Avient Corp (AVNT) 2009 Q3 法說會逐字稿

Good morning, and welcome to the PolyOne Corporation third 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 forecast 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 applied 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 the PolyOne website 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 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 in today's call, we will be comparing the operating results for the third quarter of 2009 to the third quarter of 2008. This morning we announced our results for the third quarter. Separately, we filed a Universal Shelf Registration with the US Securities and Exchange Commission and issued a separate release to that effect. I'll provide comments on the Shelf at the end of my planned remarks, and we'll leave time to answer any questions you may have about that, as well as our results for the quarter.

For the third quarter we reported sales of $548 million and net income of $49.6 million or $0.53 per diluted share. Year-over-year top line comparisons continue to reflect the effects of the recession on end market demand which has impacted all of our businesses around the world. Third quarter sales fell 25% compared to last year, driven by a 20% decline in volume. Despite this, earnings improved. Excluding special items and one-time tax items as enumerated in our press release, we reported earnings of $0.14 per share versus $0.13 per share in the third quarter of 2008.

Our headline story today centers around the improvement in Specialty platform earnings. Operating income from our specialty businesses increased to $19.5 million for the third quarter, a new record for PolyOne. All three of our specialty businesses reported higher operating income, and collectively, Specialty operating income as a percentage of sales reached 8.5%, also a new record.

During our last earnings call we cautioned that in the second half of this year we expected lower earning from our SunBelt joint venture and that LIFO benefits would diminish versus the first half of the year. Both of these trended as we expected during the third quarter, versus the second quarter SunBelt earnings declined $4.2 million, and while LIFO provided a benefit of $1.2 million for the third quarter, this was $4.2 million less than in the second quarter. Fortunately, revenues for the third quarter were better than we expected as they increased 10% from the second quarter on about 8% higher volume. Better top line plus continued margin expansion allowed us to offset the previously described headwinds. And earnings before special items improved, not only versus the prior year, but also against the second quarter.

Now let's talk a closer look at each of our segments. Our Performance Products and Solutions segment reported sales of $181 million in the third quarter. The 34% sales decline from the third quarter of 2008 was driven by a 27% decline in volume, principally due to lower housing and auto demand in the US. Despite the decline in volume in sales, operating income increased $6.7 million. Excluding LIFO, operating income increased by $0.5 million as restructuring savings, lower raw material cost, and improved mix offset operating income loss due to the previously mentioned 27% decline in volume.

Compared to the second quarter of 2009, operating income for PP&S decreased by $2.7 million and gross margins decreased by 180 basis points. Excluding LIFO, operating income increased by $800,000 as gross margins expanded by an additional 20 basis points. The gross margin improvement was driven by volume gains, partially offset by unfavorable mix as much as of the volume pickup was in contract manufacturing.

Our Specialty platform reported sales of $230 million, which is an 18% decrease from the prior years, volume fell 15% and unfavorable foreign exchange reduced sales by approximately 3%. Despite the lower volume and negative FX, operating income increased by $5.2 million versus the third quarter of 2008 due to mix improvements, restructuring savings, lower raw material costs, and LIFO benefits. LIFO added $1.7 million of operating income during the third quarter.

For the third quarter we reported Specialty platform gross margins before special items of 24.8% and, as I mentioned, operating income of 8.5% of sales, both of which are records for PolyOne. Comparing our third quarter Specialty platform sales to the second quarter of this year, sales increased by 7% as volumes increased by 5% and FX added about 2%. Operating income increased $4.9 million sequentially due to the higher volumes as well as the positive impact of improved sales mix and foreign exchange.

Our Distribution business delivered sales or $163 million in the third quarter versus $215 million in the third quarter of 2008. The 24% decline was driven by a 10% volume decrease with the remainder of the difference explained by lower selling prices as commodity costs fell year-over-year. Compared to the prior year, distributions operating income declined $2.9 million to $6.5 million principally due to lower volume. However, comparisons to the second quarter of this year have improved considerably. Third quarter operating number was $2.6 million better than the second quarter, principally due to sales increasing 21% sequentially.

The Distribution sales improvement was driven by 11% higher volume and commodity inflation, as market pricing reflected higher commodity costs which are largely passed through to customers in in business. Much of distribution's improved volume is due to an uptick in US demand as well as new business gains, and we are now starting to see transition business from the DuPont agreement.

Our resident Intermediate segment which consists of our SunBelt joint venture, delivered operating income of $3.8 million, which was $5.8 million below the prior year, and $4.2 million below the second quarter. The decline in earnings was entirely due to falling ECU prices. It appears that these prices have stabilized and are beginning to move up, although we do not expect to see the benefit of this improvement in pricing until the first quarter of next year.

Corporate and other costs before special items were $2.5 million higher than last year and include $1.4 million of incremental pension expense in 2009 due to the pension asset losses incurred in 2008. Compared to the second quarter, corporate and other costs declined $4.2 million due to previously announced changes to our post-retirement benefits, the pension expense adjustment in non-recurring costs associated with NPE incurred during the second quarter.

Third quarter results included pre-tax special items netting to $27.5 million of income and consisted of the following. $23.9 million gain related to cash received from our former parent company as partial reimbursement for previously incurred environmental costs, $21 million curtailment gain associated with post-retirement benefit plan changes, $12.1 million of expenses associated with previously announced restructuring actions, and $5.4 million associated with environmental costs associated with plants no longer owned or operated.

Shifting now to cash flow and liquidity, in the third quarter we generated $79 million of free cash flow and ended the quarter with$ 241 million of cash on the balance sheet ,which includes the $23.9 million from our former parent company. After paying down $20 million of our debt, our liquidity increased to $344 million, partially due to the higher cash, but also because of increased availability under our accounts receivable facility. Our liquidity has more than doubled from the beginning of the year. Despite a 10% increase in sales from the second quarter, working capital improvements added to cash flow, and we are pleased with the efficiency gains we continue to make. Most notably, we increased inventory turn over to 10 turns from below 7 in the prior year, and reduced past due accounts to 11% during the quarter from 23% at year end. We believe we have adequate levels of cash and liquidity, and as such we paid down $20 million of short-term debt during the quarter. Our accounts receivable facility remains undrawn and we see no reason to borrow at this time.

While we did file a Universal Shelf Registration today with the SEC, we do not have plans to issue securities in the immediate future. However, we believe that having a Shelf Registration in place is prudent as it provides PolyOne with even greater financial flexibility in the event we identify strategic opportunities that may require additional capital. The Shelf Registration Statement when declared effective by the SEC will provide PolyOne with the ability to offer and sell from time to time in the future in one or more public offerings up to $450 million of equity, debt or other types of securities described in the Registration statement or any combination of such securities. The proceeds of the securities may be used for general corporate purposes including acquisitions, capital expenditures and repayment of debt. The specifics of any potential future offering along with the prices, terms, and use of proceeds in any securities offered by the company will be determined at that time of any applicable offering and will be described in a prospectus supplement at the time of such applicable offering.

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

Thanks Bob, and good morning everyone. I am going to cover Q3 from my perspective and try to add color to Bob's comments. Consolidated sales increased 10% versus the second quarter of this year driven by an 8% pickup in volume. Demand improved across all end markets, and it's encouraging that each of our platforms reported sales and earnings growth compared to the second quarter of this year. Overall, demand is still well below where it was a year ago. But top line comparisons to 2008 have improved with each quarter of this year.

I am particularly pleased to report the record setting results for our Specialty platform this quarter. As Bob mentioned, we achieved $19.5 million of Specialty platform operating income. That's the highest ever in PolyOne history. Specialty gross margins expanded to 24.8%, and operating income reached 8.5% of sales, also both records, and further evidence that our transformational strategy is working. As pointed out in our press release, Specialty operating income for the third quarter contributed 47% of total business unit operating income. When you consider that at the end of 2005 PolyOne derived only 2% of business unit operating income from Specialty businesses, you can begin to appreciate how far we've come. And while we are highly encouraged by this progress, we are far from being finished.

Since 2007, we've said publicly we aim to derive 50% of our business unit operating income from our Specialty platform. I want you to know it's not lost on us that the 47% current quarter contribution from Specialty is helped by currently depressed earnings from the housing and automotive markets, as well as our SunBelt joint venture. As though markets recover, exceeding the 50% goal will be more challenging, but we view this as a good problem to manage. Housing and auto remain key end markets for us, and we believe they have reached bottom, and the recovery should present upside for us, particularly given our lower cost structure.

2009 has been a year of considerable change for PolyOne and it's also been a year of progress. We have strengthened our balance sheet and the earnings power of our Strategic platforms. Looking back at our accomplishments, our first quarter 2009 results were met with a sigh of relief as we reported significant cash flow and eased investor concerns about our financial position. During the second quarter, earnings per share improved as a result of restructuring actions, improved mix and lower raw material costs. The second quarter illustrated the earnings capability of our strategic platforms and the type of leverage we would see as demand improved.

The third quarter provided additional evidence of this as gross margins and operating income expanded. At 18.1% gross margins before special items for the third quarter expanded 630 points over the prior year. We outlined the drivers of this expansion in our earnings release today. If we exclude LIFO reserve charges and changes in that, gross margins improved 520 basis points despite a 20% decline in volume.

In connection with our four pillar strategy of specialization, globalization and operational commercial excellence we set aggressive gross margin and return on sales expansion goals for each of our strategic platforms, and these goals are unchanged today. We focused on gross margins initially as a measure of our product profitability. But clearly gross margin is ultimately a means to an end which, of course, is higher operating income and earnings per share. For example, we set profitability goals for our specialty platform of 25% to 35% gross margins with return on sales of 10% to 12%. While two of our specialty businesses, specialty color additives and inks, and specialty engineered materials met these goals for the third quarter, we still have to get the entire platform to attain this level of performance, and achieve and grow this level on an annualized basis.

To consistently reach these goals, our priorities are crystal clear. First of all, we need to continue to win new profitable business at a faster pace. We also must reduce costs in working capital through the ongoing successful deployment of Lean Six Sigma, and these are the two most important priorities of our company today. When I joined PolyOne, the Company was focused on moving pounds regardless of profitability. Through our commercial excellence initiative and new incentive programs that reward sellers for profitable growth, we changed the mindset of our commercial organization. We made some tough decisions to prune unprofitable business, and in some cases shrink our business.

Our color business is a perfect example of this. Color lost money every year of its existence until 2007. And for the third quarter, our specialty color additives and inks business reported return on sales in excess of 10%. While we are proud of this success, we recognize that it's now time to focus on profitably growing the top line as well. We are cautiously optimistic that the worst of the recession is behind us and we can modestly invest in new sellers, accelerate innovation and expand our Lean Six Sigma initiatives, as well as grow our international presence.

To this end, we are a cross-selling initiative whereby sellers will be rewarded for their ability to increase sales for other PolyOne businesses. A great avenue for this is our distribution business which serves 5,000 customers. We anticipate this pilot program will become a full launch in Q1 of 2010 at our sales meeting in February.

Cross-selling allow us to further capitalize on and leverage customer penetration by our specialty businesses. However, our success in this regard will largely be predicated upon our execution and our ability to innovate and differentiate PolyOne from our competitors. New products are the key to differentiation and our vitality index is a measure of our success. You all know we've stated a goal of deriving 25% of consolidated revenues from products introduced within the last five years. That's a measure that included our distribution business which has no research and development. So while we will continue to hold all of our businesses accountable to innovate and drive new products to market, the primary area of incremental formulating R&D investment is our specialty platform. So we believe our specialty platform vitality index is a more relevant metric. And for the third quarter, that was 36%. We believe a range of 35% to 40% for our specialty business is appropriate.

In addition to winning new accounts and expanding gross margin with new and innovative products, we continue to build out our Lean Six Sigma initiatives and our second class of black belts will begin their formal training in January of 2010. I am pleased by the impact our LSS deployment has had this year in reducing cost and working capital. We generated $118 million of cash flow from working capital reductions alone. Our second class of black belts will focus on improving sales force effectiveness and efficiency, streamlining sales and operations planning and gaining further synergies from global sourcing, to name a few. Our goal will continue to be 100 basis points of annual gross margin improvement from our manufacturing businesses through the successful execution of Lean Six Sigma.

Lastly, on growing internationally, we have a strong foothold in China and we are making good progress this year with recent investments in India, Japan and Poland. We will continue to capitalize on our positions in Asia and Eastern Europe, but will also look to make an initial investment in our specialty businesses in South America where we recognize we have a gap in our international service reach. Brazil is one of the fastest growing economies in the world. Our global customers are there and we need to be there, too.

Before we end the call to take your question,s I'd like to talk for just a moment about our expectations for the fourth quarter and 2010. Last quarter at this call we cautioned that during the second half of 2009 we would see lower earnings from our SunBelt joint venture and diminished LIFO benefits, and both of these statements proved correct during the third quarter. We did see better than expected volume in revenues and that, combined with continued gross margin expansion and SG&A reductions, allowed us to improve earnings per share before special items from the second quarter of this year. While we are pleased with our progress and confident in our ability to execute in the intermediate and long term, we remain cautious about near term demand. Further, we historically experience seasonal demand declines in the fourth quarter in our end markets, and this may be exacerbated this year by extended customer plant shut downs in December.

We continue to hear customers making cautionary remarks about the fouth quarter, and we cdan't dismiss those comments. With inventory levels being low, these statements may prove too pessimistic, but we have to plan for what we are hearing.

Finally, publicly reported Chlor-Alkali prices may have bottomed during the third quarter, but we expect SunBelt earnings to fall sequentially as selling prices lag the publicly reported data. This, combined with further diminished benefits from LIFO and the seasonally lower volume, will likely result in the fourth quarter sales and earnings declining sequentially from the third quarter. That being said, as we look beyond the short-term seasonal phenomenon, we are cautiously optimistic about the direction of the global economy going into 2010. In general, we believe demand will improve next year, and combined with new business gains, we expect our 2010 revenues will exceed 2009. Our two key priorities are winning new profitable business and reducing costs and working capital through the continued successful deployment of Lean Six Sigma. As we focus on these priorities and navigate near-term demand concerns, I am confident we'll continue to grow long-term earnings and drive shareholder value. I will now turn the call back to Michael to open the line for your questions.

Thank you, sir. (Operator Instructions.) Your first question comes from the line of Frank Mitsch of BB&T Capital Markets. You may proceed.

Good morning, gentlemen.

Hi, Frank.

I wanted to ask about the Shelf. I think you said, Bob, that the three areas that you would look to use it would be M&A, CapEx and debt pay-down. And your net debt is the lowest level it's been in years. CapEx in the quarter was very light. So I was wondering if you can comment on what you would look to do or hope to accomplish if you were going to go the M&A route?

Well, at present and just to comment on the Shelf generally, we made statements in our press release and really just want to reiterate those that we filed the Shelf today. As a matter of prudence and to give us additional flexibility should the opportunities arise to do a deal and/or possibly exchange debt. We don't have any immediate plans for either of the following. As we think about M&A, I would think, as you said, we have the lowest net debt levels in a long time and that gives us more flexibility than we've had a long time. We are starting to look at our M&A opportunities. At present, the only things that are out there in the near term might be smaller in nature, and ultimately those can probably be funded with cash to the extent that we decided to move forward in any event. So that's really the best observations I can make about the Shelf. Again just to reiterate, it was done out of prudence and to give us further financial flexibility.

I guess we shouldn't read too much into that, then?

Shouldn't read anything into it.

Great. Steve, when you were commenting about the fourth quarter, you seem to make the case that perhaps it's not going to be as -- decline would probably not be as bad as you are hearing from some of the customers, given that inventory levels are low. Here we are the first week of November. Can you comment on the pace of business quarter to date?

Frank, it's really the last part of the quarter that concerns us, and it's really the anecdotal stories that we hear from our customers. And you know that we listen very carefully to them, and right now they are nervous about their business environment at year end and winding down inventories, and we heard some customers say basically from Thanksgiving forward things are going to be very difficult or may even take extended shutdowns. It's not across the board, and there are some very good things going on. Auto is doing better than we had anticipated.

It's just, here we are again and it's been a year of this inability to visualize and understand where the business is headed. We didn't know it was going to get as deep as it did, and we still don't know the full breadth of the recovery. It's more about uncertainty and listening very carefully to our customers and making sure that we plan for the worst. So we don't have to deal with surprises in sort of knee-jerk reactions that aren't very value additive. That is really all about I can say about it, Frank.

Great. There are some folks who are commenting more positively about auto builds in the fourth quarter being at similar levels if not better than the third quarter. At this point you feel it's more prudent to at least plan that the potential exists that the third month of this quarter could be more dour than that expectation. Is that what you are saying?

I'd say that sums it up pretty well. On the housing front, we are still not seeing recovery in housing, and you know that -- as you well know, that is more influential to our income than anything else. But I think your analysis of the auto market is it is continuing to improve modestly and that would help us. But it extends across many of our end markets where it's just an air of caution by a lot of our customers.

I was going to make one observation about auto. When you look at the third quarter sales increase of just over 10% versus the second quarter. About 3.5% of that actually came from auto. Some of that may have been tied to Cash for Clunkers. It's hard to make a direct correlation between the two, but we have continued to see auto improve through the course of October. And as Steve mentioned, it's really more of a concern about what might happen at the very end of the year, specifically the month of December that has us concerned the most.

Terrific. Thanks, fellows.

Thank you.

Your next question comes from the line of Rosemarie Morbelli of Ingalls & Snyder. You may proceed.

Good morning, all.

Hi.

Why was distribution so strong? Do you think that it was mostly inventory build up at your customers, or was the product actually going out the door?

Well, there are two things. If you mean versus the second quarter of this year.

Yes.

The first observation I would make is that we did see some level of inflation. So as you looked at the sales increase you need to take that into consideration. Purely from a volume standpoint, the distribution business increased 11% in the third quarter versus the second quarter. Some of that was driven, we believe, by auto. And some of that has been driven by new business gains, and we specifically mentioned the DuPont agreement which we announced on our call in connection with the second quarter. I would say those two things more than anything else are driving distribution Q3 over Q2.

So you don't feel that your previous customers aren't just rebuilding their inventories and they are going to be using them throughout the fourth quarter, and therefore sequentially, I know it will be down, but it would not fall off a cliff?

No. I don't think that's the case. I don't think there's anything that would fall off the cliff in the fourth quarter. As we said before, we're concerned about what might happen in the month of December, but generally things are trending positively and that's why we feel positively about 2010 once we get past Q4.

The good news on that same front, we are really just getting revved up with this Dupont agreement transition, and we only saw really a sliver of that in the third quarter. So we are counting on and expecting some good progress on that front. But as far as if you look at this, I would like to refer to this same store sales, meaning existing customers and what their use and consumption rates are. We are not seeing any kind of substantial pickup on that front.

Okay. That is helpful. And while we are expecting sales to be seasonally down in Q4 versus Q3, should we expect gross margin to be above the 18.1% in Q3 as you benefit some more from your restructuring steps?

No the restructuring savings, we hit a run rate in the third quarter. So we are not expecting any further margin expansion as a result of those savings. And then I would assume that gross margins would likely actually decline in the fourth quarter due to our expectations for lower volume as much as anything else.

Okay. I'll get back on queue. Thanks.

Your next question comes from the line of Dmitry Silversteyn with Longbow Research. You may proceed.

Good morning. A couple of questions. First of all, I was interested in your comment on the ECU pricing in your SunBelt joint venture. You talked about first quarter of 2010 as being a period where you will see benefit of higher prices in the ECU. My recollection was that first quarter of this year still saw fairly high caustic prices, although on the way down. Now do you expect the caustic pricing to recover to first quarter 2009 levels by the first quarter of 2010, or is it chlorine pricing that will be meaningfully higher?

I want to clarify that statement. I was referencing that we think we can see some sequential quarterly improvement in operating income. So comparing the first quarter of 2010 versus the fourth quarter of 2009, by no means do I think our operating income in Q1 of 2010 would get to Q1 of 2009.

Thanks for clarifying that.

You are correct in that our view is that the chlorine pricing would be higher, but we don't in any way expect caustic to return to where it was in Q1 of 2009.

Okay. To follow up a little bit more detail on your housing and automotive exposure, when you talk about housing, do you mean just residential housing or is it general construction, light industrial, commercial, or is your focus in the market so tight that it is just the housing market that is important to you?

It's overwhelmingly housing. There's a little bit of commercial, but it's a tiny sliver of our entire revenue into the building and construction space. For us it's new housing and, of course, even remodels can, if the activity around remodels and refurbishments picks up, that is another opportunity for us.

Okay. And then on the automotive exposure, I know it's not as big as housing, but it is fairly significant. Is there a particular area of concentration in terms of geography or manufacturers that you are exposed to, or are you broad across the automotive sector?

We are highly exposed to Big Three, and we are working on penetrating further the Japanese and European OEMs and making some progress, but clearly our base business is primarily across the Big Three.

Okay.

I would add one other observation just to put it in perspective. Following on my comment to Frank, we think auto bottomed in the second quarter and from a combined revenue standpoint, that was about 8.3% of our total revenues, and in third quarter it got to 10.8%. So auto has been obviously a significant influence in the third quarter in terms of increasing top line.

Got it. Final question, you talk about volumes when you discussed individual business segments in the company overall, and you've given us some foreign exchange information. Can you let me us know what is happening with pricing, and is the pricing coming down faster or slower than the raw material prices decline? Obviously, in the distribution business the two are tied, but moreso in your specialty business, where does pricing currently stand on a year-over-year and sequential levels, and what's the market outlook like? Is there a lot of pricing pressure from customers or competitors, or is everybody still focusing on maintaining pricing and improving their margins?

I would make a statement about raw material costs and they are not falling any more. They seem to be coming up. We saw that sort of at the end of the second quarter and believe that's been the case in the third quarter. So it will be more pressure on price now than probably ever. In terms of our own performance with respect to price, I think we've done a better job this year of managing price in a deflationary environment than we did last year in an inflationary environment. And so I continue to assume that we'll manage that through the course of this year, but it will become more and more difficult to achieve that level of performance simply as a result of inflation and competitive pressures.

I want to add that I think that the organizational readiness to deal with cost increase on raw material side, we have done a great job of taking a lot of cost out of the manufacturing side, the things that we can control and manage. But it's our job and it's our obligation and our sales force's obligation to sell pricing so that we are appropriately rewarded for our efforts. And we're getting much better at this and there are a lot of reasons. It's training of the sales force. It's education and working with our customers, it's differentiation. It's having some uniqueness that enables us to be viewed as a valuable partner to the customer. All those things come into play, and I think we are faring much better than we ever have in the past and should we get some accelerated raw material increases, there could be a brief lag between capturing those costs and recovering those with margin from customers, but I think we'll be able to execute, and I'm not particularly worried about this issue.

Okay. Thank you.

Your next question comes from the line of Christopher Butler of Sidoti & Company. You may proceed.

Good morning, guys.

Hi Chris.

I wanted to go back to the question of demand, understanding that your customers are relatively cautious. Some of them looking out to the fourth quarter, and I think a fairly common story is that nobody is looking too far into the future as far as forecasting their demand and their purchases. Can you give us an idea of what the indicators that you guys are looking at that give you a more cautiously optimistic viewpoint on 2010? Is there anything different than what we are seeing to sort of big picture issue?

Let me give you a couple of data points. As we look at the consensus forecast for automotive, let me begin with that, the estimate, the latest estimate for 2009 is 10.2 million builds, and that range has been between 9.6 and 10.6 and settled on 10.2. For 2010, the low is 10,4, better than 2009 and the highest is 13.1, with the mean at 11.5 million units. So that alone is a 14% increase in automotive if nothing else happens. Not to mention, we worked through some inventory. So to me, 2010 with automotive, it looks pretty good relative -- not relative to the 2004, 2005, 2006, 2007 years where we built 16 million to 17 million units, but relative to 2009.

Let me shift gears and move it over to housing which has -- is more impactful on us. Number of builds estimated for 2009 is a low of 560,000 to a high of 610,000. Pretty tight range, a mean of 580,000 units, and we are right in there with that mean number. For 2010, the mean is 810,000 units. That is a very substantial increase in housing builds. And when you overlay that with potential mix of houses in that lower cost housing, smaller homes, lower cost per square foot homes tend to favor PolyOne because there's more vinyl and more plastic that is used in those kinds of applications. That and the execution that we've seen, gives us a lot of encouragement for future. So I don't know if that's what you are looking for, but those are specific data points and facts that might be helpful.

I appreciate that. And looking at the third quarter, the strength in the Specialty, I know that most people when they are looking at the GDP number for the third quarter are trying to X out stimulus and rebates and all the other stuff that is going on. If we are looking at your results, is there anything in there that would be more third quarter, one-time in nature, or are we looking at just straight up improvement of your specialty segment?

The only thing that I would consider as a potential one-timer is the LIFO benefit of $1.7 million. Obviously LIFO is not a one time event. It's how we account for our costs. So you'll see that the fourth quarter as well. As we cautioned, we think that benefit could diminish.

Could you remind me what the benefit would have been through the first nine months of the year?

For Specialty?

Yes.

For Specialty, the all-in LIFO benefit I think was about $3.5 million and I can confirm that.

Just a second here.

So all-in for Specialty was $3.7 million.

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

Your next question comes from the line of Chuck Peterson of Morgan Stanley. You may proceed.

Good morning.

Hi Chuck.

You talked a little bit about acquisitions earlier. What size of acquisitions would you consider at this point?

I guess clearly in recent months, we've -- we've imposed some constraints on ourselves just because we were nervous and trying to work on some internal matters and we kind of abandoned, at least temporarily, our M&A strategy. What our strategy was before that all started was kind of two-fold. Certainly, looking at leveragable Strategic platforms, primarily if not absolutely Specialty in nature, that we can find opportunities to leverage just as we've done with GLS. And I think GLS is a great example and it's probably on the larger size. There are not a lot of GLS's out there to obtain. But there are a lot of $10 million, $20 million opportunities for us, and we are going after those opportunities with renewed vigor. On a couple of fronts, one, we can do it now and we also have confidence that we can accomplish this, but also the valuations have dropped on these and there are some terrific opportunities if we can rope them in and get them under the right circumstances and they all make sense to us.

That said, I think this management team has the capacity and the capability to take on a major transformational acquisition if the right opportunity were to arise and that would be all I would comment on that. We don't have any other comments on our sights on anything but we are always out there looking each and every day to find ways to create shareholder value. If that comes in a small package, we'll go after it. And if it comes in a big package but it makes sense for us, we would also be willing to give that the utmost consideration.

As of the end of the third quarter, if we include your share of the SunBelt set, I am coming a shade under two times net that's EBITDA. With that as a base, for the right acquisition, how high would you be willing to take that number?

Actually, before got into the economic crisis last fall, we used to get the same question, and at that time we were about 3X. So we would take it up one turn higher than that if the right opportunity presented itself. I'd say that we'd probably still feel the same way about our capital structure going forward.

That's very helpful. Thank you.

Your next question comes from the line of Tarek Hamid of JPMorgan.

Good morning.

Good morning.

You talked a little bit about strength in the automotive segments sequentially from Q2 to Q3, any other end markets that helped drive the improvement in the Specialty platform?

Well, first of all, the comments that we made about auto are principally driving the PP&S, the segment revenue. As you look at their sequential increase of volume, it's about 7.8%. A decent chunk of that was from auto. The other areas, if you just are referencing Q2 to Q3, is that right? Is it Q2 to Q3 to confirm that?

Yes.

We did see a pickup of about a percentage point in consumer, and that probably was the most significant move in the Specialty platform that we saw from Q2 to Q3.

Healthcare was up [10%] sequentially.

Generally pretty broad based?

Yes.

And following off he last question, you are sitting on liquidity of $344 million. Any thought as to what sort of the right level of liquidity to hold in the business as longer term with markets generally a little bit more stable?

The best observation that I can make about our comfort level with the capital structure is in reference to debt to EBITDA, and would make the same observation that I did for the last caller. The way our debt is trading right now, our senior notes are the most substantial level of maturity we have coming due in 2012. They are trading at 101. There's a premium to take those out early, and they have a relatively attractive rate at this point. And we think if we went out to refinance, we would probably pay a little higher today.

So I really wouldn't say there is any anticipation of paying down debt in advance of its scheduled maturities. So to the extent that we continue to generate free cash flow, that would go to cash in the immediate term. To the extent that something becomes a good opportunity for us on the M&A front as Steve mentioned, that's an area where we can see future cash expenditures. But beyond that we don't have any further plans.

Understood. One final question from me. On the working capital side, obviously you've done a great job year-to-date. But any additional targets in your head, sort of any number that you want to get down to during 2010 on working cap?

We are going to continue to try to drive working capital. As we think about that internally, we focus on all three areas of trade working capital. But collectively, we are looking at trying to reduce working capital as a percentage of sales and we'll be trying to do that on an annualized basis going forward, but we don't have a specific target that we would share with the public today.

I mentioned that we had a Lean Six Sigma initiative around sales and operations planning, and this is also aimed at reducing working capital while making sure that we continue to be world-class in our on-time delivery performance. We won't push this so far that the wheels come off here and we end up losing this advantage we have with regard to customer on-time delivery performance. So that's the balance we'll strike. But we think we have improvement to go.

Thank you very much.

Your next question comes from the line of Bill Hoffman of RBC Capital Markets. You may proceed.

Good morning.

Hi, Bill.

Steve, I wonder if one last sort of focus on the specialty side of the business. What I'm curious is the geographic mix of your specialty business where -- whether it's more Europe versus US, and trying to get to a sense of what you see as sort of the ultimate revenue opportunities in that business.

So if you look at it collectively, in 2008, and this is all down this year because volumes and revenues are down, but in 2008 we had about a billion dollars of specialty income. And it is, as you know, our European and Asian business is overwhelming specialty, color additives, inks, as well as our specialty engineered materials. It's a big opportunity for us.

We've defined our total market as a $30 billion plus market. I would say that you can count on specialties being at least a third of that, and we keep redefining the market opportunities. We haven't changed our public stance, but we keep finding new niches and opportunities to grow in the specialty market. So as yet it's not undefined, but it's certainly expandable.

So I think if we look at this and understand that we've got our strong investment in Asia. We like our position there. We want to do better in Japan. We have a lot of opportunity to grow in India and continue to grow at double digits in China. We are well positioned there, and that's almost all specialty. I would say 90% of that business is specialty business. And for Europe, I would say it's a similar number. The overwhelming majority of our business is specialty. A place we have a hole, and I mentioned this in my remarks, is Latin America. We've got a little bit of business down there, really driven by customers asking us to serve. And we either have to import into that market or total manufacture with people that help us take care of some customers there, and we see quite a growing opportunity. Brazil alone, to give you an example, has a billion dollars worth of specialty potential that we know of today. So it's an opportunity rich environment and it's up to us to get after it and execute and win the business. That's why we are spending so much time, energy and effort on training the sales force on developing new products that differentiate, and that's what it really is all about.

What I'm trying to get to is of the sales dollars today, how much of that is in the international market, just if you took specialty segment and sort of added them up. -

It's 50/50. The way we organized our three reportable segments in specialty, we actually have separately reported our international businesses, and that's the easiest way to think about the breakdown of the platform. It's the international represents about 50% of the platform sales. A little bit higher in Q3 but for year-to-date it's about 50%.

The second question is the SunBelt JV, the strategy with it currently now that we are cycle trough, nine months ago we were cycle peak. We talked about monetizing that. Any change in view right now?

We continue to view our SunBelt JV as non-core. We said the same thing now for a number of quarters. We think with pricing-- Chlor-Alkali pricing troughing in the third quarter, that we are going to continue to see some improved earnings there. From a valuation standpoint things should improve. I would also point out recent proposed legislation related to mercury, and that there has been -- the House Committee on Energy and Commerce passed a bill that would require producing Chlor-Alkali producers using mercury technology to decide by June 30 of 2012 whether they will convert or shut down facilities. There are three grades of caustic - mercury, membrane and diaphragm. The SunBelt JV is membrane. Olin operates two facilities that utilize mercury, cell technology are about 18% of its capacity and this is all from their call. So I think going forward, that's probably beneficial to us since we have membrane technology, and that venture has additional capacity that can be expanded to meet those needs going forward.

Great. That's helpful color. Thanks.

I think we have time for one more question.

Your next question comes from the line of Rosemarie Morbelli of Ingalls & Snyder. You may proceed.

Thank you for taking my question. SG&A at 13.8% of revenue was particularly low. Is that ratio sustainable going forward? Was anything special in the adjusted number, eliminations that will come back next quarter or next year? Can you give us a better feel for that?

If you go off the GAAP financial statements, the SG&A of just under $55 million. There are special items totaling $19.5 million in there.

I took those out and I am looking at the clean ratio of 13.8%, which is very low for SG&A for you guys.

Well, I think it's pretty comparable to where it was in the second quarter. The percentage obviously improved because sales bumped up 10%. From a dollar standpoint, I've continued to reiterate the expectation that we should be running around that $70 million to $75 million per quarter, and it will be higher in the second and third quarters, just based on timing of certain expenses. But beyond that I wouldn't have any further comments to say about SG&A and no other one-timers. We did announce changes to our retiree medical plan and that will reduce SG&A going forward, both in the fourth quarter and the balance of the next three years as those benefits are phased out.

How about incentive on performance? What are we looking at this year? Do you have them and if not, what could be the difference next year compared to this year?

Could you repeat that? I'm sorry.

Usually if you do well, you have incentive compensation which I think shows up in SG&A. Did you have any this year? Are you going to catch up in the fourth quarter if you did better than you anticipated for the year, the beginning of the year ,and what should we expect for next year?

Well, we record our incentive compensation pro rata on the operating income as it's earned. And that is one of the reasons why I said second and third quarter SG&A is typically higher than the first and fourth because generally our earnings are higher in those quarters. So you should see that trend down in the fourth quarter. And then in terms of total expenses this year, 50% of our annual incentive compensation is based on cash flow, specifically working capital as a percentage of sales and we have done very well at that. So in terms of how well we are doing this year, we are doing better than target, and obviously as we set our objectives for next year, they will be more aggressive. In terms of what our target compensation would be, that could ultimately be lower if next year we hit target versus where we are this year.

Okay. And then just one quick question. Could you give us -- we know that for the quarter the 25.5% decline in revenues was due to a certain degree to 20% in decline in volume. Could you state the currency impact in the price mix?

Currency is about 3%, and so the balance is price and mix.

So currency was not 3% just for the specialty business. It was for the company as a whole?

Correct.

Thanks a lot.

Thanks. Thanks for the last question and thank you for everyone who was able to join us today.

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