Avient Corp (AVNT) 2009 Q1 法說會逐字稿

Good morning and welcome to the PolyOne first quarter 2009 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 meaning of 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 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 in or implied by forward-looking statements.

Some of these risks and uncertainties can be found in the Company's filings with the Securities and Exchange Commission, as well as in today's press release. During the discussion today, the Company will use both GAAP and non-GAAP financial measures. Please prefer to the earnings release post on the PolyOne web site, 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. Bob Patterson, Senior Vice President and Chief Financial Officer.

Thank you, Josh, and thank you to everyone who is joining us on the call this morning. As always, we welcome the opportunity to speak to our investors and analysts about the recent performance of PolyOne. Joining me today is our Chairman, President, and Chief Executive Officer, Steve Newlin. Before I begin, let me preface my comments by saying unless other time frames are specifically stated or referenced during today's call, we will be comparing the operating results for the first quarter of 2009 to the first quarter of 2008.

In the current environment, we know our investors and analysts are keenly interested in our cash and liquidity positions. And so I will address those subjects first, and we have great news. We ended the first quarter with $122 million of cash on the balance sheet, a $78 million increase from year end and we are happy to report our liquidity has increased $23 million to $189 million. While we had no outstanding borrowings on our accounts receivable facility as of March 31st, our borrowing capacity under our facility declined during the quarter, primarily due to a reduction in receivables resulting from better collections and lower sales.

I will also mention as we did in our earnings release that our cash and liquidity increased through the month of April, and at the end of April we had $151 million of cash and $216 million of liquidity. The primary driver of the increase in cash for the first quarter was a $78 million or more than 25% reduction in trade working capital. I would like to recognize the entire organization for their contribution to this success and share a few highlights of this accomplishment with you.

Last November, we began working with our suppliers to modify and streamline our payment processing and in January, we began paying most domestic suppliers on only one day a month. We adopted these terms because they significantly improve internal efficiency, as well as forecast accuracy. This is but one great example of Lean Six Sigma in action. These terms also improve the consistency and reliability of payments, which is good for our suppliers. Dun & Bradstreet rates PolyOne the highest possible credit score, reflecting our commitment to our suppliers, as well as our underlying financial strength.

Next, we focused our efforts on reducing inventory, beyond that which was justified by lower demand. In January and February our sourcing and supply chain resources took two purchasing holiday's to participate in Kai Zen events aimed at reducing raw material and finished goods. While we achieved modest immediate benefits from our temporary buying suspension, more importantly the holiday's created space for our organization to make supply chain improvements, brain storm, and generate ideas. As you can imagine, one of the most difficult aspects of effectuating change is creating a time to do so.

We are pleased the events were successful and led to the identification of seven Lean Six Sigma black belt projects aimed at reducing lead times and safety stocks, as well as streamlining supply chain management. The results of the Kai Zan events were immediately observable in the first quarter, helping us to reduce inventory quantities by 13.6% since year end. In dollar terms inventory declined $36 million or 20% since year end, reflecting an additional benefit of lower raw material costs. This is not an inconsequential accomplishment and is even more impressive when you consider we were able to maintain an on-time delivery rate of 95% for the quarter. While we are very pleased with these results, we will continue to reduce inventory with the previously mentioned black belt projects.

Finally, we focused on customer collections. To some extent, I think we benefited in the first quarter from customer payments that were due in December, but received in January. Not wanting to repeat this, we initiated a proactive customer calling campaign to clarify billings, pricing, and related terms and conditions with customers prior to payment due dates. We also significantly reduced overdue balances from 23% at year end to 15% at March 31st and in total we generated $16 million of cash from accounts receivable.

I also want to point out that we dramatically reduced our exposure to accounts receivable in the North American auto sector. Specifically, we measure and track our overall insured exposure to North American automotive suppliers. The last time we looked at this -- the first time we looked at this from a deep dive standpoint was October 31st when we had $25 million of uninsured exposure. By the end of March, we had reduced our uninsured exposure to $3 million. Obviously this reflects reduced demand from automotive customers, but also our efforts to minimize risks through proactive collections, expanded insurance coverage, and customer selectivity.

I would now like to make some comments about the results of operations. For the first quarter of 2009, consolidated sales fell $250 million, or 35% to $463 million. While volume fell 34% below the prior year and by 7.7% below the preceding quarter, we are seeing some stability returning as demand edged up in March versus the preceding two months. We believe customer destocking may be nearing an end.

We reported a net loss of $0.10 per share for the first quarter of 2009, compared with net income of $6.5 million or $0.07 per diluted share for the same period a year ago. The first quarter results for 2009 include a favorable settlement of a foreign tax audit for $10 million and a tax valuation allowance against deferred tax assets of $5.4 million. We are drawing your attention to these tax items as similar adjustments were not recorded in the first quarter of 2008. Excluding them, as well as special items in both periods, we reported a loss of $0.04 per share during the first quarter of 2009 versus income of $0.08 per share in 2008.

Before I begin to review the segment results, I will comment on our special items. First, during the fourth quarter, we recorded a preliminary estimate of goodwill impairment related to our Geon compounds and specialty coatings reporting units within the performance, products, and solutions segment. This noncash charge was due mainly to the significant deterioration in the capital markets in the fourth quarter and the corresponding increase in our cost of capital.

During first quarter of 2009, we finalized our testing and impairment assessment as we said we would and have recorded an adjustment to increase our preliminary estimate by $5 million. As we said last quarter, the fact we are recording an impairment charge does not change our long-term strategy and does not in any way change our assessment of PolyOne's value proposition. Further, this is a noncash item that has no impact on our liquidity. Finally, special items also include $10.1 million of pretax charges related to the restructuring actions announced on July 28th, 2008 and on January 15th of this year. Both of these programs are proceeding according to plan, and I will have more to say about them in a moment.

I will now review our segment performance. Our performance products and solutions segment reported quarterly operating income improvement despite a revenue decline of 39%, as volume fell by the same amount. While revenues were down $259 million to $159 million, gross margins improved due to restructuring savings, lower raw material costs, and LIFO reserve adjustments. Our specialty platform was significantly impacted by the slowdown in Europe and Asia. In total, specialty platform sales declined from $288 million to $190 million. Specialty operating income fell from $13.5 million during the first quarter of 2008 to $500,000 during the first quarter of 2009. The majority of this shortfall comes from our international color and engineering materials segment, which has been very heavily impacted by the global recession.

Certain markets have been hit more than others. Our Asia engineering materials business saw revenues decline 66%, principally due to lower electronic exports to the United States. We see this improving sequentially in the second quarter, but certainly expect it will be down overall for the year. Unfortunately, it is more time consuming, more expensive, and administratively burdensome to effectuate cost reductions in Europe.

Despite our best efforts to remove cost from the organization, we simply were not able to do so in advance of the precipitous decline in orders we experienced in December and then into the first part of this year. For the first quarter, international segment sales fell 43% and operating income was roughly break even. We expect it will take Europe longer to emerge from the recession than the US, however, we believe our international segment will return to profitability in the second quarter. Of all of our businesses, this segment will benefit the most in terms of sequential operating income improvement from the previously announced restructuring savings.

Our distribution business delivered another solid quarter, despite the sales decline 32% from $201 million to $137 million, operating income was nearly flat against the prior year, due to significant reductions in SG&A and lower bad debt expense. The distribution business now has an annualized return on invested capital approaching 25%. This was no easy feat, and these results illustrate the continued relentless efforts of this team to control spending, reduce costs and working capital without sacrificing customer service.

Speaking of customer service, we consider our 95% on-time delivery rate which is based on the customer request date to be best in class. And we achieved this level of performance again during the first quarter, while simultaneously reducing working capital. While our on-time delivery metrics might not be meaningful to investors at first blush, it should because we believe this important competitive differentiation continues to allow our distribution business to gain market share.

Our resident intermediate segment which consists principally of our SunBelt joint venture, delivered higher operating income in the first quarter of 2009 versus 2008, primarily due to higher caustic soda prices. Corporate costs include $5.8 million of incremental pension expense in 2009, due to the pension losses we incurred in 2008. Excluding this pension increase and special items, corporate costs were approximately the same as the prior year.

I would now like to update you on our restructuring progress. Recall in July of last year, we announced our manufacturing realignment to reduce capacity. And in January of this year, we announced another phase of cost reductions to improve PolyOne's financial strength and competitiveness. These included eliminating approximately 370 additional jobs worldwide or 8% of the global work force. Implementing reduced work schedules for another 100 to 300 employees based on demand, closing our Niagara, Ontario, facility, and idling certain other capacity. Additionally, we announced other actions including freezing executive salaries throughout 2009 and deferring other salary adjustments.

For all actions announced we initially expected to incur one-time pretax charges of approximately $76 million, of which $28 million would be noncash asset write-downs, and/or accelerated depreciation. Since we made our announcements we have reduced our cost estimates and now project pretax charges of $66 million, of which $28 million is noncash. We expect lower cash costs due primarily to reduced severance costs for our international operations.

We now project total cash costs to approximate $38 million, versus the previously disclosed $48 million, of which $12 million has already been spent. For the balance of 2009, and just to be clear, we expect remaining restructuring income statement charges to approximate $18 million and cash costs to approximate $26 million. Our savings estimates remain unchanged, with $35 million to $40 million of estimated savings achieved in 2009 and annualized run rate savings of $57 million estimated for 2010. Perhaps most importantly in the short term, is our ability to fund our restructuring costs without incremental borrowing. As we announced in March, we have generated more than enough working capital improvement during the first quarter to fund the remaining cash costs associated with these actions.

This may be the most critical near term statement that we want current and perspective investors to digest. For some time now our equity and debt valuations have been seemingly pricing in a high probability of insolvency. We recognize we are not alone in this regard, and many companies have similar market valuations due to general fears about the current economy and credit markets. We trust that our cash flow performance during the first quarter and our ending cash and liquidity positions, help to alleviate those concerns and illustrates the resolve and the capabilities of this team.

Given our current expectations, we expect to finish the year without borrowing from our accounts receivable facility. We expect to have adequate cash to fund our limited near term debt maturities, as well as our pension obligations. Our management team is steadfastly committed to PolyOne's success and to delivering value to our investors regardless of market conditions. We trust the market will recognize the importance of our near term focus on cash and liquidity, but at the same time, will understand we have not lost sight of our strategic long-term goals.

With that, I will now hand the call over to Steve.

Thank you Bob. Let me begin by thanking PolyOne employees for their relentless resolve and commitment during the quarter. Most notably, we challenged our employees to significantly reduce inventory working capital. And they did so with great success and I want to commend them for a job well done.

With the additional cash on our balance sheet, our liquidity is greater than it was at year end and our current financial strength allows to us invest selectively in our business with greater confidence. In doing so, I believe PolyOne has taken a major step toward emerging from this downturn a stronger and healthier organization. That being said, we fully recognize that we have a long way to go before the economy recovers. We have seen small, but encouraging signs that destocking may be coming to an end and that demand may be stabilizing. However, we are being realistic about near term demand which we expect will be well below the unsustainable peaks of the mid 2000s, especially in housing and auto.

We are making the necessary adjustment to right size and position our organization for profitability and growth. But we are not permanently shaping our Company for the current depressed levels, which we believe to be at or near the trough. We are bypassing more drastic steps now that could jeopardize our bright future and we're focusing on our market potential, which exceeds $30 billion. Regardless of the exact characteristics of the new level of demand, our ability to be adaptive is key to our success.

We will continue to be relentless in reducing costs, conserving cash, and reducing our break even point. The improvements we are making are designed to serve us well, regardless of the change in the external economic climate. As we said during the fourth quarter call, we have not abandoned our four pillar strategy and we continue to transform PolyOne into a specialty Company. While the current recession will delay the achievement of our long-term goals, our plan is the right one.

A great example of the continued pursuit of our strategy is our ongoing expansion into healthcare. Healthcare volumes were down about 5% year-over-year, versus an overall volume decline of 34%. A gross profit showed a double digit increase. At $40 million, healthcare comprised roughly 9% of consolidated revenues during the quarter. That's two percentage points better than in 2008, and compares to 4% in 2006. This story is a perfect illustration of why we are expanding into this market. While not immune to recession, the healthcare market offers greater stability and less cyclicality than certain of our commodity end markets and this clearly observable in first quarter results.

We've repeatedly stated that we are redirecting resources from markets like housing and auto and focusing on healthcare. We now have a dedicated corporate healthcare leader with 24 sales, marketing, and technology managers from the business working on future customer applications and translating new technology from our innovation pipeline.

During the fourth quarter earnings call we advised our investors and analysts that we would continue to invest in our business, but do so selectively and at a slower pace overall. Our focus on growing the healthcare sector is a great example of investing selectively. Another is the expansion of our investment into Lean Six Sigma. We are a late adopter of LSS principles. And that's the bad news. The good news is abundant opportunities for improvement have yet to be captured.

We began implementing lean practices and concepts about two years ago with a narrow focus of improving the efficiency our manufacturing organization and our production processes. The results were measurable, both in terms of reducing waste and decreasing our manufacturing expense. Recently we broadened the scope of our lean initiatives, setting our sights on inventory and working capital reductions. We now intend to build upon the lean capabilities we developed and expand Lean Six Sigma across our broader organization. 27 of our best and brightest people are now in full-time project execution roles for two-year assignments and we expect to double this number during first quarter of 2010.

We will continue our efforts to improve our manufacturing capabilities but will place a complimentary focus on our commercial processes, supply chain functions, and our corporate support systems. These efforts will be directly aligned with our strategic pillars of commercial and operational excellence; the key components of our overall strategy. Our first wave of projects includes accelerating and capture of new accounts. We are also launching projects designed to increase the profitability of our products and our portfolio by giving renewed attention to our product life cycle management and pricing practices. Although we have made great strides in recent years in our pricing practices, I believe we ample opportunity for improvement.

In the supply chain area, we've launched a program designed to upgrade our sales and operations planning process on a global basis. This program was launched in January when we conducted a series of Kai Zen events designed to improve our response to changes in customer demand. The project has allowed to us dramatically reduce our inventory positions over the last several months. We're also increasing our expectations of our suppliers through a series of additional Lean Six Sigma projects designed to deploy a global, strategic supplier management program that will improve the value we deliver to our customers and shareholders. We expect our key suppliers to become true partners with us in an effort to lower the total cost of ownership by asking them to raise their level of performance.

These are broad fundamental business improvement efforts designed to augment the overall performance of PolyOne. We expect that our ability -- our improved ability to execute projects in critical areas will lead to 100 basis points of gross margin expansion during each of the next three to four years, providing a significant boost to earnings growth and cash flow generation. And as you can ascertain from Q1 results, we are well on our way.

Another example of our continued selective investment is our expansion into Asia with a new facility in India. We began production in Q1 with our first sales in March. This is initially a modest investment, but will serve as a spring board into one of the fastest growing economies of the world. Our strategy for penetrating this market includes providing value-based solutions to global accounts and leading local players in selected industry segments and target geographic areas. We expect revenues to exceed $2 million this year and we anticipate this business will be profitable in 2010.

Our corporate Vitality index for the quarter was 18%. Recall that our Vitality index measures a percentage of total sales from products included that were introduced in the last five years and it has included distribution sales. We think it may be more meaningful to measure our Vitality index, excluding distribution, as this business does no product development work. On this adjusted basis, our Vitality index has now reached 26%. This means one-fourth our non-POD sales are from new products less than five years old.

Sales of new products have declined at a slower pace than the older products indicating the relative value of our new offerings. And with gross margins on new product sales well above the corporate average, we are seeing our improved pricing practices and new technology launches continue to have a positive impact in specialization. We are getting better at selling the value of our products and what they create for our customers.

Last month, we introduced new compounds for cables used for photovoltaic cells, that will support customers looking for global compliance with new safety standards in alternative energy applications. And this is a market we expect will grow rapidly as demand for potable take power generating systems increases abruptly. During the quarter we also announced a new joint venture, a Detroit development effort with Zyvex Performance Materials to successfully develop the first nanoenhanced thermal plastics that address both electrical conductivity and mechanical property requirements of specialized product applications. These products could displace metals with favorable economics in applications such as medical packaging, consumer electronics, and other high performance products.

Our innovation efforts continue to expand with industry leaders such as Archer Daniels Midland, Eastman, Dow Chemical and others as we leverage our material science and compounding expertise to develop new applications and products. Our focus and commitment to driver innovation pipeline plays an important role in our longer-term strategic position. As we balance long-term investment opportunities with improving our near term operating efficiency in the current economic environment.

We remain very cautious about our primary end markets and our actions to date illustrate that PolyOne intends to remain competitive through an economic downturn of uncertain duration and magnitude. We are balancing the near term goals of improving cash flow and liquidity with our long-term strategic objectives. The recent economic crisis, the cyclical nature of our traditional end markets, and the price sensitivity of our commodity business only serve to reinforce the need for our transformation and validate our strategy.

We are steadfastly improving our mix of sales into higher margin specialty applications and improving gross margins as a result. Compared to the first quarter of last year, gross margins have improved in all of our businesses, despite steep volume and revenue declines that would normally be very dilutive to margins. This reflects not only the mix shift I describers, but also the cost savings from our lean initiatives and the pricing discipline and rigor we have instilled in our commercial organization.

Even in an environment as tough as we are in today, PolyOne will not chase volume. This has long been an irrational and failed strategy in our industry and we prefer to reduce fixed costs rather than take business at unacceptable rates of profitability or losses. Further we different to differentiate ourselves from competition by demonstrating the total value equation of our products and services.

I am confident in PolyOne's leadership team and employees. While we have never experienced such a steep and abrupt decline as this, we also have never had a better or more capable management team. And our talented leaders are equipped to navigate us through the challenging economic crisis, while simultaneously guiding our long-term transformation process. Despite the prevailing headwinds, we are winning new business everyday by providing our customers with innovative products, services, and solutions. And our gross margin improvement indicates we're doing so at an accelerating level of profitability.

With that, I'll now turn the call back to Josh, to open the line for questions.

Thank you very much, sir. (Operator instructions). We will take a quick moment to compile questions. And our first question comes from the line of Steve Schwartz from First Analysis. Steve, you may proceed.

Thank you. Good morning, gentlemen.

Good morning.

Hi, Steve.

Bob, can you just aggregate the four factors behind the gross margin improvement, you called out in the press release? I'm wondering how much was related to the LIFO reserve adjustment?

Yes, LIFO was $8 million. If you just look on the balance sheet in terms of how that changed from 12/31 to 3/31 and if you stripped out LIFO, gross margin improvement was about 100 basis points year-over-year. And, what that translates to is, it's obviously a mixed effect of both volume declines which were significant, offset by some price and mix improvement. If you look at the top line volume, the total sales are down 35%, volume down 34%, FX was about 4% bad guy, and so that yields a pricing mix change of roughly 3%.

Okay. So that's what brings this back down to the goal you have over the next couple of years of about 100 basis point improvement?

Yes, I guess I'm sorry. I may have misunderstood my question as being focused on first quarter results.

No. No. It was, Bob. You got it right. I'm just trying to understand the long-term goal versus this quarter effect. Then my second question as a follow-up, the consolidated SG&A on an adjusted basis year-over-year, it looks to be about the same amount. So I'm wondering how much of the pension costs are in there, what effect that had? And how much is, in is there in but maybe we are not seeing from the restructuring?

Sure, the pension costs increased significantly. In fact in the first quarter of 2009 versus 2008 was an incremental $5.8 million of expense, which is almost entirely contained within our corporate and other line and segment. And the reason for that is that if you look at the participants in the PolyOne pension program, only about 10% are active employees. So we have captured those costs outside of the segment results.

So if you take last year's reported SG&A of $72 million, you've got a bad guy of $5.8 million, you would expect it to be roughly $77 million this year, and we reported $69 million. The items going the other way, Steve, are restructuring benefits of about two, lower bad debt expense, favorable FX of about two, as well as incentive accrual adjustments downward of about $2 million. So hopefully that helps you reconcile year-over-year SG&A.

Yes, that's very helpful. Thanks, Bob.

Certainly.

And our next question comes from the line of Dmitry Silversteyn from Longbow Research. Dmitry, you may proceed.

Good morning. I just wanted to confirm, you had a 30% decline in the distribution volumes but my understanding is that the raw material prices or the plastic prices that you are distributing have come down quite a bit as well. Did the margin -- the gross margin in that business improve despite the volume loss or was it too much to expect that?

Dmitry, well, thanks for that question first of all. Yes, gross margin did improve in the distribution business last year, first quarter. We reported 8.6% and first quarter 2009 was just over 10%.

Okay. And -- but that didn't have anything to do with the -- kind of the one offs, it was just literally a raw material benefit? Or did the gross margin also get impacted by things like LIFO adjustments and foreign exchange and what not?

In our distribution business, is on FIFO. So there's no LIFO benefit. Year-over-year improvement is primarily driven by mix. And our distribution business is leading the way in terms of expanding our healthcare sales and so that's one of the reasons why you are seeing that improve year-over-year. To some extent there has been a benefit of lower raw material costs but largely those are passed through to customers.

Okay. So you had to pass through to customers. Okay. The second question is, you mentioned seeing signs of kind of inventory collection being over particularly in the Asian electronics business. Can you give us a little bit more color on what you are referring to and kind of what gives you the modest confidence to say that? What are you seeing in terms of sequential improvements, what are you seeing in terms of customer order patterns that leads you to believe that the inventory collection phase may be over?

Well, I will just make initial observation about the order of magnitude. And if you look at our Asian business being roughly 5% or 6% of total sales, last year electronics was about 50% of that. This year, it's actually about a third or slightly less. So that gives the order of magnitude in terms of what's happened from an electronics perspective. And that, again, as I mentioned in my comments earlier is principally driven on exports to the United States. Steve, is there any observation you want to make?

Well, I think it's really difficult to distinguish temporary decline in demand that's due to the inventory liquidation from a more persistent decline in final end market demand. But I believe based on what we are hearing from our management teams around the world and from our sales force, is they are believing we are through the majority of the destocking that the companies have been going through.

And we don't have -- unfortunately we don't have a scientific process full of data points to determine that. So it's sort of an intuitive, instinctive call that you make. And we could be off, but we are seeing signs that we are seeing more stability in order pattern. There's more consistency. The expectations for orders, the cancellation of orders, the rate of cancellations is subsiding. So we feel like a lot of this destocking that we know has been going on is getting to a point where it's minimized now. That's probably about the best we can do to answer that Dmitry.

Okay. All right. Thank you.

Thanks, Dmitry.

And our next question comes from the line of Mike Judd from Greenwich Consultants. Mike, you may proceed.

Yes. Thanks for taking my question. I had a sort of follow-up to Dmitry's question about demand. Because I guess that's really the $1 million question here is, volumes not only in the second quarter but in the second half of the year. And I think we are all hoping that the inventory destocking basically is coming to an end here. So the question is you move into a period of seasonality, where typically there's -- there's a pick up of in demand. And then I guess the jury is kind of out on the fourth quarter in terms of what happens during that time period.

So sort of a long winded question here, but, as you think about some of the things that are going on, like Chrysler and G.M., and the impact of that during summer, and the seasonality, which those are sort of counteracting trends there, and then you think about the second half of the year, what are you -- what are you telling your organization? What sort of guidance are you providing them from a management perspective or for planning purposes? Thank you.

Okay, Mike, let me take a stab at that. First of all, what we are telling our organization is we have two primary priorities right now. And the first one is to collect more new business, that's profitable business, good business that will be business we will want to have after we get through this period. That's profitable, that's makes sense where we can differentiate and add values to our customers. So we are putting a lot of pressure on our sellers to spend more time being more efficient. We have given them a lot of tools to do that. And we are changing those expectations. They need to be out there frequently with our customers and with prospects.

Second thing that we are telling all of our employees is that we are on cash in a very intense way. Looking at everything we can do to improve our cash flow to reduce our working capital and you are seeing evidence of that. Those two things aren't changing. If anything, they are just being fortified with a greater degree of intensity.

I would say to answer the rest of your question, we don't have any additional insight behind the primary public documents that you would all have with regard to auto and housing. Our guess is, probably 550,000 housing starts for the year 2009. I will give you a couple of data points. It was averaging over 1.9 million in 2004, 2005 and 2006. Housing starts were 1.34 million in 2007, so it's a dramatic decline. Even from last year, where we saw kind of a shutdown in the second half, still we were over 900,000 housing starts. So we see that very soft for this year.

Auto we are probably looking at close to ten million units versus an average of 16.5, 17 million units in the 2004 to 2007 range. So still a dramatically lower production rates than what we have seen in the past. And that's sort of the basis upon which we are running the Company these days, until we have some data that suggests otherwise. You are absolutely right about the seasonality, that a lot of the -- with the retooling and the changeover and what's going on in auto, summer is very soft for auto. Usually offsetting that to some degree is housing has a pickup then. Whether those two dynamics will have some mitigating effect on one another this year or not, I think it remains -- it just has to play out.

I personally think all bets are off right now on seasonality when you talk about these two markets. I just -- it's not predictable. It's moving, daily. You see a new report every day in the Journal or some other document that you look at. We saw some good news yesterday about -- about construction, but I would say that a lot of that was more on the commercial production side than it is general housing. So there's some encouraging signs but I -- sure not enough for us to call it a reversal at this point.

Just a follow-up. You have a somewhat unique perspective because you have plants in China and also a plant in Poland. Can you talk specifically about those two regions in terms of what you are -- again, a similar type of question but just framing it more from an international perspective?

Well, Mike, China has gone through the same downturns that we have even everywhere else. And where five plants there, it's a very important market to us. And it certainly the domestic consumption in China is -- it is accelerating again, from what we see. The exports, we think that they have hit the trough. I think Bob mentioned this earlier. We are beginning to see some signs of improvement. We expect things to get better this year as we go through the year, but we are certainly not going to reach the highs and the peaks of the past several years by any means.

So some optimism in China. GDP growth, again in China. But I mean, 5% or 6% GDP growth in China is a steep fall from where they were. But I guess at this point, we are going to take it and we're going to continue to penetrate more markets there and more accounts to offset the growth -- the decline in our existing base business. But we think China is coming along. One of the bright spots around the globe.

Eastern Europe, not quite so robust. We're still -- we're seeing progress but there's more caution there. And of course, the connectivity to the central and western Europe economy is linked a little more closely. And I think there's not this powerhouse of numbers of demographics and numbers of people to create the same degree of demand that we are seeing in some place like China. I hope that answers your question.

Thanks for the help.

Our next question comes from the line of Saul Ludwig from KeyBanc. Saul, you may proceed.

Good morning, everybody.

Good morning.

Hi, Saul.

Guys, that was a very impressive cash generation.

Thank you.

In the quarter. When you kind of simplify it, you see that the inventories from the end of the year fell $40 million and you let your payables extend by $20 million and that pretty much explained the $64 million cash generation from working capital. If we sort of fast forward to the end of the year, do you think that the $64 million that was generated from working capital in the quarter will be about what it will be for the full year? Or do you think we will get to the end of the year, that $64 million will be a higher number or a lower number?

Well, first, I would just add it was about $78 million for the first quarter because receivables were actually down about $16 million. And I believe that performance will hold and improve through the balance of the year.

So the net of $64 million which is all the numbers in the [pull up] fund statement, it should be a little higher by the end of the year?

I believe so. I think in your -- you might be including in that the $14 million payback --

Right. Right.

That's correct. And we don't -- we don't believe we will have any outstanding borrowings on our AR facility at the end of the year.

And you didn't have any in the first quarter?

Correct.

Okay, goo. What do you see for Cap spending for the year?

We did just under $7 million for the first quarter, which really does reflect a concerted effort on our part to pull back on spending. At the beginning of the year we said $40 million or $50 million, I think $40 million is a top end number. So we should be there or there under.

Okay. The -- when you think about the cash that you built up and a lot came from, as you said, from the very good job you had done in working capital. When you sort of think out of next year or so, do you think some of this cash is going to sort of revert back in to working capital? I'm trying to get an idea of how much cash you really have. You might say it's temporary cash versus permanent cash that you could use for other purposes?

Well, with respect to working capital, we do believe that we are going to continue to improve upon working capital through the balance of the year. And so I see that as an incremental cash flow good guy for us for the next three quarters. If your second question there, Saul, is just what do we end up doing with that cash, I mean for now, we are actually very happy to just have that on our balance sheet. As you know, we do have some near term debt maturities, as well as pension funding obligations and those are our first priorities, as well as capital appropriations.

Okay. Great. Next question is related to the income statement. The $8 million the of LIFO probably all then apply to the performance products and solutions segment?

That's right.

Now, is that -- are we done with that? Or is there any more LIFO gains that we will see subsequent to the first quarter?

I think we will see continued LIFO benefit as a result of reducing inventory. I mean, we are at a point now where I don't think the influence of price will be as significant as the influence of decrement. As we get inventory qualities down, we will see a continued benefit from LIFO through the rest of this year.

Do you think the $8 million will be repeated, say, in the second quarter?

No, I don't think it it will be that significant because a big chunk of the $8 million was price. And so, we're at a point now where if we assume flat pricing and that could go up or down as you know, I think it will come more from the decrement side in terms of the just getting quantities out.

On your final compound business, how much was your -- how much did your price -- your selling price change, let's say on a cents per pound basis versus your costs for PBC resin on a cents per pound basis?

I probably won't be able to respond to that with as much detail as you are looking for. I will just tell you that volume was down 39%. Total sales down 39%. There's a little bit of -- of an FX down side there of about 3%. So I think price mix is a positive for us for the quarter of about 3%.

And did your resin costs go up or down?

Resin costs were trending down through the first part of this quarter. And we see them flattening and really stabilizing towards the end of the quarter.

So you have some favorable price versus raw material, let's say variable margin?

Yes, I believe that's true.

Okay. Great. And then the next question is SunBelt, which had a very, very strong first quarter. We are well aware of the -- what's happening with pricing on flooring and caustic, particularly caustic. What do you see the SunBelt contribution being going forward?

I mean well, first of all, just in terms of projecting ECU net backs, everyone seems to believe and [Olin] is in the same camp, that they won't be as high in the first quarter and they are trending down. I think that their outlook is a little bit more positive than CMAI. And so it would be a stretch to say that we are going to replicate first quarter SunBelt earnings I expect it will be down in the second quarter and through the balance of this year.

I mean could it be down half?

I don't know if it will be down half. I would say we don't see any real changes in volume, so it really is an effect on pricing.

And then just finally --

Saul --

Clarify, $8.8 million was what you showed as your tax benefit in the quarter --

Saul --

And that $8.8 million had several components to it. Some related to --

Hi, Saul -- I'm sorry, we -- I'm sorry to interrupt you here --

What are the different components of that $8.8 million?

Saul, maybe we can have some one-on-one. We are trying to keep this to a couple of questions.

Okay. Okay, I'll pass. That was my last question.

Okay, thank you.

Our next question comes from the line of Christopher Butler from Sidoti & Company. Christopher, you may proceed.

Hi, good morning, guys.

Hi, Chris.

First question, is there any business that you are looking at right now that really dropped off that you you particularly don't want to have back?

Well, we -- we like most of our business these days, but, of course, some accounts are better than others and we are making a reality concerted effort. We try to take care of all of our customers but we certainly have customers that are very prime. And we -- we spend time giving them extra attention.

I would tell you that we had to excuse ourself from some business in a couple of end markets that was shaky, that wasn't -- we didn't feel was credit worthy. And we won't go back into that business unless and until they become stable, that they show some signs of prosperity and growth, and that their credit risk is diminimus. So I would say that there are indeed some accounts that we had to steer in directions for other people to take care of. Just because we were unwilling to take the degree of risk relative to the reward available to our shareholders.

I would say the most significant change in our mix, Q1 over Q1 has been away from transportation and into healthcare. Q1 transportation was about 14%, and now it's about 10%. And as Steve mentioned earlier in the call, we picked up two percentage points on healthcare. So all things held equal, that's a trend we would like to see continue. And that's not to say anything disparaging about our transportation customers, but just in terms of overall mix, we would like to see it move in that direction.

We have some automotive customers where we have critical applications and it's a very good business relationship. It's a mutually beneficial business relationship. We just have to have the internal discipline not to go after some of these applications that are purely price-based commoditized, we base commoditized, we're not any different than anyone else. And because of that and perhaps because of the final end product they're producing, it's a very risky proposition and one that doesn't serve anyone real well, long-term. So there's a big distinction there between the types of -- you can't we aren't just saying that automotive is a bad business. It can be a very attractive business in certain applications.

And going back to cash flow, I guess here a little bit. Have you given us an idea of what you think any contribution might be to the pension plan here in 2009?

Publicly we said that we would make our minimum funding requirements and that's for our qualified plan -- or nonqualified plan, that's $5.5 million this year. There is always an opportunity to fund in advance of that. If you have seen our 10-K, you know that our funding contributions over the next five years are fairly significant. And so there may be a move by us at the end of the year to fund greater than the $5.5 million level. I just can't say at this point how much that would be.

I appreciate your time. Thank you.

All right. Thanks, Chris.

And our next question comes from the line of Rosemarie Morbelli from Ingalls & Snyder. Rosemarie, you may proceed.

Good morning, all.

Hi, Rosemarie.

Could you give us a better feel for the areas where the demand, you feel, has stabilized, in other words, has stopped declining and may even be showing some signs of life?

Well, I don't know what signs of life are these days, but I think just general across the board we are seeing -- particularly, I will start with Asia. We are seeing that some of the destocking that was just resulting in no orders is beginning to show up in terms some of orders and some repetitive business that's going on. That would be one area that we've seen. This has been a hard hit and abrupt decline that has affected virtually every market that we serve. And, again, I mentioned healthcare a lot less than others. I don't think we saw the same degree of destocking in healthcare. We saw a reduced normalized run rate. So that would be another area.

I can tell you that -- where we aren't seeing a lot of change are in auto and housing right now. We do not see much different going on in those. I think part of this is still the amount of build that goes on in those two market places relative to the past. I mean, you can't -- you can't stock to build products for one million houses when you are only putting 500,000 of them out of the ground. So I think when those numbers plateau and we think they are getting close, then we'll see the destocking in those two -- in those two segments pretty well eliminated.

Following up on this, as you see the plateauing in auto and housing substantially lower than it has been for years, do you think that you have eliminated enough capacity going -- for products going into those markets? Are we going to see additional plant closing or without closing a plant, can you still shut down some lines for products going into those two and therefore lower your manufacturing costs?

We can. We do have the ability to close lines without closing plants. And it's a strategy that we have, in fact, deployed. And, yes, we can always take out additional capacity. We want to be very careful that we don't get ourselves in a predicament where we can't capture some good demand when it returns. But at the same time, it allows us enables us to be more even selective about the business that we pursue.

In -- and, again, it is still part of the same question. There has been a lot of houses changing hands, and I grant you at foreclosure prices, but that is kind of irrelevant to my question, how much people pay for it. That would translate into remodeling. Would that -- if that remodeling part of the housing world were to pick up, do you have enough going into that market in order to be helped or is that almost irrelevant to your business?

No. It's not irrelevant at all, Rosemarie. It's a good question. Actually, remodeling typically has been an offset to slowdowns historically in new construction. That has been a disconnect during this last downturn. And remodeling certainly, if they are replacing windows, which often happens, there's a lot in it for us. So we like activity. We like construction. We don't care if they are building new, large or small, frankly. The percentage of our program, our components of houses in smaller homes often is a higher percentage than in larger homes. So we like to see activity. We like to see starts and we like to see remodeling and we benefit from both.

The problem with remodeling is there just hasn't been a lot of home equity loans available, et cetera which drives a lot of that remodel. But, I think you are right. We are hoping that the turnover for homes, when people buy something, especially when they buy it at distressed pricing, it gives them a little more room to put some money into it. And if we get a pickup in remodeling, we'll be delighted.

Thank you, Rosemarie for your question. We will take one more question, Josh, and then we'll conclude.

And our next question comes from the line of Roger Spitz from Banc of America. Roger, you may proceed.

Thank you very much. It looked like SG&A increased $10 million to $70 million in Q1 2009 from $60 million in Q4 2008. After trying to adjust out for some non-recurring items and such, could you comment on what a normalized quarterly run rate SG&A might look be?

Yes, I mean the first thing and again -- I didn't hear your question that well. But, I think you said Q4 2008, versus Q1 2009. If that's the case, one of the biggest changes, previously we had been accruing for incentives under our long-term incentive program for programs initially awarded in 2006 and 2007, for which there was not a subsequent payout. That was trued up at the end of last year and so I would say that you see an incremental amount of SG&A reduction in the fourth quarter versus what you'd see in the quarter.

Secondly, the biggest delta is the increased pension expense in the first quarter which is about $5.8 million over fourth quarter of last year. And I think that in terms of what we are looking at for the remainder of the year is that it's not going to be appreciably different from where we are right now. Although, I would just say that there is some timing difference in terms of how our incentive accruals are booked against operating income over the course of the year. Beyond, that we will not make much more in the way of projections for 2009.

No, that was excellent. Thank you very much, guys.

Thank you.

Thanks to everyone. I did have a couple of quick closing remarks I would like to make. And I want to clarify that the gross margin improvement from Six Sigma that we talked about, that's incremental to gross margin recovery that we expect as a result of economic recovery. And while we know we've had some benefit from LIFO, you should also understand that as we build less inventory, in terms of utilizing the equipment and covering the overheads, there's also a negative adverse offset to that. So, as we return and get some recovery, we will see, I think a nice improvement in gross margins on more than one front here.

I want to thank you for joining us today. We are confident that we can balance our near term objectives during this downturn, with our long-term strategy and deliver shareholder value. And we look forward to talking with you again next quarter. I would just like to remind you that we have an investor day, it's going to be held June 25th, beginning at 7:15 a.m. central time at the Hyatt Regency, McCormick Place in Chicago. And we're hopeful you can join us to experience the National Plastics Exposition, NPE and to see our transformation in action. Thank you, everyone.

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