Avient Corp (AVNT) 2008 Q2 法說會逐字稿

Good morning, and welcome to the PolyOne second quarter 2008 earnings conference call.

Before we begin, the Company would like do remind you that statements made during this conference call which are not historical facts may be considered 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 Management's expectation 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 statement. The company recommends that you review the updated risk factors in today's press release.

During the discussion today, the company will use both GAAP and non-GAAP financial measures. Please refer to the earnings release where the company describes the non-GAAP measures and provides a reconciliation of them to the most comparable GAAP financial measures.

Now I will turn the call over to Mr. Steve Newlin, Chairman, President and CEO. Please proceed, sir.

Well thanks, and thank you to everyone who's joining us on the call this morning. I really welcome the opportunity to speak to you today about the recent performance of PolyOne as well as our expectations for the balance of this year.

Here with me today is our CFO Bob Patterson. Prior to joining PolyOne, Bob was Vice President and Treasurer for Novellus. That's an $11 billion manufacturer of aluminum roll products, and prior to that he held a number of financial leadership positions positions with the SPX corporation. Bob joined PolyOne almost three months ago and he has quickly immersed himself in the business. He's contributing to our transformation strategy, and I'm very pleased to have him with us at the Company as well as here today for his first conference call with our shareholders and analysts.

Before I hand the call over the Bob to review results of our operations for the quarter, I want to take this opportunity to thank our former CFO Dave Wilson, who, as you know, is retiring from PolyOne later this month. Dave was with PolyOne and its predecessor companies for over 30 years and has been a tireless partner to me during my tenure. Dave, thanks for your years of service and contributions, your unwavering dedication and commitment to PolyOne and for ensuring a smooth transition with Bob . I know I speak on behalf of everyone at PolyOne when I say we're going to miss you and we wish you and Bonnie many years of happiness and health.

With that I'll turn the call over to

Thanks, Steve. It's hard to believe that three months have already passed. As you know, I've been diligently working to fill Dave's shoes, and I too would like to thank him for going out of his was to help me during my transition. I wish Dave well in his retirement.

Before I begin, let me preface my comments by saying that unless other times are specifically stated or referenced throughout the call, we will be comparing the results of operations for the second quarter of 2008 with the second quarter of 2007 . I am pleased to report that we are continuing to show progress with our transformational strategy despite a challenging economic environment. For the second quarter of 2008, consolidated sales increased 8.6% to $748 million, including the benefit of acquisition growth and foreign exchange. Net income was $8.8 million or $0.09 per diluted share for the second quarter of 2008, compared with a loss of $5.4 million, or $0.06 per diluted share for the same period a year ago. Excluding special items from both periods, we reported $0.12 per share in the second quarter of 2008 , compared to $0.10 per share in the second quarter of last year.

This earnings improvement was driven by our Specialty platform businesses, which reported a nearly 70% increase in operating income resulting from our specialization strategy. Combined with lower corporate costs and interest expense, we were able to overcome the decline in the Performance Products and Solutions segment resulting primarily from continued weak demand in North America housing, construction and automotive markets. Our earnings improvement is not an inconsequential accomplishment, and I would like to provide some further highlights of our Specialty business performance.

First I would like to remind everyone that our Specialty platform is comprised of three operating segments - Specialty Engineered Materials, International Color and Engineered Materials, and Specialty Color, Additives and Inks. A reconciliation of the Specialty platforms measures of performance has been provided in our earnings release today, and is posted on our website. In total, Specialty platform sales increased 24% to $300 million reflecting the benefit of the acquisition of GLS as well as favorable foreign exchange. Operating income increased nearly 70% from $10.1 million to $17.1 million and now represents 45% of total segment operating income.

On an organic basis and excluding the benefits of foreign exchange, Specialty platform sales were essentially flat year over year. However, operating income increased 20% or just over $2 million on the same basis. This last point clearly illustrates our focus on innovation, culling unprofitable business, improving sales mix and accelerating new business gains and higher margin sustainable businesses. A great example of this is our expansion into the healthcare market , which Steve will speak to shortly.

Within the Specialty platform, our International Color and Engineered Materials segment sales increased 14.5% to $172 million, and operating income increased 33% to $10.4 million. Importantly, operating income increased nearly 20% on an organic basis due to our continued focus on exiting unprofitable business and benefiting from growth in sales of our low-smoke halogen-free products. The remainder of the Specialty platform organic operating income improvement was driven by Specialty Color, Additives and Inks segment which is benefiting from new account generation and a more profitable sales mix.

GLS has another solid quarter of performance and added $3.7 million of operating income. GLS continues to meet our expectations in highly attractive markets, and the integration is going better than expected thanks to their leadership team's support.

Another performance highlight is our Distribution platform which increased revenues 9.5% to $208 million for the second quarter of 2008. Operating income increased 7.7% to $7 million, eclipsing the previous record of $6.5 million set in the second quarter of 2007. What is particularly impressive about this is that we believe we are gaining market share as North American demand has generally declined year over year. Our focus on and heightened investment in commercial initiatives and resources has allowed us to expand our presence in new higher-margin markets such as healthcare and consumer which has more then offset declines in automotive and appliance markets.

Our third platform, Performance Products and Solutions, which no longer includes the Resin and Intermediate segment continues to be challenged by weak demand tied to the current economic environment, and escalating raw material costs. For the second quarter of 2008, revenues declined 6.8% to $274 million, and operating income declined by $13.3 million to $5.3 million. This includes $1 million of charges taken for specific customer claims which were resolved during the quarter and that we do not expect to recur.

On the surface, these numbers are disappointing. However, we believe that they reflect better than expected performance given the housing and automotive market challenges confronting this business. Housing starts for 2008 are expected to approximate 950,000 units compared to 1.4 million in 2007 and down considerably from the high of 2.1 million units started in 2005. In addition, the automotive market is continuing to see reduced production forecasts, from 16.1 million units last year to a revised forecast of 14.5 million this year, the lowest level since 1992.

That being said, new business closers are better than they have ever been, and this has allowed us to offset some of the market driven demand decline. Led by Rob Rosenau and his team, we are positioning the business to grow by embracing our commercial and operational excellence initiatives. We sometimes forget to highlight their efforts because of the market dynamics that overshadow them. We want to remind our investors, customers and suppliers that our ours is the premier brand in this business and Performance Products and Solutions is one of our strategic platforms. It is a core business, and we are committed to its success.

I'd now like to comment on our financial position. Last year we used the proceeds from the divestiture of our investment in Oxy Vinyls to pay off our 10-5/8 senior notes, allowing us to reduce interest expense by approximately $7 million per quarter . While we increased our borrowings this year to fund the acquisition of GLS, total interest expense for the quarter was $4 million less then the prior year excluding special items, and we remain confident that GLS will be accretive in 2008. Current borrowing availability under our receivables security facility is approximately $143 million, and we have $60 million of cash on the balance sheet . We believe that our financial profile has never been stronger, and we have adequate liquidity and future cash flow to fund seasonal working capital requirements and strategic investments, including opportunistic bolt on acquisitions.

I'd now like do turn the continual over to Steve, who will

Bob, thanks. I'd like to begin by thanking the PolyOne leadership team and all of our employees for delivering a strong quarter. It's been two years since I joined the company, and we began our journey of value creation. During this time, we focused on transforming the company from a commodity-based compounder to a premier global provider of value-added specialized polymer materials, services and solutions. I'm convinced that our transformation process is working. There's no better evidence than our results for the second quarter .

Today we're facing the most challenging economic headwinds that this generation has ever seen, including unprecedented increase in raw material and energy costs, coupled with demand declines in our key markets, such as housing, construction and automotive. Yet we were able to report earnings growth for our shareholders. Our specialized strategy has led us to move our business mix away from commodities towards higher margin stainable businesses. And as Bob mentioned earlier, a great example of this is our expanded market presence in healthcare.

During the first half of 2008, our healthcare customer revenues increased approximately 25% over the prior year. On an annualized basis, sales from this market are approaching $180 million, and that's an increase of almost 60% from 2006. Our active sales projects in this market have increased by over $80 million since the end of last year. And our efforts to globalize the new healthcare business team allow us to build strong momentum with new programs and technologies that are focused on metal and lead replacements, medical device innovations and the ability to reduce medical product costs associated with surface preparation. We've invested in and lifted the skills of our global sales force to be more effective at pricing, selling and capturing value. What I really like most about our success in the healthcare industry is that it illustrates our focus on winning new business in key markets. And that's a key element of our commercial excellence strategy.

Through the first half of 2008, our company-wide new business closes have outpaced reported lost business by approximately $250 million. More importantly within the Specialty platform, this new business is generating gross margins that meet our objective of exceeding 25%. One of the reasons we've been successful in growing new business has been the rate of new product introductions. Our vitality index - and you've heard us speak of this often - has increased to 17% of sales versus 13% in 2007 . That's a direct result of advancements in research and development, as well as improved sales force training. We're teaching our sales force to understand customers' needs, and go beyond our current product portfolio in addressing them.

As a follow-up to the key new program launches we completed in 2007, we're seeing stronger business unit revenue projections. Our new product pipeline is showing promise with a number of opportunities being developed on platform technologies that we believe will be important for our future. Let me give you a specific example that was highlighted recently in Plastics Technology magazine, where demonstrated heat resistance improvements in compounded PLA, which is polylactic acid, that's a bio-polymer which has inherent heat resistance deficiency. We're very much encouraged by this development because it could lead to more durable uses of polymer versus the disposable applications that today we aren't involved with .

Last week the House and Senate passed an amendment to implement a ban on select phthalate plasticizers in products intended for sale of toys or child-care articles for children under 12 years of age. PolyOne has been developing solutions that provide options to comply with either legislative or market -driven demands for alternatives to materials using phthalates plasticizers. Our Performance Products and Solutions segment has the formulation experience and capability to deliver formulations to our customers in a manner compliant with the legislation currently in place or proposed. In the past, this approach was not seen as valued by some of our customers due to its inherently higher costs. However, this is changing with the impact of the current legislative initiatives.

In our Specialty Color Additives and Inks segment, an ongoing program is continuing to develop phthalates-free alternatives under our trade name Epic. This line has been growing due to an increased worldwide demand for non-phthalate inks for garments driven by the desire for major brands to be viewed as progressive with respect to these issues. In anticipation of the growth of non-phthalate demand, the Epic product line is under expansion to include a wider range of products. And earlier this week, you probably saw we issued a press release to announce an exclusive license agreement with Battelle for a series of bio-based plasticizer technology patents. This technology involves the manufacture of plasticizers from bio-based sources, such as soy bean oils . So I hope you can see we're taking a lot of steps to proactively identify unique, renewable alternatives for customers looking for specialized solutions.

Earlier, Bob mentioned that International Color and Engineered Materials second quarter operating income increased organically by 20% over the same period a year ago. This has been led by our low-smoke halogen-free product sales, which have increased almost 30% during the first half of 2008. Let me remind you that this product is making headway in new markets because it's an eco-friendly solution for flame-retardant applications. I'd also like to add that operating income from our Europe Engineered Materials business increased 5-fold to $1.4 million as a result of improved sales mix and ongoing pruning of unprofitable business.

Finally on the topic of globalization, we recently announced that we will be opening a new manufacturing site and color-lab in India, the world's fastest growing plastics market. This is an important milestone on our globalization strategy, and also reflects our drive for specialization. Construction at the facility is expected to begin later this year, with operations scheduled to commence in the middle of 2009.

We also announced the opening of a new office in Japan, to specifically target gaining specifications with Japanese OEMs and polymer processors. Both of these initiatives will be led by Dr. Willie Chien, our Vice President and General Manager of Asia. As I said before, this Specialty platform is becoming the growth engine of this company, but we're embracing the pillars of change in all our businesses.

Our PolyOne Distribution business delivered stellar performance this quarter under the leadership of Mike Rademacher and his team, and we believe our Distribution operating margins can improve to 45% return on sales with continued focus on commercial and operational excellence. We've now reached a point where on-time deliveries exceed 95%. We've been taking market share in new industries, such as healthcare and consumer products, which has allowed us to offset declines in the housing and automotive markets. Our sellers are equipped with tools to help our customers improve their profitability by reducing customers' total operating costs. When we combine these solutions with new and innovative products and services we create customer loyalty, and everybody wins. And that has never been more important than it is today. Our specialty focus has allowed us to weather an incredibly difficult market .

However, as a result of the current economic conditions and as a part of our operational excellence strategy devised before the economic turbulence, we recently announced our plans to reduce manufacturing capacity and realign assets in North America . We believe that there has historically been excess capacity in this industry. And while decisions like this are never easy, this capacity reduction is needed to improve our near-term operating efficiency while advancing our longer-term strategic position. I think it's really important to know this was not a knee-jerk reaction to a difficult market environment. Rather it 's the culmination of a very in-depth, thorough and thoughtful review of our entire operation. Our ultimate decision was driven foremost by our concern for customers and employees at a time when we are confident we can execute these actions without disruption to product quality, delivery or service .

You heard me say before, we're not on a volume hunt at PolyOne. Too much capacity is not only wasteful, it drives poor business decisions leading to unprofitable, unattractive markets or customers. The dynamic nature of a targeted end market focus continues to shift our own mix, which requires manufacturing agility and flexibility. Polyone's realignment reaffirms our commitment to creating value for employees, customers and shareholders.

With that, I'd like do hand the call back over to Bob to review the details of the realignment as well as comment on the outlook for the

Thanks, Steve. Over the next nine months we will close certain production facilities including seven in North America and one in the United Kingdom resulting in a net reduction of approximately 150 positions. Production at the effected facilities as well as several manufacturing lines will be moved to a limited number of the Company's more than 30 remaining plants. As a result of these actions, we expect to incur one-time charges of approximately $31 million, of which approximately $18 million are expected to be non-cash. These one-time charges will include costs related to severances and asset write-downs which will be included in our financial results over the next three quarters. We expect these actions to generate pre-tax savings of approximately $17 million or $0.12 per share on an after-tax basis.

These actions are part of our previously disclosed operational excellence target of $50 million in cumulative identified supply chain savings by 2011. We expect no disruption of service due to the company's focus on improved product, delivery systems and inventory management. In fact, we plan to invest approximately $12 million in additional capital expenditures at our remaining locations to support these changes and our ongoing customer requirements.

In our earnings release today we outlined the key elements of our outlook for the balance of the year as follows. We anticipate continued economic uncertainty as well as continued raw material and energy cost pressure. While second half 2008 revenues are expected to grow approximately 15%, including GLS, compared to the second half of 2007, these aforementioned factors are expected to put downward pressure on earnings primarily in the Performance Products and Solutions segment. Operating margin improvements in the Specialty and PolyOne Distribution platforms are expected to drive operating income growth for these platforms compared to third quarter 2007 levels. Third quarter operating income in the Performance Products and Solutions segment is projected to increase sequentially from the second quarter of this year but remain below the year ago level due to raw material cost inflation and continued weak end market demand. Resin and Intermediates operating income for the third quarter of 2008 is expected to approximate second quarter levels this year. Based on these projections, we expect full-year 2008 earnings before special items to exceed prior-year earnings before special items.

Now I'd like to hand the call back do Steve for some final remarks .

Okay. Thanks, Bob. Let me just summarize by saying that for the year we expect to deliver earnings growth. I believe this would be a significant accomplishment given the challenging economic environment that we face in key end markets.

I'd like to once again thank the PolyOne leadership team and all PolyOne employees. Their commitment and dedication have allowed us to improve earnings and drive shareholder value. Year-to-date, PolyOne's share price has increased roughly 25% while the S&P 500 has declined about 12%. And I believe that our share price can continue to advance at an accelerated pace as a result of the successful execution of our strategy.

If you were inside this organization, you would clearly see that PolyOne is a dramatically different company than it was two years ago. While we still have plenty of room to improve on all fronts of our transformational evolution, we 're not waiting for the US economy to turn around to create value for our shareholders. We're winning new business and improving our margins everyday by providing our customers with new and innovative products, services and solutions.

And with that, I'll turn the call back to the operator to open the line for questions.

(OPERATOR INSTRUCTIONS) Your first question comes from the line of Mike Harrison with First Analysis. Please proceed, sir.

Hi good morning.

Hi Mike.

Good morning. Was wondering, as you look at your end markets right now, I think we generally have an idea for, so to speak, what 's hot and what's not. Was wondering if you could give us some idea of where you're seeing some signs of improvement and maybe if there are any areas where you're seeing weakening, both on an end market basis and a geographic basis.

Well, I would say that we're not seeing a lot of change base d on -- You hear this as well as we do. Housing obviously is in deep trouble and about 950,000 units, looks like about where the year is going to end . That really isn't changing much. Auto is down, and we all know about that. And it's shifting, the mix in auto is shifting. So you have to be on top of which applications you're pursuing. If you're going after SUVs right now, you may be in the wrong the wrong spot. And the other more -- the less cyclical businesses of healthcare and, frankly even consumer, we 're not seeing much change whatsoever. So appliances, a little softening; wire and cable, we see some softness in certain segments of that business. And if you want to walk around the globe now --

I think we reported -- and I think we were fairly early to report last quarter, we mentioned that we saw signs of slowing in Asia for the first time in quite some time based on not domestic consumption, but based on exports, products that were being exported to the US, and we've continued to see that same softening in some of the electronics fields and other applications where primarily US -based multinationals are producing and shipping to the US

Europe held up for us. We keep hearing about some softening in Europe, and we're cautious about it. So we're trying to be very careful about where we go with our business in Europe, and continue to balance pruning existing customers with finding new more attractive applications for our business. That kind of takes you around the globe and across the markets that we're seeing.

Clearly the bellwether of distribution sees softening in the same markets I just described, and people have often asked well how are they growing their business when they're so North American-based and their end markets are predominantly declining? And the answer to that is - places like healthcare, it's gaining share with the existing business that you have they have. If you look at it sort of -- if you looked at this more like home Home Depot on a same store sales basis, our existing accounts are down because they're producing less. But we're winning plenty of new business that's not only offsetting the erosion, but it's helping us grow quite substantially. So that kind of -- I hope that answers your question, Mike. If not revise it, and I'll attempt to get

I appreciate the color there. Was also wondering if you could give us some more details on the market dynamics and plasticizers. Are phthalates the primary plasticizer that's used in PVC compounding? And maybe what portion of your customers right now are using the Epic products that you've mentioned? And is Epic -- are those products something you can use as an alternative in pretty much every application, or are there certain types of products where you have to use phthalates?

Right now, plasticizers are used extensively in vinyl based compounds, and plastisol is in inks as well, and even our specialty Resin customers. I would say about 90% of the plasticizer industry is based on phthalate chemistry. And they're under attack, no question about it . That's why we're very pleased to be proactive and out in front and have alternatives for these applications .

That said, the recent news that you've seen, and the legislation has been focussed in around a very specific class, and they're really trying at this point to get after things like toys, areas that are going to be exposed to children, predominantly under the age of 12, and there's some overriding state legislations that don't exactly line up with this as well. So it's fairly dynamic and off the press. But we didn't see the legislation coming, but we saw the opportunity, and that's why we've been positioning well for this.

This Battelle technology license agreement is going to help us. We're very pleased to have an exclusive arrangement on that that lasts through the duration of patents, which is going to take us out into the years 2021 and 2028. So we think we're in a real strong position.

If you look at the products that we sell, from PolyOne's total portfolio - What do we sell in products that have plasticizers? It's probably less then -- it's probably around 12% of our total revenues. And if you zero in on that a little deeper and look at the revenues that are associated that could be impacted by this legislation, it's probably more like 2% to 2.5%. Honestly, we wouldn't mind it being higher because as we replace and cannibalize our own business, we have, I think, opportunities to replace those products with replacement products that are more attractive to us as well as our customers . They're a little more expensive. They're a little more profitable for us, and we like that, because we think it's, in some cases, unique solutions for our customers.

Epic is specifically an inks related application. So this is going on garments, and while the legislation hasn't been completed in that arena yet and may not be, leading-edge companies want to get there first and they don't want to take the chances either for image and reputation and brand-protection reasons or potentially even for litigation-based reasons. But the leaders are out in front of this saying, you know, " help us now. We know we don't have do, but want to." So we're in a strong position there. That's where products like Epic-- we have another one water-based called Oasis. So we think we're in a really good position now to capitalize on the changes, however wide and deep they may be on this front. I hope that answers

It does. And if I could just sneak in one more. Looking at the balance sheet, accounts receivable was up about $100 million versus the end of last quarter. Are you seeing customers with credit issues? Or is there another explanation for that?

It's just the AR securitization facility. If you recall, Mike, we replace that with $80 in senior notes in April .

All right. Thanks very much.

Your next question comes from the line of Rosemarie Morbelli with Ingalls & Snyder. Please proceed.

Good morning, all.

Hi, Rosemarie.

The recent realignment, you briefly talked about on the conference. Is that mostly linked to the Performance Product and Solutions, or are there other particular areas of your business which will be effected? And then, linked to that, as you spend $12 million on the facilities that are you are going to keep, I am assuming that some of the capacity is just going to be produced somewhere else. So net net, how much are you really eliminating, and is there more to come?

There are several questions there. Let me try to answer all of those. First the realignment actions do take place across more than just the Performance Products and Solutions segment. We don't have Performance to disclose capacity or capacity utilization. And with respect to the $12 million of additional capital expenditures, I think your observation is spot-on in the sense that manufacturing would go to our existing plants. And we further expect that the majority of that $12 million would be incurred by the end of the this year.

So this means that while you my improve your manufacturing efficiency by producing more at a given plant, you are not necessarily eliminating a lot of capacity, or am I wrong?

We're eliminating a substantial chunk of capacity. In some cases, we need certain equipment to deal with mix, and so we'll be upgrading some equipment to sort of more modern equipment to make sure that we can be efficient. But we 're clearly taking out a fair bit of capacity. At the same time, when you have machines that are in a facility and they're not running at anywhere near capacity and you move those, your shifts don't really change. We're really going to save a lot of money on people. We just have -- we want to keep our plants running smoothly and running with some degree of efficiency, and the way to do that is by consolidating some of them.

And I'd also add to the earlier part of your question, Rosemarie. It's true that this is affecting several businesses. I tell you we've been extremely sensitive to our color business, because it's such a real speed, rapid response oriented, customer-oriented business, and there is one very small plant that effected by this change that is a color plant.

Okay. And still staying on the Performance Product Solution, the operating margin this quarter was 1.9% compared to 3.2% in the first quarter. Given the fact that -- Are you doing enough in-house to actually have this 1.9% the bottom regardless of what happens based on the steps you are taking?

Well, the first thing that I would mention, Rosemarie, is that we did have $1 million of specific discrete customer claims that were resolved during the quarter. So on a recurring basis, you can add that back to get to, I would say, a more normalized operating margin percent . With respect to your question about -- I'm not sure if it was whether or not this is a bottom, but we have certainly experienced continued raw material cost increases and that has put fresh pressure on margins in that business in this

And with the price of oil -- if I may sneak this one in as well -- As oil prices are declining, do you still expect for material costs to continue rising considering the demand is also particularly weak?

We're going to continue to see escalating ROS and it will moderate the degree and the amplitude by the recent pullback. But, you know, you have to -- there's sort of been a pent-up cost there certain companies have been absorbing. They first try to take out through productivity initiatives, hold pricing and it got way away from folks. You really have to kind of roll the clock back to last fall, to $65 to $90 oil pricing, to get the basis upon which a lot of the costs are being dealt with today . So if we go to $1.10 or $1.20 or $100, I don't know. There's still going to be increases that we have an obligation to deal with and to pass through. So we 're going to manage that. We keep really close tabs on the escalation of our raw materials as well as our manufacturing costs, and it 's our duty to make sure that our customers pay us appropriately for the products and services we provide.

So, you can't really predict -- nobody can predict what's going on in this -- in the oil field right now with regard to oil prices, nobody that -- you know, a few people have been accurate, but we like the direction it's in right now. Certainly it helps more, it eases things when we get reductions like we've seen recently. But we're going to be flexible and agile, and we're going to adapt to whatever conditions that we can't control. Whatever

Okay.

Again ladies and gentlemen, as a reminder, please initially limit your questions to two questions. And if time permits you will be able to reenter the queue to ask additional questions.

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

Hey, good morning, guys.

Hi Roger.

Hey could you update 2008 CapEx guidance which perhaps includes the majority of the $12 million of extra CapEx from the closures and what you think normalized CapEx would be in the future? I didn't see that, perhaps, in the Q that you just put out .

Yeah. We have historically said, at least for this year, CapEx to be about $55 to $60 million, which is back end loaded. Our -- that did not exclude the $12 million that I just referenced for the realignment actions. We are going to try to get that $12 million dollars into the $55 to $60 million range for the full-year and we would expect, on a normalized recurring basis, that it's not that high, and perhaps in the $40 to $45 million range of which 50% is probably maintenance.

Keep in mind we've got an SAP upgrade project in this year that's $8.5, $9 million. It's a one-time. So I think Bob is spot-on with the assessment of where we're going with CapEx.

And that $8.5 to $9 was included in the $55 to $60.

That's correct.

Okay. Thank you for that. Working capital went down by nearly $7 million in Q2. Actually a great result in the current inflationary environment. I see the payables days were up more than receivables days, but can you comment more broadly on how you achieved this, given the inflationary pressure? And do you expect to be pressured more in Q3 '08 or the second half of '08?

Yeah. What I'd say -- perhaps I'll do this in reverse order. I think that we do have a seasonality in our cash flow whereby we see higher levels of cash in the second half of the year, and we do expect working capital improvement as a result of that. And I think that relative to what we have been able to accomplish this year, I think it's just an ongoing concerted effort to manage risky accounts, and we have said ad nauseum today about housing, and construction, and automotive and I think we've made a concerted effort to be proactive about those collections and to try steer clear of where we see cedi risk.

All right. Well, thank you very much, guys.

Thank you.

And your next question comes from the line of Saul Ludwig with Keybanc Capital Markets. Please proceed, sir.

Good morning.

Hi.

I assume the whole special $3.8 million was in corporate?

That's right.

In the performance sector, could you tell us --? On, let let's say a cents per pound basis, how much did your, let's say, resin cost go up versus last year? And how much did your selling prices change on a price per pound basis? This would be on the vinyl compound arena to see whether you're seeing any compression in what I'll call the variable margin?

Well I guess I would answer the question maybe first this way, and then we'll go from there. On the Performance Products and Solutions segment, that's obviously where we've been hurt the worst from a raw material perspective, and volume declines have offset any benefit that we would have received in pricing over raw materials . In fact, we're not really seeing that in that particular segment. In aggregate for the Company, Saul, we reported -- just to put it into context, we reported $82.5 million of gross margin last year for the second quarter, and this year we'll report $88.5. So about $6 million of improvement.

The way I'd like to characterize that improvement is as follows. We have obviously incremental gross margin from GLS and F X and let's call that $12. So we've got $12 million incremental year over year, and we have to explain a $6 million decline to get to our gross margin performance this quarter. About $12 of that comes from the Performance Products and Solutions segment, and so the $12 negative offset by a positives Specialty and in Distribution where we are actually seeing pricing improvement over the raw material cost

Just to go become to the question. Performance Products, did your price per pound increase equal or was it less than your raw material cost per pound increase? Because I'm trying to segregate the impact on profitability from volume versus price cost relationship? .

Yeah. If you want to get into -- we don't get in deep into material margin discussions, but we certainly look at our material margins. And we've held pretty solid in the (inaudible) on compounds business, which is the bulk of Performance Products, we've had pretty solid performance. On material margin, we have taken out a lot of manufacturing costs, but the demand decline has exceeded our ability to take those costs out. So the erosion has been more on volume and demand versus a price spread over the resin cost increases.

So relative to volume, could you comment on what your volume changes were second quarter to second quarter in the various categories?

Well, in aggregate, I'd say the volume is down this year about 8%, and Distribution is relatively flat until the majority -- obviously the remainder of there is in PP&S and Specialty.

And how much was it in Performance category? The vinyl?

The bulk of it.

The bulk of it.

And just finally, very nice performance on GLS. Can you comment on -- two parts to this -- What was GLS's sales in the quarter? And secondly, if you removed the $3.7 million profit on GLS, the residual left Engineered Materials business actually got a little worse, and so I wondered if you could comment on what's going on there? So two questions, sales of GLS and profitability of core Engineered Materials?

Sales from GLS are about $35 million and you are spot-on on the observation about Specialty Engineered Materials . So GLS is adding ing $3.7 million quarter over quarter, and for the total segment, we only added $3.6. So that means the remainder of our Engineered Materials is down about $100,000 year over year. And I think broadly, the way I would describe that is we have been focused on the acquisition with GLS this year, and we've obviously talked a lot about the transformation strategy; and in this particular segment I think it will take longer to see the results of that strategy than it will, say, in the Color business where we have a faster turnover in customer response. So on the Specialty Engineered Materials side we are focusing our efforts on trying the get spec'd into higher margin, sustainable business, and I think it's reasonable to expect that we're not going to see that initially this year, but will going forward

We've added some investment also, Saul. We have new sellers that are incremental to that EM team and they're are out doing great work in not bringing home invoices. You have a purchase order just yet because of the long sales cycle they're dealing with. But we absolutely believe in those investments and they paid off for us in Distribution, clearly, and they're going to pay off in EM. It's just -- To get specs in your favor takes 18 to 24 months, and we got geared up on this probably more like six months or so ago.

I'd also add that bulk of the historical EM business has been general purpose products that have gone into wire and cable business, and that's a soft business for us right now. It's a very difficult environment. We don't talk about that much because compared to housing and auto it's not as large for us, but to EM, wire and cable is a big piece of their business and it's in a real soft patch right now. So I'm feeling good about EM and the team and the progress that they 're making. And I think, stay tuned, because I believe that the investments in the sellers and the strategy to get after OEMs will certainly pay nice dividends. We could have made a choice and cut some of the investments or scaled back and we consciously decided not to . So that's our answer with regard to EM, your on observations are

Just finally, as you look at your forecast for the year to be better than last year, it would imply that your second half of the year earnings would have to be the same as they were in the first half of the year, the $0.21. Normally there's a seasonal slowdown in the second half of the year. What it that you are counting on in the second half of the year to be better than what would be the normal down turn in earnings that you typically experience in the second half of the year versus the first half of the year?

Saul, that's great question. I'd answer it this way. Let me start by saying what we're not counting on. We're not counting on a rebound in housing and we're not counting on a rebound in auto. Okay. We're counting on the momentum that we're billing, the new business flow that's come into our organization at an accelerated rate, and we're counting on doing a good job of capturing pricing and improving our mix. I think those are the prime elements that are going to drive us toward success in the second half of the year.

We have great momentum in Distribution. We have outstanding momentum in our Specialty business. We're going to finally, in the fourth quarter, lap ourselves on a comparable basis for our PP&S business where weave had the sharp declines sort of late Q3 of last year.

Great. Well, thank you very much, Steve.

Thank you, Saul.

Thanks Saul.

Your next question comes from the line of Mike Judd with Greenwich Consultants. Please proceed, sir.

Thanks. My question has been answered.

Okay.

All right, Mike.

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

Hi. Good morning, guys. Just wanted to step back to the plasticizer announcement. You had mentioned that the products are a little more expensive. I know soy bean oil is up in cost significantly. Is the eventual success of this business tied to making a cost competitive product, or is this a legislation play? Could you give a little color there?

I think these things often start out with -- Do you have a green conscious? And are your customers willing to pay a premium to feel good about their contributions toward the environment? And frankly, until recently, the answer has generally in North America been "no." It's kind of like why -- you'd say yes if all things were equal, why wouldn't you? But to pay a premium, but geez, maybe it's nice but maybe not worth it .

Legislation changes all of that. Mandates force you the do things that you might not ordinarily do that have some added economic cost to it , and I think we're beginning to see some of that. I would also suggest that as you begin to build more volumes and gain knowledge about using these alternative materials, that just the competitive nature of business today begins to drive costs down. I can't suggest because I won't predict how some of these renewable resources will do with regard to cost, but I do believe that in some cases there just aren't viable options and customers are going to have to pay more for the options that exist .

So I think you have a little bit of both playing here, but when you're told you have to do something and it's a legal requirement, you're going to figure out a way to do it and industry will be creative and innovative and figure out ways to do it in the most economical way and it may not always achieve parity with what the past has been. Sometimes it's better. Sometimes it's lower cost, sometimes it's more cost. Right now we're at point where it is a little bit more expensive, and some of these products we've had recently out and we had customers say, "This is really nice. We're glad you have it. We're not ready yet because can't compete if we go there." But with a mandate and the playing field gets levelized, then it changes the game. So that would be my answer to your question. I hope I answered what you were

Absolutely. And shifting gears to the capacity reduction and your guidance for the second half. Do you have any savings from some early moves that you've made in the second half -- in your second half -half guidance? There.

That will be upside. We'll strive for it. But we'll be really careful with this, Chris, to not -- we try the do everything with speed here, but we try to do things right as well, and the last thing we're going to do is move so quickly that we cause a disruption with our customers. So to the degree that we're able to move more quickly, that would be upside, we don't have it factored into this year. It's sort of the last three quarters of next year is the pace that we have this mapped out. So I would say it's unlikely that we're going to see an economic benefit in 2008 from these changes.

And just quickly, the remediation expense in the quarter, was that an adjustment to estimates, or was that one-time completely off the books now?

That's one-time. It's a discrete item that we resolved during the quarter. It's at a non-operational site. So we would expect that going forward those costs would be relatively consistent with our prior guidance of 1.5 pre-tax per quarter.

Thank you for your time.

Yep.

(OPERATOR INSTRUCTIONS) And your next question is a follow-up from the line of Rosemarie Morbelli with Ingalls & Snyder. Please proceed ,

Bob, you said that the $3.8 million special item was incorporated in the segments. Where is it in the P&L?

It's split between SG&A and gross margin -- or, I mean, SG&A and cost of sales and about $1.5 of that is in SG&A.

Okay. Could you give us the split between -- company wide between volume, price mix, currency, and acquisition leading to your sales growth?

From a sales perspective, we've described the year over year growth as 8.6%, 5.2% of that is GLS, about 3.9% is FX. So on an organic basis we are just slightly down.

And when you talked about volume down 8%, was that company wide, or was it --?

That was company wide.

Okay. Thank you. I was wondering on the bio-plasticizer technologies, Battelle licensing agreement. What do you have in terms of the time frame regarding the commercialization of those products, and when we see them at least on the top line?

You know, it's a great question, and we don't know yet, Rosemarie. That's the honest answer. We have more R&D work that's required to optimize the chemistry, and that's what our people in our labs are working on right now. So we have this wide range of patents around this area, and what we have to keep working on - now that we have this agreement and the exclusive nature of it allows us to really put some resources behind this - and work with some other partners, by the way, to develop the alternatives. I can just tell we're all over it, and we're on it, and I'm just not able to predict when we're going be popping out new products that we'll be able to invoice. But we're going to move with greatest degree of speed we can, and still get it right.

Okay. Thanks.

You're welcome. I think we have time for one more brief question.

And your final question comes from the line of Roger Smith with Merrill Lynch. Please proceed, sir.

Thanks. On GLS, would it be possible do give us sales and EBITDA for Q2 '07 and Q3 '07 so we can do our pro formas correctly?

I mean, roughly the performance is pretty consistent year over year, and what we've seen historically, or at least we gave you sales of $35 million, and earnings of $3.7 million, and DNA is adding about $1 million to that per quarter.

Okay. Great. And lastly, would you be willing to provide a breakdown of the $17 million pure savings by your segments?

No, we're not actually planning to disclose anything about those estimated saving beyond what we've said at this point.

All right. Thank you very much, guys.

Certainly.

Thank you all. Well, we appreciate you all participating in our call today, and we thank you very much. I know that Bob is going to be available later today if your questions weren't answered. He'll be around, and be happy to take your call and discuss further our quarter. Thank you very much.

Yeah.

Ladies and gentlemen, thank you for joining today's conference. That concludes the presentation. You may now disconnect. Have a wonderful day.