Avient Corp (AVNT) 2009 Q2 法說會逐字稿

Good morning and welcome to PolyOne second 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 the Private Securities Litigation Reform Act of 1995.

Forward-looking statements will give current expectations or forecasts to future events and are not guarantees of future performance. They 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 the 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 refer to the earnings release posted on PolyOne's website where the company describes the non-GAAP measures and provides a reconciliation of them to most comparable GAAP financial measures.

Now I will turn the call over to Bob Patterson, Vice President and Chief Financial Officer. Please proceed.

Thank you. 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 that unless other time frames are specifically stated or referenced during today's call, we will be comparing the operating results for the second quarter of 2009 to the second quarter of 2008.

For the second quarter of 2009, we reported sales of $497 million and net income of $3.5 million or $0.04 per share. Excluding special items and one-time tax adjustments as enumerated in our press release, we reported earnings of $0.13 per share versus $0.12 per share in 2008, despite a 34% decline in sales driven by 30% lower volume.

Perhaps more importantly, these results show sequential improvement of $0.17 per share from the first quarter of 2009, demonstrating the earnings capability of PolyOne when demand rebounds even slightly from its current unsustainably low levels.

Gross margin expansion was a key contributor to our second-quarter earnings growth. Our second quarter gross margin before special items was 18.2%, which represents a 600 basis point improvement over prior year despite the 30% volume decline. As clearly articulated in our earnings release today, LIFO contributed 190 basis points of this increase. The remaining 410 basis points of improvement is attributable to the realization of the benefits from restructuring actions as well as improved sales mix and price and lower raw material costs.

LIFO reserve reductions totaled $5.4 million for the second quarter. We mention this because we want to be transparent with investors and analysts, but also because we want to highlight that gross margins before special items improved 360 basis points from the first quarter of 2009 to the second quarter, excluding LIFO.

The benefits we have realized from restructuring actions have exceeded expectations this quarter as we completed many of them ahead of schedule. Most notably, our international segment operating income improved from the first quarter to the second by $6.3 million, partially owing to incremental cost reductions.

We estimate we have completed 90% of our actions and should achieve close to a $60 million run rate of savings by the end of the third quarter. We project remaining total charges to approximate $10 million to $15 million.

Included in special items for the second quarter are $3.1 million of after-tax charges primarily related to these ongoing restructuring actions. Other contributors to gross margin improvement have been better sales mix and lower raw material costs.

It remains an intensely competitive market, but we believe we have done a better job demonstrating the value of our products and services this year than last year. One of the ways we are breaking away from commoditization of our materials and services is through the expanded implementation of our proprietary economic valuation estimator tool to quantify how improvements such as lower cycle times, design support, and reduced scrap add value and increase profitability based on the customer's own operating environment. Given the focus our customers have placed on optimizing their overall cost structures, our ability to communicate savings such as these is more important now than ever.

Shifting now to cash flow and liquidity, we are pleased to report the momentum built in the first quarter of this year has carried through into the second quarter as we generated $59 million of free cash flow and ended the quarter with $182 million of cash on the balance sheet. Overall liquidity increased by $66 million to $255 million. This was accomplished as we paid semiannual interest payments of $18 million. And we continue to have no outstanding borrowings on our accounts receivable facility.

As with the first quarter, working capital improvement continues to be a driving factor in the success story. While we are striving for improvement in all areas of working capital, the most impressive accomplishment has been reducing inventory by nearly $50 million from the end of 2008.

We previously stated we initiated new vendor terms in the first quarter and realized a benefit in accounts payable. However, there have been no significant changes to terms in the second quarter. What we are now seeing is the effect of inventory turning at a faster rate. We are now turning our inventory at a rate of nearly 11 times per year versus seven times a year ago. This improvement is a direct result of 13 Lean Six Sigma projects focused specifically on inventory management and efficiency on a global basis.

From an accounts receivable perspective, we have reduced our days sales outstanding by 2.3 days from the first quarter, primarily due to continued proactive customer calling to confirm pricing and terms before the bill is due. We have also reduced past-due receivables from 23% at year end to 12% as of June 30 through disciplined credit management.

We continue to believe there are many opportunities to improve working capital, including but not limited to reducing slow-moving inventory, continued reduction of past-due accounts receivables, and streamlining the overall supply chain process. These changes should benefit us even in an increasing-demand environment.

Due to the dramatic increase in cash and liquidity, and the improving results from operations in the first half of this year, S&P now cites a stable outlook, and Dun & Bradstreet continues to rate PolyOne the highest possible credit score. We are exceptionally proud of both of these accomplishments.

I will now view our segment performance.

Our performance products and solutions segment reported sales of $170 million in the second quarter. This 38% decline from the second quarter of 2008 is driven by a 35% decline in volume, principally associated with lower housing demand.

Despite the decline in volume and sales, operating income increased $9.3 million. Excluding LIFO, operating income increased by $2.7 million, and restructuring savings, lower raw material costs and improved mix offset operating income loss due to the previously referenced 35% decline in volume. Compared to the first quarter of 2009, operating income for PP&S increased by $6 million, and gross margins increased by 260 basis points.

Contrary to the year-over-year comparison, the LIFO benefit declined from the first quarter of 2009 to the second quarter of 2009. Excluding LIFO, the gross margin expansion of 590 basis points can again be attributed to restructuring savings, lower raw material costs, and improved mix.

Our specialty platform reported sales of $214 million, which is a 29% decrease from the prior year as volume fell 25%. Unfavorable foreign exchange reduced sales by approximately 4.7%.

Operating income declined by $2.6 million versus the second quarter of 2008. However, gross margins continued to show improvement in percentage terms. For the second quarter, we reported gross margins before -- gross margins of 23.3% versus 18.5% in the second quarter of 2008.

As we said on our first quarter call, our international operations were not able to effectuate restructuring actions as quickly as our domestic operations, and this negatively impacted their first-quarter results of this year. However, we have made great progress accelerating the international restructuring during the second quarter, and we will see the full benefits of those actions in the second half of the year. A certain portion of these restructuring savings are reflected in lower SG&A, which was $1.2 million favorable, including $800,000 of negative impact from FX.

Comparing our second quarter specialty platform results to the first quarter of this year, sales and volumes both increased by 13%, led by a 50% increase in sales in Asia. Operating income increased $11 million sequentially due to the higher volumes as well as the positive impact of improved mix, lower raw material costs, and restructuring savings.

Our distribution business delivered sales of $135 million in the second quarter versus $208 million in the second quarter of last year. The 35% decline was driven by a 24% volume decrease with the remainder of the difference explained by lower selling prices as raw material costs fell year over year. Segment operating income declined to $3.9 million as a result of this lower volume. This illustrates how scalable this business is, and as we win new business and the economy recovers, we will see immediate operating income gains in distribution.

Our resin and intermediates segment, which consists of our SunBelt joint venture, delivered operating income of $8 million, which was slightly below the prior year. However, caustic soda prices have dropped significantly this year, causing R&I operating income to fall by $3.7 million from the first quarter. This trend will likely continue into the second half of 2009, and we will have more remarks on this topic in a few minutes.

Corporate and other costs before special items are $8.5 million higher than last year and include $3.6 million of incremental pension expense in 2009 due to the pension asset losses experienced in 2008. The remainder of the variance is due primarily to higher external legal fees, lower capitalization of IT costs related to last year's SAP upgrade, and higher incentive compensation.

Finally, excluding the unusual tax adjustments, tax expense with lower during the second quarter of 2009 versus the second quarter of 2008, principally due to tax benefits recorded in foreign jurisdictions related to exchange rate changes.

Before I hand the call over to Steve, I want to reiterate our near-term focus is on generating positive free cash flow and improving liquidity. We expect we will continue to be able to generate working capital improvement through our Lean Six Sigma efforts, and accordingly we do not see a need to borrow against AR -- receivable facility at this time. With our increasing levels of cash, we are gaining confidence that we will have greater flexibility to expand and grow our business in the future.

With that, I will now turn the call over to our Chairman, President, and Chief Executive Officer, Stephen Newlin.

Thanks Bob. I'm pleased with our second quarter results, most notably the sequential growth in earnings from the first quarter of this year. The improvement in earnings was driven primarily by restructuring savings which we are completing ahead of schedule, continued spending containment, and improved sales and sales mix. And I will speak about each today, but we will begin with some remarks about what we are seeing from a demand standpoint.

First of all, it was encouraging to see an 8% pickup in volume this quarter from the first quarter of 2009. This was significantly better than the 2% increase in volume from the first quarter of 2008 to the second quarter of 2008. We think this suggests we are seeing an increase in sales that goes beyond our historical seasonality and may also be an indication that destocking largely concluded in the first quarter. We view this as a positive sign and the possible beginning of a recovery in our end markets.

Recent housing and auto data suggest that those two end markets may have reached bottom. July consensus estimates for new housing starts are now estimated to approximate 550,000 units this year. US auto and light truck sales were estimated to be $10 million last month, but with the recent success of the Cash for Clunkers stimulus program, many sources believe 11 million builds is now possible.

We understand and recognize that these are just estimates and they are certainly subject to error and they can be influenced by recent stimulus events that may not continue. But nevertheless, they appear to have bottomed and may be trending positive.

We expect the pace, timing, and degree of economic recoveries will vary by region and end market. It shouldn't be any surprise that Asia appears to be leading the way. Our Asia sales grew nearly 50% in the first quarter of this year to the second. Much of this growth was in the electronics market where we believe certain customers may be replenishing inventory.

Globally, forecasting remains a challenge, largely because we have a limited visibility to demand. In the short term, this is partially due to trends in customer buying patterns, as many customers are more frequently buying in smaller quantities as they manage their own working capital and customer requirements.

Over long periods, macroeconomic factors and the effects of government stimulus programs remain unclear. As many of you already know, we're on a transformational journey to become a specialty company. We've said for some time now that we are focusing our business growth in higher margin, more differentiated specialty applications in attractive end markets such as electronics and health care.

As we continue deriving the specialty, we certainly have not abandoned two of our key markets, housing and automotive. Although they stand at the epicenter of the current economic crisis, the housing and auto markets will recover from the unsustainably low demand levels of today, and we think that they may have already hit bottom.

PolyOne is poised to take disproportionate advantage of the inevitable uptick in demand for houses and automobiles for two reasons. First, we have radically reduced capacity and related operating costs; and second, because we continue to create innovative, value-added solutions for these customers. Trends toward lower-cost, smaller and greener homes and lighter, more fuel-efficient vehicles certainly favor our products.

Our commitment to our customers and innovation was perhaps best illustrated this quarter by our participation in the National Plastics Exposition, or NPE, which is held once every three years. Many companies chose not to attend this year because of the challenging economic environment. However, we certainly saw value in participating.

Our presence at NPE was important because our customers and our prospects were there. Our booth showcased our commitment to our customers through innovative solutions, which we believe is a competitive differentiator for PolyOne. We introduced 10 new innovative product platforms ranging from optical fiber applications to bio-based soft touch thermoplastic elastomers.

While overall registration and attendance at NPE were down this year about 30% from 2006, we were extremely pleased with the total number of quality leads generated. Over 70% of the leads expressed interest in our specialty materials.

We also featured our biomaterials at the emerging and sustainability pavilion at NPE, and a high traffic indicated this is rapidly becoming a viable new market. This emerging application drew strong interest with over 100 leads related to our bio-based materials.

Many of the inquiries were also related to innovations for medical devices and additional interest in our targeted healthcare markets as well. Some of the key areas of heavy interest included pharmaceuticals, IV kits, catheters, respiratory, and anesthesiology applications.

Our specialty engineered materials business continues to successfully sell products under their Trilliant HC line of medical materials and has also developed a line of medical tubing products for which we were recently awarded the 2009 Frost & Sullivan Product Line Strategy of the Year Award. This is a second Frost & Sullivan award we've received in less than a year.

We mentioned briefly that we are implementing our restructuring actions ahead of schedule, and as of the end of the second quarter, we are more than 90% complete. Bob covered most of the details related to these actions and the remaining costs and savings expectations, so I won't repeat them.

But I do just want to acknowledge of critical point that we previously stated. Our international operations and specialty platform benefited the most sequentially from restructuring savings in the second quarter. Specialty operating income is now 35% of our total operating income before corporate charges. Recall that our goal is to derive 50% of operating income from specialty business. And we are pleased that our second-quarter results puts us back on track to achieving this targeted operating income mix. This is critical to our transformation because the specialty end markets produce higher margin, more sustainable revenue streams that were historically undervalued at PolyOne.

In the last three years, we have made great strides in improving our specialty earnings profile, as evidenced by the expansion of gross margins from 14.4% in 2006 to 21% for the first six months of 2009. We are well on track to reach our stated specialty gross margin goal of over 25% by 2012.

For all of PolyOne, our continued success at driving gross margin expansion toward our long-term goals will be dependent upon our ability to effectively differentiate our products and service offerings as well as managing pricing in what may become an inflationary environment.

Earlier, I noted that lower raw material costs help our earnings this year compared to 2008. But this trend may be diminishing as suppliers have begun announcing price increases during the third quarter. I think we've done a pretty good job at managing price and improving sales mix this year, and this certainly has helped our margins.

Looking ahead, this may be more challenging, specifically as we see significant growth in cyclical end markets such as housing and automotive. However, we will not accept all new business regardless of proper profitability. This has long been an irrational and failed strategy in our industry. Further, PolyOne will remain selective in allocating available capacity and in gaining new business.

A great example of our operational and commercial excellence is our Lean Six Sigma effort, which continues to deliver impressive results in production efficiencies, greater sales force effectiveness, and working capital improvements. Bob already covered the working capital stats, so I will just make a few comments about on-time delivery related to this.

We took a small step back this quarter as on-time delivery slipped from 95% to 92%. Just let me remind you that we hold ourselves accountable to the customer request date, not a negotiated date, so this is holding us accountable to the highest level of performance.

This metric was challenged for three reasons this quarter. First of all, we were consolidating operations as a result of restructuring actions. Second, we've been reducing inventory to improve free cash flow. And third, and perhaps most significantly, as I mentioned before, we've seen a dramatic shift in customer order patterns as customers are now buying smaller quantities more frequently.

So while our second-quarter on-time delivery rate was slightly below our target, it's a respectable performance given the significant amount of actions and new trends that have taken place. Furthermore, we believe that these levels maintain best in class performance.

With increasing cash and a reduced cost structure, we are gaining more confident about our future. And we will emerge from the recession a leaner, healthier organization. We are encouraged by the modest uptick in sales from the first quarter to the second as well as the continued expansion of gross margins already discussed.

As new housing starts and auto production appear to be bottoming, we remain cautiously optimistic the worst is behind us, but we are mindful of rapidly changing conditions. Such changes in the near term include our expectation that favorable increases in chlorine prices will not be enough to offset unfavorable caustic soda price trends, and this will put pressure on earnings from our SunBelt joint venture in the second half of 2009. Further, with raw material cost inflation, LIFO may transition to a headwind in the second half of 2009.

It's unfortunate that these items may overshadow the progress we've made improving our core earnings. However, they are purely a function of the current economic environment. We will continue to focus on our strategic platforms, and we remain confident our four pillar strategy of specialization, globalization, and operational and commercial excellence are transforming PolyOne into a specialty company.

So what does all this mean right now? Well, this past year has been consumed by a lot of internal projects aimed at restructuring, improving cash flow, and related initiatives. Throughout this period, I am pleased to say that we never lost sight of our existing customers. However, those competing priorities did dilute our sales prospecting efforts.

I am pleased we are now repositioned to launch aggressive sales force productivity initiatives with specific targets on revenue growth. With focused sales force training, more innovative products, solid marketing support and pricing discipline all established, we must now turn our attention to growth of both revenue and profitability. And that's our top near-term priority.

In conjunction with this, we will now diligently resume selective sales force additions to add feet on the street as we pursue our $30 billion market potential. We expect to add 10 to 15 additional sellers in the next two quarters. Now, that's not a massive number, but it's an important step and directional change. It reflects our confidence in our recruiting, hiring, and training process, enabling growth in attractive markets.

Yesterday we announced that DuPont has selected PolyOne Distribution as its key distributor for less-than-railcar orders in North America. This is a headline win for PolyOne. It's a really big deal in our industry, and it's another example of how the POD team is winning new business.

On July 22, we separately announced recent developments between PolyOne Distribution and several resin suppliers, creating an expanded portfolio of solutions for our customers. These included becoming an exclusive US national distributor for Ineos ABS, exclusive US distributor for Diamond Polymers' Centrex ASA and Diamond ABS polymers, and being selected as North American distributor for MRC Polymers.

PolyOne commitment to helping customers win new business and enhance profitability is second to none. Our exceptional network of facilities, technical support, and just-in-time delivery capabilities coupled with the strategic addition of new products to our solution set will enhance our customers' ability to meet the challenges they face in today's economic environment.

The expanded relationships with these marquee suppliers is further evidence of this commitment and our success in our distribution business. And we believe our suppliers and customers now recognize us as the market leader in less-than-railcar distribution.

So thanks to the POD team for all their hard work and efforts, and I would also like to thank all of our employees for their outstanding contributions. Their relentless resolve will allow us to achieve our long-term strategic platform goals.

With that, I will now turn the call back to Onika to open the line for questions.

(Operator Instructions). Saul Ludwig, Keybanc.

Congratulations on a terrific quarter. The LIFO all -- the $5.4 million was all in the performance sector?

No, there was about the $1.5 million in specialty, so which is split between color and EM.

Okay. The corporate expense which you show there as $21.9 million, that included $4.6 million of specials, right?

Correct.

So that meant the number was sort of $17 million, which was up a bunch from the first quarter when I think you had only $12 million if you didn't include any specials there. And should we be thinking about a $17 million run rate for corporate as we look to the balance of the year?

I think it's actually better to think about the run rate SG&A being where we are on a six-month basis. And the reason being that we record incentive compensation accruals pro rata based on earnings across the quarter. So given the fact that the first quarter was a small loss of $0.04 a share, and then we've got $0.13 in the second quarter, there's a greater amount of SG&A recorded in the quarters where we are earning more money. But if you look at it on a six-month basis, I think that's a reasonable assumption for run rate for the balance of the year.

And just a final question, you quantified what you thought your cost savings initiatives were going to deliver. How much of those cost savings fell into the second quarter that helped you? And what should we think about the third and fourth quarter cost saving component?

Sure. We -- the savings were $14 million in the second quarter. We expect those to get to $15 million in the third quarter, which is the $60 million run rate we referenced earlier.

Thank you very much.

Frank Mitsch, BB&T Capital Markets.

Can you -- Bob, can you take a minute or two to talk a little bit more about the tax adjustments and the appeal process and the timing of all this? The special -- the $0.06 a share special for the quarter?

It relates to principally one audit in a foreign jurisdiction that we are not going to name -- for obvious reasons. And this was just related to tax planning that we had in this foreign jurisdiction. It has been assessed, and we do have to post a letter of credit for it, and I would expect the appeal process could take a very long time. So fortunately, we don't have to pay cash. We can post a letter of credit. But I can't give you an accurate estimate of how long it will take to resolve.

The -- what period does this tax audit assessment apply to? For example, when was this liability generated?

It actually is an estimate of our total exposure for the last seven or eight years and relates to that total period of time based on the -- again, the audit assessment.

All right. And so, this is not -- in your opinion -- are you going to start accruing at a higher level in this foreign tax jurisdiction going into the future?

Yes, we will. Based on the assumption that we have accrued for what we believe is the assessment on the prior years, we will ultimately accrue at a less -- we will accrue at a higher rate going forward.

All right. And Steve, you talked -- I think you said Asian sales were up 50%. Was that in a particular unit or was that for the company overall?

That was the company overall, but it was heavily skewed toward our engineering materials, which was supporting the electronics business in Asia. We had a nice uptick up electronics. Of course, we still haven't recaptured all the decline that we had when we had an abrupt change fourth quarter of last year. So it's a good statement of directional recovery, but it was predominantly in electronics.

Great. And lastly, the PolyOne Distribution business was essentially flat sequentially. Is there any expectation for an uptick in that business for the balance of the year in terms of sales?

We are seeing a little bit larger size of orders. Each month seems to be getting a little bit better for us. What we are really excited about, if you saw, and I'm sure you did, our announcement about this change in distributorship with DuPont. Now, that will probably land more on our lap in the fourth quarter. But we're pretty excited about this and other changes in distributor relationships that we think favor us substantially. So we expect some business wins, and we expect our business growth rate to accelerate in POD, regardless of what happens to the overall economy.

So we should be picking up some share in there in addition to any additional momentum we get from auto and housing picking up. So we're optimistic about the outlook for distribution for the remainder of this year and into early next year as far as we can see right now.

Are a great. Thank you.

Christopher Butler, Sidoti.

I think the main question that I have kind of follows up on the last question. If we are looking at the improvement that you are talking about, if I remember correctly from the investor day, the conversation was surrounding stability but not necessarily improvement. We are six weeks forward now. What's changed here over the last six weeks that is giving you this little bit of more optimism?

I think the pickup in order pattern from our customers is showing some signs of rebuilding. I think that we feel comfortable now that the destocking is behind. We don't know exactly the new run rate, and we don't know if we've level off at the new run rate yet. It appears as though momentum continues to be building. And it's not a rapid acceleration. By no means is there a V involved in the process, but we are feeling better about the flow of orders into the organization that is sort of happening sequentially month over month.

If we are looking at a situation where the inventory levels have all been drawn down and we have normal seasonality, which you pointed to, do you have any indication that the end customer is purchasing any more? Or is this just a removal of the chinks from the supply chain, so to speak?

That's a really difficult question for us to answer because we don't have visibility into the end customers, other than the stories that we listen to carefully that our customers tell us. But we feel -- a lot of end customers, you read the news, Proctor & Gamble had a tough quarter. They are a good bellwether for a lot of the end customers in certainly the consumer space.

But I think where we are at is, relative to where we've been here for the last few quarters, things are settling in at a new run rate. It seems to be getting a little healthier each and every month. So I think it's a little more than just the end of destocking for us. It is a consumption rate now that appears to be building slowly and modestly, but it's a trend that we like.

I appreciate your time. I'll go back in the queue.

Rosemarie Morbelli, Ingalls & Snyder.

Congratulations. Following up on Chris's question, when you are saying that you are seeing healthier order patterns every year, every month, are we talking about the same customers? Or are you talking about new customers deciding that they need to replenish their inventories a little more, which makes a big difference. If it is the same customer, they are selling whatever they bought the previous month. If it is -- if they are not selling, then you will have new customers ordering. Do you have a feel for that particular picture?

Yes. I mean, we can't dissected it to probably the degree you would like, but we are gaining. Certainly we think we are gaining new business at a rate that's pretty consistent with the last 12 months. So that's not a major change. We always have new business coming in, some new business leaving. We've got price adjustments up and down, and then we've got this whole establishment of how much business every customer is placing with us.

What we can say is that the size of the orders, and I mentioned this in the prepared remarks, the size of those orders are smaller. But it's more due to a frequency of -- or it's more due to the management of working capital by our customers and not really associated with use.

So what I think we're finally seeing is we've reached that period where a sort of a steady state of inventory has occurred. And so this build that we are seeing, modest as it is, is to us an indicator that the economy, the markets, the end markets that we serve are getting somewhat healthier. I sure am not ready to recall it a recovery of any major magnitude, but it feels to us like we have seen the worst of things and we are seeing gradual improvement in these end markets.

Okay. And when I look at your inventory, you have made unbelievable progress there and your turnover is 11 times. Is that a sustainable level when the economy recovers? Or will you have to build it up even though it seems as though orders, the size of orders is smaller?

We believe that the inventory improvements that we have made are sustainable. If you look at our total working capital days now being 35, that's roughly where our inventory days are. They are turning almost 12 times. Just about 11. And so obviously if sales go up you might see some incremental investment in inventory associated with that. However, our goal is to continue to improve inventory turnover, and we consider our current performance to be average. So we want to be -- try to be at much better than where we are now, and I think we can manage working capital investment in a growing demand environment.

Let me just add, I think we attacked this in the right way. We put a major team of well schooled, Lean leaders on this, had kaizen events. We involved sellers, so we weren't forgetting about those customers in the process, and I think we did this with a strong foundation underneath it and with a mindset of continuous improvement here, and I believe -- our expectation is that we can maintain this and hopefully build on that.

I'm not pleased that we had a little hiccup in delivery, but it wasn't a train wreck by any means. And I still think we're managing that as well as anybody else that's in the space, so we will keep working on improving the turns and still meeting our on-time delivery schedule goals.

And if I may ask one last question, based on all of the comments you have done, you have made regarding SunBelt, regarding LIFO hitting, regarding raw material costs going up, and it remains to be seen whether you can get selling price increases. Are you guiding us to the possibility of negative results in the third quarter? Is that a possibility?

Will we are not specifically providing any guidance, and it's just very difficult to predict order of magnitude on either of those two items, frankly. And I will give you a good example. One is that inflation in and of itself can cause a negative implication from a LIFO standpoint. However, we continue to expect that we're going to drive inventory down on a quantity basis, which could offset some of that. But it really remains to be seen, again, by how much raw material cost inflation we will see in the second half.

And the SunBelt, you still expect a positive return given the price situation there?

Again, I think it remains to be seen on where pricing settles out for the second half of the year. So we're not providing any more guidance on those numbers. Absent to say what we did earlier, which is that I think it's likely it will be below the second half of the -- excuse me, below the first half of this year.

We just are not in a position -- there's just so much going on in this space. It's moving rapidly. Caustic fell precipitously and now chlorine is moving up. There are too many dynamics that are unpredictable for us to be looking forward too far with any kind of numbers on that front.

Thanks.

Steve Schwartz, First Analysis.

If you could, Steve, you mentioned restructuring was about 90% completed, and previously you'd said that in 2009 the savings would be $35 million to $40 million and then maybe in an incremental $20 million in 2010. That would get us to about $55 million to $60 million. Where do we stand with that being 90% done? Do you see less incremental next year? More falling in this year?

Well obviously, taking the costs out a little earlier gets us less of an increment next year. We'll carry over those savings. But the comparison year over year will be lower.

We did $14 million in this quarter. We said $60 million. We stand by that number. It's a $15 million a quarter, so if you -- and we will have that. We believe we will have the full $15 million for Q3, Q4. Call it $14 million in Q2, and we had a little in Q1. So there will be some carryover from Q1, and maybe call it $1 million in Q2, and then we will kind of be at our run rate next year based on the program we've mapped out right now. That's not to say that we stop looking for opportunities to save money, but that's what we've outlined in our very specific restructuring plans.

I don't know if, Bob, you have any other adds (multiple speakers)

Just for modeling purposes, for example, we had about $6 million of savings in the first quarter. That moved to $14 million in the second quarter this year. So if you get $30 million in the second half, you're looking at maybe an incremental $10 million to $12 million next year.

Very good. That's helpful. Then you mentioned the price decrease in distribution. And it looks like it was maybe around 11%. What does the profile of that look like over the next couple of quarters?

Well I think, actually, you could start to see that going in the opposite direction just based on raw material costs. Recall our distribution business is largely a pass-through for those. And so the top line just reflects the movements in the underlying commodity markets more so than our other businesses. But where we saw that being a negative in the second quarter on the top line, I think that could start to go the other way, particularly if you recall in the fourth quarter of last year we had a pretty substantial decline in pricing that came through into the first quarter of this year.

Okay. And then lastly, this DuPont deal, you mentioned it kicks in after this 90-day transfer period fourth quarter. What could that be worth to you on the top line on an annual basis?

We're still developing information, and I'm not at liberty to share too much, but here's what I can tell you, that PolyOne distributes roughly $60 million worth of DuPont products, and if you kind of align Ashland and PolyOne, roughly the same size. Maybe they are a little bit larger. And if they have the same kind of mix that we do, that would be kind of in the ballpark of what's at stake here. So it's a very nice prize for our sales force to capture.

That's helpful. Thanks guys.

Dmitry Silversteyn, Longbow Research.

Good morning. Let me add my congratulations to a solid quarter here.

A couple of questions. Number one, you talked about inventories coming down on about $50 million from the end of last year. Did declining price of inventory play a big role of that? Or was it largely volume declines that you've done?

No, price does -- price has obviously had an effect on that. The quantity decline is about -- just north of 20% in quantities. So (multiple speakers) you'd measure that in pounds.

Got you. So that as we're looking at stabilization of raw material costs, would you be able to maintain your 11 turns levels? Or do you expect it to actually maybe go down to more like 10 or nine?

Well, we are targeting a higher turnover, and we have internal goals of getting there quarter by quarter. And so obviously with inflation inventory balances will increase on a flat quantity basis, but so will sales. So our objective is to continue to improve turnover in the future.

That's helpful. And then on -- you had a very significant recovery of profitability of the specialties business, obviously, so all of them were improving. But I have a particular question on international operations where you've gone from a loss to a substantial profit here in the second quarter. You mentioned the fact that restructuring actions are going slower in international markets, and my understanding is that the raw material tailwind in Europe isn't quite as strong as it is in the US, and maybe a quarter or two before it gets to levels we are seeing here in the second quarter and the beginning of the third quarter. So what was the driver for this pretty material expansion of margin and reversal of the losses that you've been posting?

Well, first of all, I would say on the restructuring side, the incremental improvement is about $3 million to $4 million Q1 to Q2. We also mentioned that we did have an uptick in volume. Specifically we talked about Asia increasing 50%. As we've said before and I think you know, Asia is about 7% of our total business. So we're not talking about huge numbers here but good gains nonetheless. So those are two big drivers as well as just volume improvement in Europe and again, continued expansion of restructuring actions in our -- from a specialty platform perspective in our other businesses, EM and color.

Okay. All right. And then, on the -- so on the specialty platform and domestically, the improvements there were largely restructuring-driven or largely mix-driven?

It was really both. I would say it was heavy on restructuring, to the tune of roughly $5 million to $6 million -- or $4 million to $5 million.

And raw materials didn't play much of a role I take it? It's going to be more of a second-half event for raw materials, that delta to get really positive for you?

Well, we actually saw raw materials costs continue to come down through most of the second quarter. What we are thinking is that that's going to begin to reverse and we will see higher raw material costs in the second half of the year.

Sequentially. But on a year-over-year basis, there's still going to be a fairly positive comparison?

I think year over year that's right on the third quarter. It remains to be seen on the fourth quarter.

Okay. Got you. All right. Well, that's all I have. Thank you very much.

Mike Judd, Greenwich Consultants.

Good morning and congratulations on a good quarter.

My question, I would like to follow up to Maryanne's question. Or -- sorry -- Rosemarie's question. With SunBelt, I guess Olin indicated in regards to their chlor-alkali business last week during their conference call that they expected their business to operate at an operating profit level in the ECU business at a loss in the third quarter. Is there anything that's significantly different about SunBelt's -- the joint venture assets relative to Olin's other assets that would indicate that its performance would be any different from that of Olin's?

I would say two key differences. The first is, I think when Olin talks about their results in total, they obviously have a mix of different diaphragms, diaphragm grades. So we have a slightly I think -- a membrane -- better membrane grain in SunBelt. So there's a little bit potentially better pricing there.

However, from a -- I think the biggest difference is that we have a take-or-pay contract with Oxy and effectively operate at a flat level of ECU volume. And so one of the things that I think Olin was citing was a decline in volume due to demand, where we don't see that at SunBelt, and we effectively are operating at 250,000 ECUs.

Okay. And then I just want to make sure I understood the comments about the corporate and eliminations. Were you implying that sort of the ongoing run rate for that number should be around $15 million per quarter? Is that about right?

Yes. What I said was that I -- we've got a different in terms of how we record our incentive accruals from one quarter to the next, but I think if you take the six-month run rate, that's a reasonable assumption for the second half of the year.

Okay. So if we combine basically lower profits at resins and intermediates, and potentially higher corporate and elimination costs versus what we had previously modeled in, and then we take the FIFO/LIFO issue and layer that in but also look at higher volumes, net/net all those things, this doesn't imply that second-half profits should be down versus first-half?

Well, I think that -- well, first of all we are not giving any guidance because we do believe there is still a lot of variability to how those numbers can move, and limited visibility to demand. But if you just want to look at the second quarter, for example, knowing that we have $5.4 million of LIFE, what we've called benefit, and you assume that goes to zero or potentially even a tailwind, you could be talking about a $0.06 change pretax for the third quarter. How that plays out for the balance of the year remains to be seen.

Thanks for the help.

Bob Amenta, J.P. Morgan.

Two quick questions. I just wanted to follow-up on SunBelt. Obviously results would be down, but saw the Q come across, and for the second quarter anyway partnership income, $18 million versus $19 million. So basically flat. Is there an inherent lag since the distributions, even if the second half of the year is poor, that you still may have some dividends on to come, if you will, from the second quarter? Or is there nothing like that going on?

Well, if you're talking about cash, there's always a lag on the cash. So if you know what the full-year earnings are for SunBelt, the cash distributions are heavily weighted towards the second half of the year. And the reason is that per the JV agreement we have with Olin, we retain enough cash within the venture to cover the principal and interest on the debt within the venture, and then begin to distribute out cash from there.

Okay. So the -- just looking at -- it's not much of a balance sheet. But it shows non-current liabilities, $97 million. What is the debt balance there at that entity now?

Our share of that is 55, so it should be 110.

So second half, you still may have some dividends coming just by virtue of what happened in the first half.

Exactly.

And then just lastly on CapEx, you had previously said $35 million to $40 million. I don't know if you've changed that. You're only at $12 million for the first half.

That's right. I think we will be at the lower in the that range. We see $35 million as reasonable, and we obviously did $12 million in the first half of the year, and there could be some incremental spending in the second half associated with some of our restructuring actions as well as potentially incremental investments in our international operations.

Okay. That's all I have. Thanks. Good quarter.

Dmitry Silversteyn, Longbow Research.

Actually my question has been answered. Thank you.

Thanks, Dmitry. I think that's the last call.

Okay. I'd like to thank everybody for joining us today. We are confident we can balance our near-term objectives during this downturn with our long-term specialization strategy and deliver shareholder value. So we look forward to sharing our progress with you again next quarter. Thank you all very much.

Ladies and gentlemen, this concludes the presentation. You may now disconnect. Thank you and have a good day.