sales force to be more effective at pricing, selling and capturing value.

We've substantially shifted our business mix away from commodities toward a more specialized portfolio, at what we believe is a brisk pace. Within our specialty platform, the magnitude of our income growth reflects our significant strides toward building businesses and earnings that are separate from our historically cyclical end markets. Our specialty businesses are becoming the primary engine driving our earnings growth. Going forward we expect this higher quality earnings stream to fuel an improvement in our valuation multiple. To bring it closer to that of other top tier specialty chemical companies. Our innovation processes are completely retooled and building momentum.

And finally, we've dramatically improved our financial profile. In fact, it has never been stronger. Our de-leveraged balance sheet provides with us the financial flexibility to transform PolyOne. The urgency instilled throughout our organizations is allowing us to realize our goals more rapidly than we had anticipated. I encourage you to compare our performance over the last five quarters to our broader peer group. You will see a difference.

Our margins are expanding and we're turning around businesses that traditionally underperformed. Our North American specialty businesses are now profitable and growing, whereas a year ago they weren't and in fact, hadn't been since PolyOne's formation. Although we're a recognized industry leader with an enviable breath of product and geographic reach, this is a Company with significant untapped growth potential. We've come a long way in a short time but we are fully cognizant that much work remains in order for us to realize this potential. We believe this places PolyOne in a very desirable position relative to many of our peers. Our recent performance has demonstrated we can execute in new frontiers and we're only beginning. We know where we're going and we know how we're going to get there.

Our key priorities for the remainder of this year are as follows. First of all, we have to manage our escalating costs and that includes working with suppliers, executing lean manufacturing throughout the organization, controlling and managing logistics costs and managing pricing. Second, we have to drive new business gains to offset base business slowdowns and revenue reductions resulting from pruning decisions. Third, we have to keep executing on our strategy. And finally, we're going to continue the ongoing process of managing our portfolio. So, these priorities will be the focus for PolyOne for the remainder of this year.

In closing, I hope the significant progress achieved in recent quarters is quite evident. The fundamental change occurring with PolyOne is reflected in improvements in the quality and sustainability of our earnings base. And as current performance indicates, the momentum behind these factors is coalescing to drive greater cash flow and earnings growth in order to deliver increased value to our shareholders.

Now, before I turn it over to David Wilson, I know that you've seen the two news releases in advance of this call. Today, will be Dave Wilson's last earnings conference call with PolyOne. And David, on behalf of everyone at PolyOne, I want to thank you for all that you've done to make PolyOne the Company it is today. You've been a great partner over the years and I appreciate the tireless dedication you've provided to me and to our Company. I wish you and your family many years of good health and happiness as you enter this next chapter of your life. So, David, thank you very much. And with that, I'll ask Dave to discuss in more detail our first quarter financial results and outlook. Thanks for your attention. Dave?

Thanks, Steve, those are kind words and I do appreciate them. And I don't want to take too much of the focus off the real purpose of the call, which is discussing the strong performance of PolyOne this quarter. But I do want to say to our audience that one of my favorite responsibilities as CFO has been to be the voice or a voice of PolyOne to the Street and to shareholders. I've thoroughly enjoyed the rigor of the relationships with the Street, in good times, tough times, and all times. And I'm proud of all that we've accomplished at PolyOne and I'm proud of how well positioned the Company is today to succeed at levels of performance never before reached. I'm absolutely confident our best performance is still ahead and I do look forward over the next quarter to working with Bob to ensure a smooth and seamless transition.

Now turning over to the quarter's performance, I'll be discussing first quarter sales and earnings, our financial position and make some brief comments on our outlook for the second quarter and for the full year. Before I begin my remarks, I want to draw your attention to attachment six of the earnings release. Steve reviewed the changes we've made this quarter to our reportable segments. Attachment six provides a recast of segment performance by quarter back through 2007 and for the whole year 2006. And this, of course, conforms with our 2008 presentation. So we have provided the history to help people understand our segments as we're reporting them today.

Steve reviewed the many accomplishments we delivered this quarter. The strong earnings growth demonstrated by our specialty businesses, especially considering the challenging economic environment and depressed residential housing market in North America, reflect the fundamental change occurring within PolyOne. This performance underscores our progress building a strong foundation of sustainable high quality earnings that are less susceptible to economic volatility. Moreover, our specialty businesses, coupled with the solid earnings growth from PolyOne distribution and lower financing costs, effectively counterbalanced the earnings performance by Geon performance polymers compared to a year ago.

For the total Company, reported EPS for the quarter was $0.07 per share, compared to 0.08 reported in the first quarter last year. Special items for both quarters were $0.01 and additionally, included in the current quarter, was $0.01 associated with a one-time inventory step-up related to the GLS acquisition purchase accounting. Adjusting for these items, EPS for the first quarter would be $0.09 per share comparable with last year's performance. I'll be providing greater detail on earnings performance later.

Turning to sales. In the first quarter sales, as Steve mentioned, were $714 million, up 8.5% from the first quarter of last year. This increase was due to the benefits of GLS acquisition and foreign currency. On an FX adjusted basis, sales of the Geon performance polymer segment were down approximately 9%, largely reflecting lower volumes, partially offset by favorable price and mix adjustments. Organic growth for businesses outside Geon performance polymers approached 4%, driven by price and mix benefits, reflecting management of escalating costs, as well as penetrating new higher value market niches and shedding low profitability business accounts.

Now turning to operating income. For the quarter, we reported operating income of $20.1 million, which includes $1.6 million of special items. Operating income before specials, therefore, was $21.7 million. Last year reported operating income was $26.5 million. After consideration of $1 million of special charges, operating income in 2007 first quarter was $27.5 million. Compared to a year ago, operating income from our specialty businesses was up nearly $9 million or roughly triple compare to the first quarter of '07. The improvement was driven by a 300 percentage point improvement in gross margin, as each business within the specialty platform achieved significant quarter over quarter improvement, of which only 1/3 would be attributable to GLS. This performance is particularly encouraging because it provides clear evidence of the earnings transformation occurring from executing our specialization strategy effectively.

In a similar vein, each operating segment across the platform achieved a meaningful earnings improvement as margin and mix improvements offset volume declines, which primarily were due to pruning decisions. PolyOne distribution achieved 9% sales growth, which was leveraged in the 20% operating income increase. This income improvement was largely due to an improved sales mix, reflecting greater proportionate share -- sales to higher valued niche applications, as well as the higher average gross margins.

The Geon performance polymer segment, facing a combination of depressed demand as a result of continued residential housing weakness, as well as escalating energy and derivative feed stock raw material costs; recorded a $13.3 million decline in operating income compared to the first quarter of 2007. This result was due principally to lower sales volumes and frankly to a lesser extent, to margin compression. Resident intermediate segment earnings were up $1.6 million for the quarter but well below our expectations. The 2007 performance includes a $1.3 million loss recorded by OxyVinyls.

Sunbelt earnings were up $0.2 million from a year ago to $7.2 million. Even though this was year-over-year improvement, Sunbelt earnings were approximately $1.5 million below the level we had anticipated, reflecting weak incremental chlorine demand, which limited production volumes, partially offsetting the higher caustic soda pricing. Chlorine demand shortfalls reflected weak downstream demand in PVC and polyurethane end markets, particularly for construction applications.

Corporate and eliminations increased approximately $3.7 million compared to the first quarter of '07. Excluding special items, the increase was just a shade over $3 million of which, half was attributable to the $1.6 million one-time purchase accounting charge related to our GLS acquisition. And it's important that we -- that you note that that charge we reported in the corporate and eliminations, because it was -- as a one-timer, we didn't want it to affect really ongoing segment performance comparisons.

Our selling and administrative expense, as a percentage of sales, was 9.6% for the quarter compared to 9.1% a year ago. On an absolute basis, S&A expense grew by a little over $8 million. Over 50% of this increase was due to GLS and another 25% was attributable to FX. The balance primarily reflected inflationary adjustments compared to a year ago. So you know, GLS operates at an S&A level -- S&A to sales ratio of approximately 14% but it also achieves a 10% operating margin. This is the profitability model we're driving toward for our entire specialty platform, with gross margins at 25% or more and operating margins of at least 10%.

When we made our commitment to invest to expand and upgrade our commercial capabilities, we stated that the result would be to raise S&A spending by approximately 1 to 1.5 percentage points to a level roughly between 9.5% and 10%. As evidenced by first quarter '08 results, we are in the low end of that range. We are controlling the general and administrative component of this cost base, favoring incremental investments in commercial resources as appropriate where market opportunities warrant. But even here, we've slowed the pace of new investment. Financing costs, defined as the combination of net interest expense plus the discount paid related to receivable facility drawings, were down $5 million, as anticipated, compared to the first quarter of 2007.

Turning to net income. We reported the $0.07 per share down $0.01 from a year ago. As previously mentioned, after adjusting net income for special items and the one-time GLS purchase accounting charge, EPS was comparable to first quarter '07 results at $0.09 per share. Lower financing costs offset the year-over-year decline in operating income. Our effective tax rate for the quarter was 33%, reflecting our mix of domestic and foreign sourced income. Last year our effective tax rate was 33.9%. Going forward, based upon our anticipated mix of earnings, we estimate that our effective tax rate will be between 33% and 34.5%.

Looking at our financial profile. We ended the quarter with a debt to adjusted EBITDA leverage ratio of approximately 3.2 times, compared to year end '07 levels of 2.4. Borrowed debt, including the Sunbelt guarantee and drawings under the receivable facility, were approximately $570 million, up $165 million from year end, primarily due to the acquisition of GLS. And we finished the the quarter with approximately $87 million drawn on our receivable facility. And funds received from the add-on issuance of $80 million to our existing 2012 notes were used to pay off the majority of these borrowings. So you know, we have completed our planned financings to fund the GLS acquisition with the successful issuance of the $80 million add-on, as well as $40 million revolver put in place in early January. We project net incremental financing costs for the acquisitions to approximately $11 million for the year. For a weighted average cost of roughly 7.5%, which frankly, is about 1 full point less than our original planning projection.

Now, let's turn to our outlook. And as we do I draw your attention to the outlook discussion contained in our earnings release, as well as to our forward-looking statements. As noted, we anticipate continued economic uncertainty, as well as volatile raw material and energy costs. Based on early results, we anticipate second quarter '08 sales growth of approximately 6% to 8% despite weak demand trends in North American residential construction and automotive markets. Our international demand is generally remaining intact, although we are seeing select pockets of softening for customers who primarily export product back to North America.

Geon performance polymer segment sales are expected to show sequential improvement but declined 9% to 12% from the second quarter of '07. We estimate organic growth outside the Geon performance polymers group segment, excluding the benefits from the GLS acquisition and FX to be 7% to 9%. So outside of the Geon businesses, we are looking for organic growth in the second quarter of 7% to 9%.

Margin improvements in the specialty and PolyOne distribution platforms are expected to drive operating income growth for these platforms in excess of both first quarter '08 results as well as second quarter '07 levels. The performance products and solutions platform operating margin is project to increase sequentially but remain below a year ago due to continued weak end market demand, principally for the Geon businesses. Sunbelt earnings are currently expected to decline moderately, if at all, on a sequential basis as a result of the same low incremental chlorine demand dynamic I've already discussed.

Based on these projections PolyOne expects second quarter '08 earnings, before special items, to approach the level of second quarter '07 earnings before special items, which would also have them increasing sequentially versus first quarter '08 results. For full year '08, based upon current North American demand levels, PolyOne now projects sales growth of 7% to 10%. We also continue to anticipate positive year-over-year earnings growth in 2008 with the distribution of quarterly earnings being expected to be more heavily weighted towards the second half of the year.

In summary, first quarter performance reflected the substantial progress being made transforming not only our earnings base but also how we go to market. Our specialty platform is truly becoming a growing sustainable base of high quality earnings. It's evident that we're increasingly -- that as we increasingly demonstrate this progress by delivering high value earnings growth, PolyOne should no longer be viewed as a Company whose earnings are largely dependent on the volatile chlor-vinyl cycle but rather be viewed and valued as the specialty business we're rapidly becoming.

Never in our history have we been better positioned to create value for our shareholders. Never have we been as well positioned for commercial achievements with people, products and prospects that will drive valued solutions to our customers to help them win in their markets. And that's a critical distinction between PolyOne today and PolyOne yesterday. And it's that capability that is distinguishing our performance in a challenging market environment. With that, I thank you. And we'll now open the conference call up to questions.

(OPERATOR INSTRUCTIONS) Your first question comes from the line of Mike Judd with Greenwich Consultants. Please proceed with your question.

Yes, good morning. A couple questions. On SG&A, do you have an estimate for us for the June quarter, what that should look like? Obviously with the addition of your new business and given some of the target that you talked about, 14% of sales, it's hard to imagine you'd get there in one quarter. But so what should we be looking at there, please?

I think the S&A to sales ratio should be about what it was in the first quarter. As sales grow, the percentage, in fact, may come down a little. We anticipate that the absolute level of S&A would increase. And from our specialty businesses, you're right, it will take some time for us to continue to invest in more commercial resources to see the S&A to lift. But even then the blend of S&A to sales, with the specialty at 14% or so when you look at our -- the Geon businesses, the distribution business, the S&A to sales ratios for those businesses would be closer to 5%. And so, we'd stay at that blended 9.5% to 10% rate.

We've said a 10% in the range given our current portfolio and I think we have no reason to deviate from that. I want to be really clear, when Dave gave, I thought, a good illustration of the GLS sort of pro forma, that doesn't mean that the entire PolyOne portfolio supports and sustains that sort of a pro forma. You've got to have margins in order to invest in the sellers and the research organization and the marketing organization behind it that justifies a 14% or 15% SG&A in that arena. So, this is something that we ratchet up with time and we grow margins faster than we grow our SG&A. And in the end, you come out with a model that looks a lot like a 10% return on sales organization. So, I wouldn't want you to think that we're on a pace to ratchet up to 14% for the Company or even for all of our specialty businesses right now.

And just secondly, with the Sunbelt, we learned from one of the other companies that's involved in that joint venture, at least in terms of some of their other businesses, it seems that there are limits in some of the contracts in terms of how much caustic prices can go up. Capped essentially on an annual basis or whatever. Is that one of the issues that your joint venture faces also?

Honestly, I don't know. Olin does manage caustic sales for the joint venture but I think more important than that, the challenge that the venture faces is low incremental chlorine demand. And so, there's the contract that we have with OxyVinyls for chlorine, but above that it's open market sales. And with the weak PVC resin demand and not quite as weak polyurethane demand, there just isn't a lot of incremental chlorine that we can sell. And as you know, if you can't move the chlorine, you can't make the ECU. And that's really what's limiting Sunbelt's profitability this past quarter and perhaps in the second quarter. I think the jury is still out as to whether or not caustic increases can offset the adverse effect of lower volume. In the first quarter that dynamic didn't happen but as we look forward, we know the team at Sunbelt, and Olin managing for Sunbelt, is going to be work diligently to get the very best result.

And just lastly, Dave, thanks for the help over the years.

Thanks, Mike. I appreciate that.

Your next question comes from the line of Rosemarie Morbelli with.

Good morning all. And I want to start by thanking Dave for all of your help over the years. You'll be missed and we can talk before you leave.

We certainly will and thank you for those kind words.

When you look at the trend throughout the first quarter, you said that you expect the second quarter to be weak. Have you seen a decline in your markets, the demand overall, et cetera, during the first quarter? And do you expect it to continue to decline in the second quarter or just weak at the same level? Do you have any feel for what is happening out there, both in the U.S. and internationally?

I don't know that we've said that we expect the second quarter to be weak, and we really have -- we always are very careful about what we state in our outlook. So I think we have --.

I'm sorry, Steve, you meant that the U.S. will continue to be weak in the second quarter, so I was wondering if it was at the same level or if it's actually weakening some more. I was not talking about your results.

Okay. Yes certainly, Rosemarie, we see the same news and headlines that you all do when it comes to the economic environment externally. We don't see a lot of change in the U.S. It's all a matter of what you read and what you believe. Yesterday, there was an article in The Wall Street Journal declaring that the housing crisis is over. So if you believe that author, we should feel really good. I don't think we're going to actually go that far, frankly.

We see sequential sales improvement for the quarter, and we've indicated that. We are seeing continued solid growth internationally. There's a few little pockets in Asia, that is business that's sold to American-based houses that tend to soften with this economy. But beyond that, we're seeing solid growth in Asia. Europe, we keep hearing about slowdowns in Europe. I'll be honest, we're not seeing it right now.

So, I think another good barometer for us has been our PolyOne distribution business, which in the first quarter, we saw slowdowns in base business. There's no question that the molders and the customers of PolyOne distribution in general bought a little less from us this quarter because they produced fewer goods. But at the same time, it was offset by growth of new business. So, that's a good benchmark for us. How's the PolyOne distribution business doing and what does it say about production throughout the U.S.? And yes, it was softer. We don't see that -- we don't see much change to quarter two. We think the outlook that we're talking the about here is pretty consistent and consistent with the macro economic environment. And I think what's offsetting the downturn for us is some good solid performance on new business gains.

Regardless of what we read in different journals and so on, what do you hear from your customers? And what is -- if you take their temperature, are they continuing to be negative, are they kind of depressed, for lack of a better word, or do they see a little light?

It's really tough. And these are anecdotal stories and you have to be, I think, a little careful about valuing them. And sometimes negotiations are woven into these stories. But I would just say in the housing related markets, it is really tough. And we have empathy for the people that are our customers. We're trying to help them succeed in a very difficult environment. Other markets don't seem to be feeling much of a downturn. We have seen a little bit in wire and cable, obviously appliances, which is connected to housing, and you see some of our key customers there, earnings releases and revenue growth rates. So, those are challenging markets but all in all, we think customers have been cautious. I think they're going to be very cautious about inventory buildup but I think all in all things are -- seem to be sort of simmering down a bit from the really rough period in March, when all the news that you saw in your industry was very bad and the financial markets were very distressed. I think people got extremely cautious in that period, and I think we're -- based on anecdotal stories and data points from customers, I think we're working our way out of that right now. I hope that answers your question.

Yes, it does. And I wonder if you could address the raw material costs for the balance of the year? And then in this economic environment, your ability to continue increasing prices? And linked to that, what is the competition attitude? Are they raising prices as you are, or have they decided to change their model and go for volume at all costs and therefore are not raising prices?

Rosemarie, I think you're over the question limit but we're going to try and answer your good question the best we can. And then we'll have to allow someone else the opportunity. I think with regard to our ability to see inflation and to capture pricing, the remainder of this year it's an important point. I mapped it out as priority for us very intentionally. Internally, we have to do all the things on the top numerator and the denominator of a gross margin line to make sure that we continue to expand the margins.

I'm thrilled that we were able to do it in the first quarter but inflationary costs keep coming at us and it comes on several fronts. Freight, for example, if we don't act on our freight costs, We'll have a lot of maybe $7 or $8 million worth of costs that we'll have to absorb. And we can't do that. Our job is to provide valuable solutions to customers at a fair price and so they're going to have to deal with some of the inflation that we can't control.

On the other hand, we have an obligation to our customers and our shareholders to run very efficient manufacturing, to be as lean as possible, to do the most streamlined purchasing that we can on a value-oriented basis for the lowest total costs of operation. And so, those are the things that we'll continue to do. I think that as our value proposition strengthens, and as we move to marks where value is more appreciated, we have much better ability to get fair and appropriate pricing for what we deliver. And I think you're seeing some of that the last few quarters with our performance. I don't think that customers in major medical applications want to take significant chances. And so they recognize that we don't control oil pricing. And nobody likes it ever when you ask for and sell a price increase and insist on one but I think they're also understanding it.

We're running our operation efficiently and we're doing what we can control to be efficient and to be fair with our pricing. But we are going to have to keep managing suppliers throughout this period of escalation because oil has now worked its way all through the system yet. Our global footprint helps us mitigate some of this. We have leverage opportunities in our supply chain that we haven't fully taken advantage of as well. So, I think we're in a good position to manage through this.

It's really difficult to talk much to the other part of your question, was competitive behavior. I think it's better that you ask them questions about how they're doing on this front. We really are not in a comfortable position to comment much. We're trying to distinguish ourselves and differentiate ourselves and be rewarded with a fair price and we can't really control what the competition is going to do. But I'd love for you to take that up directly with them. Thank you.

(OPERATOR INSTRUCTIONS) Your next question comes from the line of Mike Harrison with First Analysis. Please proceed with your question.

Good morning.

Good morning, Mike.

Congratulations to Dave on your retirement and best wishes.

Well, thank you. Thank you. We'll have opportunity over the next 60, 90 days to catch up and I'll continue to be talking about PolyOne.

To be sure. I wanted to kind of continue following up on what Rosemarie asked about pricing. In terms of PVC pricing and pricing in your vinyl business, or Geon performance polymers, any move to increase the proportion of customers who are indexed to raw material costs? And can you maybe talk more broadly about how you're approaching pricing in that vinyl business. Where you're dealing with more general purpose applications and it's maybe a little bit more difficult to institute the kind of value-based pricing that you're pursuing in more specialized areas of your business.

It's always a tough situation when you have soft demand and escalating prices and escalating raws that are out of your control. It's a tough situation and we have to deal with this in aggregate and individually. And some markets are certainly easier than others. Some of this depends on our end customers' ability to pass on pricing. And then when we talk about being a value added collaborator and partner, in some cases we work with our customers to help them go get pricing from their customers to get relief based on this sort of energy derivative world that's escalating rapidly right now.

So each is -- it's tough. There's no question. We have announced price increases. We have captured reasonable pricing but our margins are certainly, without question, are down. A lot of that -- part of that is demand driven. I would say the majority is demand driven. I think our customers understand. They don't like it but they understand. And we have to keep working through the battles one by one. And I will tell you, in the more general purpose applications where we're not differentiated, it's darn tough. And we're going to keep fighting them out. But as we continue to evolve and mature as an organization that moves toward more value added applications, every quarter we get a little farther down that path and we get a customer base that is understanding of the components that add up to our value proposition. So, I think that's about all I can really say with regard to our pricing externally.

As you look at the vinyl business sales decline of about 4%, is there any way that you can break out -- was pricing positive and volume in the high single digits negative, or how should we look at that?

You should look at it as pricing was positive and volume was down mid teens, frankly, on a year-over-year basis.

Okay. And then wanted to also ask, in terms of -- I know you've talked pretty recently about positioning yourself as a no surprises supplier for your customers, trying to prevent some of the bad publicity that rises from lead and other undesirable substances being found in plastic products. Looking at some of the backlash that we've seen recently against phthalates, in baby products in particularly, as well as BPA and some other additives, with governmental bodies moving to ban certain additives or at least talking about banning these additives in certain applications for plastics. How do you think this is going to play out for the plastics industry overall over the next few years and maybe how is PolyOne positioned to deal with these potential changes?

That's a great question, Michael. And thanks for asking it. I -- the industry will respond. The industry will adapt to the new environment, to the new world we're living in and to new information about certain materials that are used in our marketplace. And for PolyOne, we see this as a terrific opportunity. We have opportunities to provide alternatives to customers who desire a BPA-free technology. And we're working on a number of options to use our polymer performance expertise and our compounding knowledge to develop new applications that have very similar performance characteristics to the BPA-based product.

I would tell from you PolyOne's perspective, we have relatively low risk here, less than 1% of our raw material spend is on polycarbonate. We don't -- we are not aware of any sales into baby bottle or water bottle applications and we don't provide any epoxy-based products into can coatings that contain BPA. So, our PolyOne distribution business does distribute some polycarbonate to molders who are making parts primarily for transportation, recreational equipment, clear packaging, like music CD's. And our engineered materials business sells some into computers, printers and other business equipment applications. But these applications are not expected to be impacted by the current attention on BPA-containing plastics.

So overall, we have relatively low exposure. And we think net-net, we see this as an opportunity. And this is why when you're on top of innovation opportunities and on top of your markets and you see changes occur, we think change is great. Because we think we're an adaptable organization and we're pretty quick at responding, despite our size, and so we think there's upside for us. We have an answer for our customers today and we'll have additional options for them in the future. Did that answer your question?

Yes, it did. Thanks very much.

You're welcome.

Your next question comes from the line of Saul Ludwig with Keybanc. Please proceed with your question.

Good morning, everyone.

Good morning, Saul.

In the outlook comments, are you kind of suggesting that as regards to the Geon sector, that their second quarter earnings might be in the same neighborhood as the $7 million you made in the first quarter?

Well, we didn't really get that specific, but we would not anticipate that there would be a substantial improvement, although we would expect to see is sequential improvement, yes.

Okay. And then in your outlook for the back end of the year where you've said your total corporate earnings would be more heavily weighted toward the back end of the year, how does your -- how does that outlook tie in with your outlook for the Geon portion of the business? Are you counting on them to do much better than they will have done in the first half of the year in the second half of the year?

No, it's really our second half performance. We're not anticipating that there's going to be a marked recovery in the vinyl business in the second half. That would be great if it did. But what we're seeing in the second half is just continued momentum, primarily from our specialty businesses. As Steve mentioned, the success we've had on new business closes and the high value that we're realizing from those new closes. And it's really that momentum that's going to continue to have us see sequential improvements in earnings.

In the first quarter where you've said you had the margin decline, in your vinyl business, obviously your volume dropping off is a factor but you also said there was some margin compression. Was that a margin compression that came about because of a -- call it a variable margin compression, the difference between your selling price and your PVC input costs, or was it due to compression in fixed costs spread over fewer units?

It was both. There was a slight compression on a variable base but the operating margin or even gross margin for that business was most affected by volume.

Just a quickie -- two quickies.

Saul, you only get one more quickie.

Where's the environmental $1.6 million charge, in which segment?

Corporate and other.

That's in corporate also.

Yes.

And then just finally, GLS, in the 10-Q report would appear to have had operating income last year in the first quarter of only $800,000. You've just had a terrific increase from a loss of $900,000, to $2.9 million. And if we were to put the GLS from last year in last year's numbers, you would have been essential break-even. Was the improvement due to GLS doing a lot better or due to your former engineered materials business doing better? I thought the improvement was very, very impressive and significant. But I was also surprised to see how little GLS made last year in the first quarter.

What you're looking at is in the Q for everybody's knowledge, where we have a pro forma look at the first quarter, as if we had purchased GLS the first quarter of '07. And what that shows is really total Company, not specifically GLS. And included in that pro forma number is a $1.6 million inventory step-up similar to what we had this year. And so the net-net for the total Company would have been only $800,000 or so but when you add back the $1.6 million, you get a better reflection of where GLS earnings really were. Now, I will also tell that you relative to last year, they did see sequential improvement -- or year-over-year improvement, as did the other parts of our specialty engineered materials segment.

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

Thanks very much. Can you provide EBITDA for GLS for 2007? And for the last nine months of 2007, I think you provided the EBIT for 2007.

Deferred depreciation is -- I'm looking for help here, $2.5 million and this year it's going to be up another $1 million or so associated with purchase accounting.

Okay. And would you say that GLS EBIT over the four quarters was reasonably flat or are they subject to seasonality? I'm trying to figure out how to get the right LTM EBITDA on a pro forma basis.

Right. You're asking me a question -- I think it's -- they're going to be susceptible to a level of seasonality but their end markets are more stable than we would have in the general PolyOne business, with the automotive and residential construction exposure. Their focus is more packaging, as well as consumer and healthcare, which are flatter. So, I think Roger, it's safe to say that there is seasonality but not as dramatic as what you'd expect from the balance of the PolyOne portfolio. Particularly, the performance products and platform businesses.

So dividing full year EBITDA by four, adding on your $2.5 million divided by four, is a reasonable proxy to get a pro forma EBITDA, is what you're suggesting?

I think it's a reasonable proxy, yes.

Thank you very much.

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

Good morning guys. I think a lot of my questions are answered. Just one here really for you. We're looking at inflationary costs, you mentioned freight, you're passing through pricing as quickly as possible, understanding the conditions in the market. Yet, the -- your guidance for top line has come down for the full year. Could you give us an idea of where the give is here?

Yes, I think -- we have stated for the last year now that -- we've cautioned investors to be careful about their view of our top line. Because of the pruning process, it's very important in improving our profitability. And that process continues. It's alive and well. It's having a very positive impact on our organization. And I really -- I don't want to put our businesses in the position of putting top line pressure on to the degree that we fail to prune business that doesn't make sense for us. And so, it's always a difficult to gauge because you don't go into a process always expecting to walk away from the business. You try to work things out with the customer. You try to get pricing that's reasonable. And sometimes you're unable to but if it doesn't make any sense for us to have that account, we'd rather put it in someone else's hands, who is willing to lose money or has some willingness to go ahead and do business a basis that isn't highly attractive. And so, we'll continue this process and we're working on some of this in Europe right now, as well as select markets in North America. And so, this is all about upgrading our accounts, upgrading the target businesses that we pursue. And that has -- that certainly takes its toll on the top line. So, that's why we've always been careful about that, Chris. And also say, we're not -- we have not forecast any kind of upturn in the vinyl demand for later this year. That would be upside if it comes but that's not factored into how we're viewing the business today.

Just following up on that last comment. If I remember for your analysts day, the projection for housing was to reach a bottom by the end of the year, somewhere in and around there, is your expectations for 2008 looking for housing to continue to trend downward for this full year?

Yes, it's a really tough call. We're kind of basing our business around 850,000 to 900,000 housing starts. The latest forecasts are showing that to be more like 950,000 housing starts. So, we think there may be a little upside there. But we just aren't going to be in the vulnerably spot of hoping for things to happen. We're trying to make things happen. So, that's where we are with regard to the housing market. We are certainly -- we're hopeful that it improves but we're not counting on it. And the latest numbers we saw said 950,000 units started in '08 and 1.05 million more or less in '09. So, that would say that we've hit the trough but we're not going to hold our breath for that. We're going to keep bringing costs out of the organization. We're going to keep going after new opportunities in non-building and construction markets. So, that would be our response to our view on housing and its impact on us. We're still cautious about it.

Dave, it's been a pleasure working with you and thank you for your time this morning, guys.

Thanks, Chris.

Thanks, Chris. Is there time for one more, do you want to take one more?

Yes, why don't we take one more question.

Your next question comes from the line of Bob Amenta with JPMorgan Asset Management. Please proceed with your question.

Thank you, good morning, guys. Two quick ones, I believe. In the even pro forma for the bond offering and everything, the short term debt is about $90 million. $40 million, you said, was the revolver. Is the other $50 million -- what is it and is it stuff that can be rolled over? Is it truly due in the next year or what is that?

It's short term facilities that we have with banks. It's largely in Europe. So, it's debt that we can take in and out as cash flow comes.

Okay. So, we don't have to look at this as truly $90 million needing to be paid off in -- the revolver obviously, is long term.

Right, that's right.

And the other question is, on the attachment six, you referred to it, is it pretty safe that any one-time items that we would consider for all these periods shown would be in the corporate line, such that all the segments are actually pretty much apples-to-apples?

Yes. That is, frankly, our reporting convention. All the specials go into corporate and eliminations, frankly, for just that reason. So, that you've got good comparability between periods for the operating segments themselves.

Okay. Well, like everyone else, I want to thank you. And I think the last year, you and Dennis leaving, PolyOne has lost a couple of good guys. And I'm going to miss, I'm going to have find someone else to whine about Cleveland sports to. But there's a lot of whining to be done after last night. But anyway, good luck in your retirement.

I appreciate that. Thanks, Bob.

Okay. Thank you, all very much. I'm sorry we've gone over a little bit today but good questions and we appreciate your participation. Thank you.

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