Avient Corp (AVNT) 2008 Q3 法說會逐字稿

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

Before we begin, the Company would like to remind you that statements made during this conference call which are not historical facts may be considered forward-looking statements within the meanings of the Private Securities Litigation Reform Act of 1995. Forward-looking statements will give current expectations or forecasts for future events and not guarantees for future performance. They are based on Management's expectations and involve a number of business risks and uncertainties, any of which could cause actual results to differ materially from those expressed or implied by the forward-looking statements.

The company recommends that you review the updated risk factors in today's press release. During this 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 most comparable GAAP financial measures.

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

Well, thank you, Karma, and thank you to everyone who was joining us on the call after what was no doubt a late night of watching election results on TV. I really welcome the opportunity to speak to you today about the recent performance of PolyOne and also talk with you about the expectations for the balance of the year. Here with me today is our Chief Financial Officer, Bob Patterson, and before I hand the call over to Bob to review the operating results for the quarter, I want to make a few brief comments that I'm sure many of you will relate to. You know, it is a tough market out there without a doubt, and there's tremendous uncertainty on Wall Street as well as on main street. And I can't recall a time in my career when it's been so difficult to anticipate near-term business demand, let alone accurately predict the operating results for the next quarter. There's uncertainty in the credit markets. It's harder for people to get a mortgage. There's uncertainty in the commodity markets. After catapulting to nearly $150 a barrel for oil just several weeks ago, oil is now trading less than one half its level. There's uncertainty in global currencies with the Euro trading as high as $1.60 and down nearly 20% since then.

Finally, up until last night, there's been uncertainty about who will lead the United States as our next President. So I hope with at least one of these equations solved, we can move on and global markets and economies can find greater stability. The new PolyOne certainly is no stranger to change. We are relentlessly pursuing our specialization strategy and I think now more than ever, it's obvious that we need to reduce our exposure to commodity products in traditional, cyclical end markets. We believe that our previously disclosed four pillar strategy is working and our efforts are setting the stage for significant earnings leverage when the economy rebounds. In the event that global markets remain uncertain, and/or get worse before they get better, the strength of our balance sheet gives us comfort that we will be able to weather such an economic climate. So with that as a backdrop, I want to turn the call over to Bob Patterson, our CFO.

Thanks, David. Before I begin, let me preface my comments by saying that unless other time frames are specifically stated or referenced during today's call, we will be comparing the operating results for the third quarter of 2008 to the third 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 third quarter of 2008, consolidated sales increased 10.6% to $735 million, including the benefit of acquisition growth and favorable foreign exchange. As a result of special items primarily related to the manufacturing realignment we announced in July, as well as certain environmental charges related to facilities we no longer own, we are reporting a net loss of $5.6 million or $0.06 per share for the third quarter of 2008, compared with net income of $2.3 million or $0.02 per diluted share for the same period a year ago. Excluding special items in both periods, we reported $0.13 per share in the third quarter of 2008, compared to $0.14 per share in the third quarter of last year, respectable performance given the rapid deterioration in several of our end markets.

The results -- these results were modestly better than we had expected back in September, principally due to the fact that the Hurricane Ike had a less significant impact on the third quarter results than we anticipated. Our specialty platform continues to outperform the prior year and reported a nearly 47% increase in operating income despite lower international earnings. In addition, operating income from our distribution business increased almost 80%, partially due to favorable pricing trends, but also as new business gains and higher margin markets such as healthcare replaced declining volume in housing and auto. Unfortunately we were not able to overcome the decline in the performance products and solutions segment, resulting primarily from continued weak and declining demand in the North America housing, construction, and automotive markets, and as a result, we reported lower operating income during the third quarter compared to the same time period a year ago. On a year-to-date basis, earnings per share before special items is flat with the prior year, again respectable performance, given the extraordinary rise in raw material and energy costs and precipitous decline in demand in several key end markets.

In total, specialty platform sales increased 17% to $280 million, reflecting the benefit of the acquisition of GLS, as well as foreign exchange. Operating income increased 47% from $9.7 million to $14.3 million. On an organic bases and excluding FX benefits, specialty platform sales were down slightly year-over-year. However, operating income increased just over $1 million on the same basis. This last point clearly illustrated our focus on innovation, calling on profitable business, improving sales mix, and accelerating new business gains and higher margin sustainable businesses. Our great example of this is our expansion into the healthcare market, which Steve will speak to in more detail. Our specialty platform operating income improvements was driven by the addition of GLS as well as gross margin improvements principally in our specialty color, additives and ink segment. Specialty color, additives and inks added $1.5 million of operating income as a result of new account generation and a more profitable sales mix. Our specialty engineered materials segment operating income improved $5 million as GLS added $5.1 million. Note that GLS third quarter operating income increased over 60% from a year ago, when they were a stand alone company.

Within the specialty platform, our international color and engineered materials segment sales were essentially flat with the prior year. However, operating income declined from $6.5 million to $4.6 million. Excluding the positive impact of $500,000 of foreign exchange, operating income fell $2.4 million due to declining volumes and margin compression from higher raw material costs. As we have noted during our last two outlook updates, weakening demand in Europe continues to be a concern for us, and we are increasingly seeing that concern become reality. Another performance highlight is our distribution platform, which increased revenues 15.5% to $215 million for the third quarter of 2008. Operating income increased $4.1 million or 77% to $9.4 million, eclipsing the previous record of $7 million set just last quarter. While we have benefited from certain favorable pricing trends, we continue to believe that we are gaining market share, as North America demand has generally declined year-over-year. Our focus on and heightened investment in commercial investment and resources has allowed to us expand our presence in new, higher margin markets such as healthcare and consumer, which has more than offset declines in automotive and appliance markets.

Our third platform, performance products and solutions, continues to be challenged by weakened market demand tied to the current economic environment and continued high raw material costs. For the third quarter of 2008, revenues were flat at $275 million, despite a 15% volume decline. Price increases offset some of the volume shortfall, however, they were not enough to offset rising raw material costs, resulting in a 60% decline in operating income from $12.6 million to $5.3 million. While volumes certainly contributed to this, we are most disappointed by the challenging price environment in this space. 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 just over 800,000 units, compared to an system of 950,000 just two months ago and well short of 1.4 million in 2007 and the all-time high of 2.1 million units started in 2005. In addition, the automotive market is continuing to issue reduced production forecasts, from 16.1 million units last year to a revised forecast of 12 to 13 million this year, the lowest level since the early '90s. This level of production for both housing and auto is not normal, nor is it sustainable, but it's representative of the market challenges we are facing today and in the near term.

I would now like to comment on our financial position. During the quarter, we retired $10 million of our medium term notes and reduced short-term debt by $10 million. We borrowed $12 million against our accounts receivable security facility for a total borrowing reduction of $8 million. We also repurchased 1 million shares of our common stock during the third quarter. As of September 30th, 2008, we have cash on hand of $37 million and immediate borrowing capacity under our accounts receivable securitization facility of $133 million, for total liquidity of $170 million. We have not experienced any issues with being able to access our cash or our A/R facility and we don't expect any problems moving forward. Pursuant to the capital structure objectives that we outlined when announcing our share repurchase program, we plan to buy back shares from time to time while simultaneously reducing our debt, which is what we did during the third quarter.

However, concerns about the current economic crisis have caused us to think even more conservatively about the future use of cash flow, with an emphasis on preserving liquidity. I will speak more about this during our outlook discussion towards the end of this call this morning. Before that, I would like to briefly discuss the special items recorded during the quarter. We reported $26.7 million of pretax special items or $0.19 per share. $11.6 million relates to employee severance and plant closure costs in connection with the manufacturing realignment we announced in July, and $10.4 million relates to environmental accrual adjustments for ongoing and projected remediation costs associated with facilities either no longer owned or closed in prior years. Finally we recorded an impairment charge of $4.7 million to write down our investment in a South America joint venture where recent events have caused its carrying value to exceed the net present value of future expected cash flows. I will now hand the call over to Steve who will discuss our transformation progress.

Well, thanks, Bob. You know, as I mentioned at the begin beginning of the call, this is a really tough market and it's unlike any other that I've ever seen. Many people believe we are headed for a recession, if we are not already in one, and with even greater debate surrounding how deep and protracted the recession might be. I guess that's a technical decision that others can make, but I can tell you, it certainly feels like a recession to me and I think many people would agree with me. Consumers are very cautious as evidenced by the decline in consumer spending during the third quarter and businesses that serve them are also pulling back. Not only has this become apparent to me through our commercial teams who are the on the front line every day, but I can also sense it from the tone of questions we receive from investors and analysts who quickly want to understand our cash and liquidity positions. Given the current financial crisis, it is certainly easy to understand how the focus has changed. Investors are worried about survival and I don't blame them. Recent events have shown that not every company is going to survive the current economic slowdown, and more may fail before things get better.

Last year, we made the prescient decisions to sell our joint venture in OxyVinyls and use the proceeds to retire our high yield debt. This was very impactful and is very impactful to our income statement, as well as our balance sheet. As it stands, we reported year-to-date EPS before special items flat with the prior year and I feel comfortable with our financial position. Previously Bob mentioned our cash and debt positions, indicating we have adequate liquidity to fund seasonal working capital requirements and capital expenditures. But more importantly, we have the strength to weather a prolonged economic slowdown if necessary. With that being said, this is not a time to feel at ease. I called upon the PolyOne leadership team to cut back substantially on discretionary spending and to raise the standard for payback requirements on capital appropriations. Today we are projecting to spend less than $55 million on capital expenditures for the year and that the additional capital required in connection with the manufacturing realignment we announced in July, as well as continuing to expand our operations in India which are important investments to our future. We are not going to do anything foolish and we have to find the appropriate balance between long-term investment and short-term results. But we are being more conservative with our cash, and this is one example of that.

As we mentioned in our earnings release, we are disappointed that our earnings before special items fell short of last year by $0.01 a share. However, when you consider our operating income from our performance products and solutions segment dropped nearly 60% and equity income from our SunBelt joint venture dropped 14%, our reported results seem quite respectable. As we mentioned in our recent outlook update, we are concerned that the economic slowdown we have observed in the U.S. may be deeper and more prolonged than previously anticipated and it certainly appears to be spreading around the world. We believe this was confirmed with our third quarter results, where performance products and solutions experienced demand declines consistent with that of the first and second quarters of 2008, as well as further gross margin compression. I'm disappointed in our inability to get meaningful price increases in this business to overcome increases in raw material costs in this segment.

Our international segment reported operating income below last year's third quarter and below the first and second quarters of 2008. Where we had previously experienced relatively flat volumes in the first half of the year compared to prior year, third quarter volumes fell approximately 10% versus the prior year. We have seen a reduction in volumes in nearly all end markets in Europe and Asia, and only our low smoke halogen free products showed volume improvements year-over-year for the third quarter. The slowdown may continue for sometime, and we have to be prepared for that. We are not going to change our strategy. We are going to continue to focus on the four pillars of specialization, globalization, commercial and operational excellence. However, we are changing the pace of our investment until things improve. The current downturn and the cyclical nature of our traditional end markets, coupled with the price sensitive nature of our commodity businesses only serve to reinforce the need for transformation and validate our strategy.

For those of you who followed our stock and are long-term investors you know we are transforming PolyOne into a specialty company. Given the economic environment we were experiencing today, it's going to take longer than previously expected, but we remain absolutely convinced that the actions we are taking are working and our results demonstrate our success. Our progress in the health market is a great example of our strategy in action. During the first nine months of 2008, our healthcare customer revenues of $142 million represented an increase of approximately 29% over the prior year. In fact, year-to-date revenues from healthcare customers exceeded revenues from healthcare during the entire year in 2006. Our active sales projects in this market have increased by over $200 million at the end of last year. And our efforts to globalize the new health care business team allow us to build strong momentum with new programs and technologies focused on metal and lead replacements, medical device innovations and the ability to reduce medical product costs associated with surface preparations.

We have invested in and lifted the skills of our global sales force to be more effective at pricing, selling and capturing value. But what I really like most about our success in the healthcare industry is that it illustrates our focus on winning new business in attractive new markets, a key element of our commercial excellence strategy. Through the first nine months of 2008, our companywide new business closes have outpaced reported lost business by approximately $300 million. And more importantly, within the specialty platform, this new business is generating gross margins that meets our objective of a minimum of 25%. And one of the reasons we have been successful in growing new business has been the rate of new product introductions. Our vitality index has increased to 17% of sales versus 13% in 2007. This is a direct result of advancements in research and development as well as improved salesforce training. We are teaching our salesforce to understand our customers' needs and go beyond our current product portfolio in addressing them.

We are also working hard in seeking solutions that are environmentally friendly. In September, we received Frost & Sullivan Green Excellence of the Year Award for 2008. Frost & Sullivan has long been known for recognizing best practices in industry and we are honored to receive the first reward ever give in this category. Frost & Sullivan's Green Excellence Awards are presented to companies that excel in green product and technology innovation and service achievements that promote sustainability. These awards recognize ground-breaking ideas and innovations that originated from a firm sense of environmental responsibility across a multitude of disciplines. Recipient companies are committed to a continuous focus on reducing their dependency on non-renewable resources, decreasing their impact on climate change and diminishing their overall ecological footprint. Frost and Sullivan's team of analysts track companies across all industries and assess their individual green initiatives and award recipients are selected only after a very vigorous research is performed. This award underscores PolyOne's strategic focus on the innovative sustainable solutions that benefit both customers and the environment. Specifically, PolyOne was recognized for its leadership in the development of sustainable programs and services, including the company's unique packaging system and the company's benchmark no surprises pledge, which outlines PolyOne's commitment to helping people grow their business with safe and environmentally sound solutions. Really, to say it more simply, PolyOne was recognized as a company who is actually doing something about green, not just preaching about it.

Another example of our leadership in creating sustainable and environmentally friendly products is the recently announced collaboration with Archer Daniels Midland company. This was done to jointly develop bio-based plasticizers for use in polymer formulations. Last quarter we discussed our license of Battelle technology for bio-based plasticizers. And this is the next step towards developing and commercializing viable candidates for the polymer industry. Plasticizers are used primarily to make plastics softer and more flexible. The global plasticizer market is at an estimated $11 billion industry, and is comprised mostly of petroleum-based products. The goal of this alliance is to develop and commercialize bio-based plasticizers from corns and oil seeds. Clearly PolyOne is committed to innovation and we are excited to have GLS as part of our specialty platform. They have a long track record of creatively assisting their customers with new and unique products. And as I've often said, GLS had been a great acquisition in many way and we are learning from them about how to be a specialty company. They serve attractive end markets and helped us grow our specialty platform with higher margin sustainable business. This has never been more obvious than the third quarter when GLS recorded $5.1 million of operating income, more than 60% higher than the third quarter of last year, when they were a stand alone company.

Specialty color, additives and inks also enjoyed a great quarter, reporting operating income of $4.7 million. That's a new record. They have been able to do this by improving customer mix, selling unprofitable business and eliminating excess cost. This is a great example of the success of our specialization strategy, as well as commercial and operational excellence initiatives. As I have said before, the specialty platform is becoming the growth engine of this company. But we are embracing the pillars of change in all of our business. Our PolyOne distribution business delivered stellar performance this quarter with on time deliveries exceeding 95%. And while we have certainly benefits from some favorable pricing trends, we are also benefiting from an improved mix of end customers, as we have been taking share of new industries such as healthcare and consumer products, offsetting declines in housing and automotive businesses. Our sellers are equipped with tools to help our customers improve their profitability by reducing customers' total costs. When we combine these solutions with new and innovative products and services, we create customer loyalty and everybody wins. That's never been more important than it is today.

Our specialty focus has allowed to us weather thus far an incredibly difficult market, one that may get tougher. As you likely know, in July we announced plans to reduce manufacturing capacity and realign assets primarily in North America where we believe and know we have excess capacity. These actions are proceeding according to our previously disclosed time frames and we continue to expect that they will deliver $17 million of annualized savings when complete. We will look to accelerate these actions where possible, but we won't do so at the expense of customer service and quality. As I said last quarter, actions like these are never easy, but this capacity reduction is needed to improve our near term operating efficiency while advancing our longer term strategic position. PolyOne's realignment reaffirms our commitment to creating value for employees, customers and shareholders. And with that, I am going to turn the call back over to Bob to comment on our outlook for the balance of the year.

While our results for the third quarter were modestly better than anticipated, our fourth quarter earnings may fall short of our previous expectations. Accordingly, it may be a challenge to deliver full-year earnings per share before special items within the range of guidance we provided in September. There are a number of factors contributing to our revised assessment, but predominantly, we are concerned about the recent deterioration in the global economy. We expect further pressure on our international results, first as it becomes increasingly clear that European and Asian demand is slowing, and second, due to the recent weakening of the Euro relative to the U.S. dollar. Additionally, the U.S. economy is under tremendous strain on the heels of the global financial crisis, creating significant uncertainty over the next few quarters for our customers. In particular, such key PolyOne end markets as housing, construction, automotive, and electronics face particularly troubling business conditions, which we expect may reverberate through our other markets as the global economic slowdown gains momentum. In reaction to the uncertainties described above, PolyOne is taking actions to reduce spending and preserve liquidity. As Steve already mentioned, we have reduced CapEx and without limiting spending related to the realignment, we are now forecasting to spend less than $55 million for the year which approximates 85% of depreciation.

I would also like to add that the fourth quarter is typically our strongest cash flow quarter and we expect that to be the case this year. Given our concerns about the economy, we will be focusing on applying free cash flow first to require short-term debt repayments and second to ensuring we have adequate liquidity to fund seasonal working capital requirements. We will then consider additional capital expenditures beyond maintenance levels prior to furthering our overall capital structure objectives. With respect to our current capital structure, we expect to reduce short-term borrowings by year end, while maintaining approximately the same level of liquidity. We have $20 million of long-term debt due in each of the next two years, 2009 and 2010, which is well below our historic range of free cash flow. Finally our credit facility and accounts receivable securitization facility do not mature until 2011 and 2012 respectively. In short, we believe that if market conditions get worse before they get better, we are confident that we have the balance sheet strength and liquidity to manage through such a scenario. Now I will hand the call back to Steve for some final remarks.

Well, Bob, thank you. I just want to -- we have covered a lot of ground here and I would like to summarize by saying, there's no question we are concerned about the near term economy and that things may get worse before they get better and you all know that. But earlier in the year we were cautious about a slowdown in Asia due to lower exports in the U.S. In our last two outlook updates we expressed concern about slowdown in Europe, which is clearly upon us now. And now we believe that Asia may slow even further as a result of decelerating global production. These prevailing market conditions have caused to us take immediate actions to control spending, limit capital expenditures and focus on improving working capital as has been discussed thus far on this call. I would like to thank all of PolyOne's employees for their tireless resolve and commitment to take these necessary short-term initiatives while at the same time remaining vigilant in our common goal to transform PolyOne. We have to balance our long-term goals and objectives with the immediate desire to preserve cash and liquidity.

I'm very confident in PolyOne's leadership team and employees. We have never had a better or more capable management team to lead us through the near term economic downturn while also guiding our long-term transformation process. Even with the prevailing headwinds, we are winning new business every day by providing our customers with new and innovative products, services and solutions. We are going to continue to focus on specialization, globalization, commercial and operational excellence as the four pillars of our strategy. We believe that PolyOne is well positioned not only to survive this downturn, but to emerge from it as one of the strongest players. Our balance sheet strength, our management team, global footprint, and growing differentiated and environmentally friendly product portfolio provide one of the strongest positions in the polymer industry. If the stock market is truly forward-looking, I hope investors will think of PolyOne as best in class as they position their portfolios for an economic recovery. Now I'm going to turn the call back to Karma to open the line for questions.

(OPERATOR INSTRUCTIONS ) And the first question comes from the line of Saul Ludwig from KeyBanc.

Good morning, guys.

Good morning, Saul.

Hey, Bob, I wonder if you could talk a little bit about the effect of FIFO accounting and how that may have helped you in the third quarter because in a period of rising prices you had benefits from FIFO accounting and then when we go the other direction, is there a reverse effect and particularly maybe as it affected your distribution business but other businesses as well. So in looking at your outlook, how is the declining selling prices for resins and FIFO accounting going to impact you?

Well, without disclosing the exact order of magnitude, that would be a rough estimate, Saul. It did benefit us in the third quarter, and you can see that in our distribution business perhaps more clearly than the others. But you are right in that we will see a negative implications from a downward pricing environment in the fourth quarter and beyond if prices continue to decline. And that is part of the expectations we have for the balance of the year and one of the reasons why we see that it's a challenge to meet our prior earnings expectations.

My other question is any early thoughts on cap spending for next year relative to somewhat less than $55 million for this year?

Well, it will definitely be less than that number, Saul, and we are conducting a thorough review of our capital appropriations for next year. I will tell you that our maintenance levels are around $20 million to $25 million and we will be giving a great deal of scrutiny to any projects beyond that next year.

Thank you very much.

Certainly.

The next question comes from the line of Mike Judd from Greenwich Consultants.

Hi, Mike.

Yes, good morning. I wonder if you could add a little more granularity in a couple of areas where it looks like things might be rolling over a little bit. You definitely got -- it looks like a benefit from hurricane-related issues and your distribution business in the September quarter. And I'm just wondering if you could talk a little bit about volumes and any other pertinent issues in that particular segment in the December quarter so that we can make sure that we understand seasonality but also the hurricane impact and how that would have impacted profits and volumes in the September quarter. And then just lastly, are you implying -- and I haven't updated my file yet, but are you implying that we might see a break even to negative EPS number for the December quarter? Is that kind of where we are going?

Well, let me -- let me tackle the first part and then I will let you have the other part, Bob. I'm not that -- I'm not sure where you are concluding that we had a benefit from the hurricanes in distribution, Mike. We were more concerned about adverse effects from it because it did affect our plant in Seabrook and Pasadena, Texas. Both of those plants were impacted. We got through it more quickly than we anticipated. There were some supply disruptions. So in some cases, we had difficult times securing supply to compound products for our customers, but really the impact on distribution was not really noticeable, that we couldn't relate any of distribution's performance in the quarter of any substantial magnitude to the hurricanes.

Yes, I would add that the most significant impact during the quarter as a result of the hurricanes was our SunBelt joint venture, which was forced to declare force majeure in about the third week of September. And in terms of volumes, what we saw in distribution for the third quarter was really relatively flat volumes. And as we mentioned during the call, we have seen a decline in general demand in our traditional end markets, but that has been offset by growth in other markets, such as healthcare.

Okay. And then just the last question for some clarification. I realize it's very difficult. There's so many moving pieces here. You have got currency and you have got everything else that's going on. But just some -- some sort of thought on whether it would be negative for EPS on an absolute basis or break even or any thoughts along those lines.

Well, it's very hard to predict and that's one of the reasons why we are giving the guidance that we are. We certainly see the fourth quarter as more challenging than we did in September and that is principally due to the continued weak demand in North American markets, where we are seeing unprecedented volume declines in our performance products and solutions segment and we continue to see declines in international. But yes, if you just follow the simple math of what we've earned year-to-date, EPS before special items which approximates $0.33 and our new projection is that it will be a challenge to within a range of $0.36 to $0.41. You can deduce what our thoughts are on the fourth quarter.

Thanks for the help.

Next caller.

The next question comes from the line of Mike Harrison with First Analysis.

Hi, Mike.

In terms of the restructuring plans as they've currently progressed, how much of that $17 million in annualized savings should we expect to see in 2009?

We expect to hit the $17 million run rate by the end of the second quarter. And I would say that the current thinking is around $12 million for 2009.

Okay. And then looking at the SG&A costs, excluding the special items, it looks like you came in below 8% of sales. I know in the past you had talked about additional sales, marketing and technical resources that you thought were going to keep that number as a percent of sales closer to 10%, so what is it exactly that we are seeing happen here in the third quarter? Are you guys scaling back on some of those additional resources that you had been investing in over the past year or so?

Yes, I don't think we are wavering from the sort of long-term rate of around 10%. We think that's what the business generally needs and that will change as the portfolio mix changes but needs to sustain the kind of growth that we expect. We had benefits in the quarter from two things. We have scaled back our spending. We have stopped our incremental hiring, so we are hiring replacements. We are not making adds right now. We just don't think it's prudent to do, when we look out and we can't see through all the clouds right now. The second thing that really helped us -- it's not something that I'm pleased with, but the fact are that AIP accrual reversals were coming in lower than planned and so some of the bonus accruals were reversed during the quarter and that's what helped lower it. And Bob, you probably have some other things to add.

Just to put it on a run rate perspective basis, I would say as you look at Q2 -- or Q1, 2 and 3, for example, as Steve mentioned, our incentive accruals were reduced. We had a benefit of about $1 million in the third quarter as a result of that, versus expense of $5 million and $6 million in Q1 and 2 respectively.

All right. And in terms of the sales growth number, 10.6%, what was that, if you exclude FX and the impact of the acquisition?

The organic piece of that for the quarter was 3.5%.

All right. Thanks very much, guys.

Certainly. Thanks, Mike.

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

Hi, good morning, guys.

Hi, Chris.

I was hoping you might be able to talk a little bit about your move towards more specialized products. I noticed in the quarter that if we X out the GLS acquisition, for the first time, it looks like the remaining portfolio, kind of took a step back as far as operating profits. Could you give us an idea of how things are progressing there, what we are looking at in the quarter. Is it just weakness or customers downplaying or moving away from more specific -- more sophisticated products?

I will make one first comment and that is you are right in that there has been a step back in the focus, just on the specialty engineered materials business. But the composition of that is actually different than the comment that we made, in the second quarter, where we have seen a trend of North America engineered materials being the driver of that. And this quarter, it's actually European based. There's a European TPE component of specialty engineered materials and that's really what took a step back in Q3. We did make some small progress in North America engineered materials for the first time. So that's actually a positive, but those numbers are really very small when you compare it to obviously the contribution of GL S.

I think it's getting a little hard to specifically break apart GLS, because we are benefiting from not only a great company that's well led, but we are getting some synergy and some of that is top line synergy. I would just say that the big reason that specialty X GLS was not growing in the quarter, we did find in North America, our North American color business did well. The problem was the international, both Europe and Asia. The Asian element of the business was really slowing in engineered materials where they are very much electronics related. This is a market that the we do like long term, but if you are not building machines and you are not producing them, you can't sell a lot of compounded resin applications into the space. And that's exactly what happened to us in a big way in Asia, as well as just the general across the board slowdown in Europe. So that's what it -- if you look at our business, remember, 95% of Europe and Asia is what we categorize as specialty.

And just quickly, what was the average price to repurchase shares then?

793.

Thank you.

Thanks, Chris.

The next question comes from the line of Rosemarie Morbelli from Ingalls & Snyder.

Good morning, all.

Good morning, Rosemarie.

Looking at international color and engineered material. I understand that Europe and Asia are kind of difficult at the moment, but this 3% operating margin is rather dismal. And looking back, the fourth quarter is sequentially lower in terms of profitable. Was there something specific in the third quarter in order to get that 3% margin, and if that was the case, should we kind of buck the trend in Q4 and show improvements sequentially? Is there something you can do about that or the sequential margin will be historically lower as in the past?

As we said at the beginning, one of the reasons that we do have revised expectation for the balance of the year is a continuation of what we have seen in the third quarter going into the fourth quarter. I will point out that in the third quarter, the international business did have a volume decline of about 9%, where it had been relatively flat in the first two quarters of this year. So we are seeing a demand decline in the third quarter that we had not previously seen this year and our expectations is for that to continue through the fourth quarter. So I think it's reasonable to make the assumption that I think you are arriving at, which is that, yes, our fourth quarter will be challenging internationally compared to last year.

We are suffering from some reversed leverage that you have when you see demand decline like this. And the good news is we'll get tremendous operating leverage when the demand picks up. We will do the best we can to manage through this downturn and manage costs out wherever we can and take capacity out when we have opportunities to do so that won't hurt our long-term prospects. But I would say, if you haven't -- I don't think this problem is unique to PolyOne. We may be a little bit early. We were early to talk about Asia at the first quarter. We started talking about Europe in the second quarter. I don't think it's unique to us. I think there are very real and very sudden slowdowns throughout the globe and Europe is showing it in a very large way and it's a big piece of business for us. I think there's a lot of conservative that's built into their order pattern. I think that the inventory that's typically kept on hand is being kept to an absolute bare minimum, and of course, we suffer from that. So that's where we are in Europe. Nothing unusual happened. We didn't report any additional major losses of business. Our base of new business development was pretty much on par with what we had all year, but we just saw far fewer orders from our existing base customers. And that's what caused the problem in international.

Do you have a feel for how much inventory is at your customers, whether it be in North America or overseas and whether that could -- that level could affect not only the fourth quarter but also Q1 and maybe Q2 of next year?

It's -- that's a great question. And I wish we had better visibility throughout the channel and a better understanding of inventory on site. And that's something we want to work on long term, because frankly we think we could help our customers by helping them manage their inventory. But at this point we don't have that level of sophistication. We just have the anecdotal stories and the observations that our sellers make out there and the discussions they have with customers to help us understand that most industries today are being, just as we are, very conservative with our cash, very careful to build up inventory. And I think it's probably exaggerated even further in this specific period, Rosemarie, because with oil prices dropping, the belief that that's going to cause resin prices to drop substantially, people don't want to be holding assets that are going to devalue, especially at the rate they go through them. So I think we are probably getting -- I can't promise you this, I can't verify it, but I think we are probably also getting a little bit of impact from people hoping to -- to collect the next order at a price that is lower than the last one.

Thank you. And if I may ask one very quick question, could you speak for us, the revenue growth of 10% between volume, price, mix, currency and acquisition?

Yes, I won't get all of those, but I will break it down as follows. 10.6% is comprised of 2% FX, 5.1% GLS and 3.5% organic.

Okay. Thanks.

Certainly. Thank you.

The next question comes from the line of [Roger Schmidt] from Merrill Lynch. Please proceed.

Good morning, guys.

Good morning.

OxyVinyls is apparently SunBelt's sole customer -- chlorine customer. Does OxyVinyls have to take SunBelt's chlorine as long as OxyVinyls doesn't have a force majeure or does OxyVinyls treat SunBelt as the swing chlorine supplier?

That's a very good question. Unfortunately the nature of our contract does allow us to get into the details -- the details of it. I will say that clearly the primary source of offtake for SunBelt is Oxy, but I think beyond that we really can't -- we are not at liberty to disclose any of those other terms related to the contract. I'm sorry about that.

Okay. Given your plans to deemphasize your commodities, how will that manifest itself? Will you look at divestitures, JVs, under investment, further plant shutdowns or perhaps some other alternatives?

I mean, we are always -- in business today if you close your eyes and pause for a long time, you are going miss opportunities and so we are always going to be looking at all of the above. That's how we conduct our business here and challenging ourselves to think about our business differently and keep an eye towards the future but recognize we need to get through today as well. So I would say that we have gone conservative at this particular moment in terms of acquisitions and I also tell you that there are times to sell businesses and there are times when you just aren't going extract much value for them and I think we are in that period right now. So I think that you could expect probably not a whole bunch of action in the near term, but as things improve, as we get more comfortable with the future, if we find opportunities acquire or divest of businesses that may not be as long-term fit the portfolio, rest assured we will give it the utmost consideration.

Great. Thank you very much, guys.

Thank you, Roger.

And the next question comes from the line of Ivan Marcuse from KeyBanc Capital Markets. Please proceed.

Hey, guys, just a quick question. For every 10% move in the Euro, how does that affect EPS or actually how much did your operating income benefit from foreign exchange this year?

I will just answer it on a fluctuation basis. You can assume on a pretax standpoint, it's about $2 million to $3 million.

For a 10% move.

Right. On an annual basis.

Got it. And then, real fast, this may have already been asked. You guys have done a great job in improving margins in the specialty business year-over-year, looking out at '09 and declining volume and in light of what you are doing in healthcare and the green products, the declining volume with raw materials falling, are you able to keep price and maybe improve margins next year or do you think that will be a challenge and how do you expect to do that?

I think one of the things I would say about that is clearly our specialty business has far more opportunity to keep price because we are not just talking about the pellets. We are talking about the applications and what we do and those are the conversations that we're having. And Bob will have a couple of remarks on this as well. But really to address the question properly and in-house, you have to -- there's several things that you have to consider. The first one is, PolyOne was not able to fully price in the previous raw material inflation evident particularly in our performance products and solutions segment. So there appears to be an industry acceptance of pricing levels that we think are unsustainably low in the PP&S segment. Give this, there could be downward price pressure as the pricing falls. But I will tell you, we can't give away what we didn't get. And in PP&S, we didn't get our share of pricing and that compressed our margins. Second, in our distribution business, that business is going to be challenged to manage the timing of its inventory purchases related somewhat to Saul's earlier question. It could be adversely affected if it gets pinched between customers requesting a price decrease that's ahead of the actual purchase supplier cost reductions. So we are managing through that.

And we can't ignore the impact of unprecedented demand declines in our performance products and solutions business that may overshadow any benefit that we receive from lower raw material costs. So specialty is absolutely the best place for us to get and hold our pricing. And I've got to tell you, our smart customers want us to succeed, because they know that they can't -- we can't provide service, quality, on-time delivery or new offerings if we don't succeed. So they may push us hard and that's their job, but they also understand that we have a business -- a business to run as well. Remember also that, as I mentioned earlier, our new specialty business is coming in, in the 25% plus gross margin range. That is our long-term goal. That is above our existing base business. So we are demonstrating that we can succeed with that kind of pricing in the market where we have these differentiated offerings. So that would be my -- that -- those would be my comments on this whole pricing and where we hold a question, Bob, you may have some other remarks.

I think that was well said. I wouldn't add anything else, unless you had any further questions.

No, I'm good. Thanks, guys.

You have another question coming from the line of Bob Amenta from JPMorgan. Please proceed.

Thank you. Good morning. A couple of questions on cash flow items. Looking at the cash flow statement, there's two line items for environmental, obviously implying that you expensed more than you are actually spending in cash. Is that -- the 14 versus 8, I guess year-to-date, what going forward can we expect? Would we expect cash and expense to be in line or would there be material differences, such that we might want to add or subtract some of that?

I think it's generally fair to assume that cash and expense will be in line on a forward basis.

Okay. And then I guess similar, on the pension line, there the contribution to pension, 25 year-to-date, does that mean the cash component has been $25 million more than the expense year-to-date? How will that play out?

That's right. We are actually -- we are required to fund our pension obligations in accordance with the Pension Reform Act, which has us fully fund those by 2015, and based by -- based on our year end 2007 pension asset valuations, that meant that our cash money was, in fact, in excess of our P&L expense this year.

Do you expect in Q4 a meaningful difference between the cash and the expense items (inaudible)?

It will be -- well, for the most part, and you can see that in our 10-Q in terms of how much we actually funded to date, which on the pension side is about $18 million. I will tell you that Q4 will not be appreciably different than the first part of this year. But like a lot of companies being I'm sure they are all looking at their pension assets right now and thinking forward. We are going to be seeing some challenges in 2009 and beyond if we don't see improvements in our pension assets between now and the end of the year.

Just lastly, on working capital and I know you said it would be a source, have you put any numbers around the fourth quarter and what you might expect between raw materials going down and just the general seasonality, what you might expect to pull out of working capital this year, fourth quarter.

No, we haven't provided a number on that, but I would say that seasonally, it is our strongest quarter and we are expecting to see the same thing this year.

Okay. Thank you.

We have time for one more question. We have an all employee meeting that is starting after this. So I don't want to keep our team waiting. I want to finish up with this call on time. So let's have one final question, please.

The final question comes from the line of Mike Harrison from First Analysis. Please proceed.

I just had a couple of follow-ups. I know that earlier this year you were starting to get concerned about receivables and bad debt expense. Can you give us a sense of how much worse that situation has gotten recently? And have you taken any further steps to insulate yourselves from losses due to customer credit issues?

Yes, bad debt expense so far this year is about $3 million higher than it was last year. However, write-offs are relatively flat at about $3.5 million each year. So what that reflects is some additional conservativism on our part on in terms of what we think might be at risk in the future. And I would remind you that we did take out credit risk insurance at the end of last year for our distribution business, which could potentially have the greatest exposure to receivable issues. And we have benefited as a result of having that insurance this year. And I'd cite that as one action item we have taken. We are certainly becoming more cautious relative to certain end markets in the U.S., principally automotive, where we've got exposure to big three and their suppliers and that's well underway.

Mike, we are spending a lot of time on this, and we are -- we are being more conservative, to the point of not accepting some orders that we think are risky. So I can tell you that it's clearly on the radar screen. It has been, but we've fortified our efforts around this. And I think we are doing what we can do to minimize our exposure here.

And then, quickly, you mentioned that you are increasing your buyback requirement period. Wondering if you tell us what that requirement is and maybe talk about any of the projects that you are seeing fall by the wayside as you scale back on CapEx plans.

Well, historically and if you just look at our key objectives for -- that we set last year for 2011, we are trying to achieve a return on invested capital of 15%. We have been using that as an internal rate of return threshold. I would say that if you think about that in payback terms, we are trying to increase that by at least two fold and looking at projects that help us try to generate cash in years one and two. And I'm not going to specifically discuss any projects that have been delayed as a result of that decision.

Thanks very much.

Thank you all for joining us today and good success to you for the rest of your day. Thank you very much for your participation.

This concludes the conference for today. You may now disconnect. Have a wonderful day.