Avient Corp (AVNT) 2009 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the PolyOne Corporation fourth-quarter 2009 conference call. My name is Michael, and I will be your operator for today. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes. At this time, I would like to turn the call over to Joe Kelley, Vice President of Planning and Investor Relations. Please proceed.

Thank you, Mike. Good morning, and welcome, everyone, joining us on the call today. Before beginning, we 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 of 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 the PolyOne website, where the Company describes the non-GAAP measures and provides a reconciliation of them to the most comparable GAAP financial measures.

Operating results referenced during today's call will be comparing the fourth quarter of 2009 to the fourth quarter of 2008, unless otherwise stated.

Joining me today on the call is our Chairman, President and Chief Executive Officer, Steve Newlin, and Senior Vice President and Chief Financial Officer, Bob Patterson. Now I will turn the call over to Bob, who will review the quarterly results.

Thanks, Joe, and thanks, again, 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. This morning we announced our results for the fourth quarter and the full year of 2009, as well as recent changes to our global organization structure.

For the fourth quarter of 2009, we reported sales of $553 million and net income of $24 million or $0.25 per share. This compares favorably with the fourth quarter of 2008, when we reported sales of $542 million and a net loss of $283 million or $3.07 per share.

Before special items and tax adjustments enumerated in our release today, we reported earnings of $0.14 per share versus $0.08 per share for the fourth quarter of 2008.

Our earnings per share nearly doubled from the fourth quarter of last year on the strength of operating income improvement from our Specialty and Distribution platforms. The fourth quarter of last year included a $16.5 million benefit from LIFO versus a $3.2 million benefit during the fourth quarter of this year. Ex LIFO, the earnings improvement is even greater as mix improvements combined with lower raw material costs and restructuring savings added 500 basis points gross margin versus the prior year.

We are very pleased with this margin expansion, but we are even more energized by the top-line gains. The fourth quarter represents a return to growth for PolyOne after four consecutive quarters of declining year-over-year revenues associated with the recession.

Driving this growth in the fourth quarter was our Specialty and Distribution platforms, which saw double-digit sales increases over prior-year levels. Also noteworthy is the sequential growth in revenues from the third quarter of this year, which we find encouraging for two reasons. First, the addition of new business gains has allowed us to overcome the seasonal decline in revenues traditionally experienced during the fourth quarter. And second, we do believe we are seeing some positive demand momentum as we head into this year.

Let's now take a closer look at each of our platforms and their related performance during the quarter. Performance Products & Solutions reported sales of $158 million in the fourth quarter. The 19% sales decline from the fourth quarter of 2008 is driven by a 16% decline in average selling prices principally attributable to business where prices are indexed to publicly disclosed raw material benchmarks. The remaining 3% volume decline is related to building and construction demand in the US.

Seasonally, the fourth quarter is traditionally the weakest for this segment as its historical performance is closely tied to new housing starts and the construction cycle. While this year was no exception, these results are encouraging because this is the lowest year-over-year decline in quarterly volume this platform has seen since the second quarter of 2007.

PPS achieved $8.1 million in operating income or 5.1% of sales. This is down from the $16 million reported in the fourth quarter of last year. However, last year included $15.1 million of LIFO benefits versus $800,000 in the fourth quarter of 2009. Ex LIFO, operating income increased by $6 million as restructuring savings, lower raw material costs and improved mix more than offset operating income lost due to the volume declines.

As you know, we have taken significant costs out of this business over the last two years. We used to believe that our breakeven point was 1.2 million annualized housing starts, and in 2009 we achieved operating income of 6.5% of sales on starts of 560,000. The majority of these cost savings are permanent nature so as volumes recover we are positioned to leverage the lower cost structure to deliver profit margin expansion.

Our Specialty Platform reported sales of $228 million for the fourth quarter, which is a 14% increase over the prior year, principally due to a 13% pickup in volume. The most significant fourth-quarter Specialty revenue gains were achieved in Asia and Europe, which grew 38% and 24%, respectively, and were driven by improving demand dynamics for electronics in Asia and automotive in Europe.

While the revenue increase in the Specialty Platform mainly resulted from international growth, each of the three Specialty businesses contributed to profit margin expansion, driven by improved volume, mix, lower raw material costs and restructuring savings; specialty operating income increased nearly tenfold to $18.4 million or 8.1% of sales compared to $1.9 million or 1% of sales for the fourth quarter of 2008.

Our Distribution platform delivered sales of $190 million in the fourth quarter versus $173 million in the prior-year fourth quarter. The 10% increase was driven by a 13% volume increase with slightly lower selling prices as commodity costs fell year over year.

Compared to the prior year, Distribution's operating income increased $3.3 million to $9.5 million, principally due to higher volume and lower bad debt expense. We have always said that this business is scalable and that has never been more apparent than this quarter as the 10% increase in sales versus the prior-year fourth quarter improved operating income from 3.6% to 5% of sales, a new record for this business.

During the third quarter, we announced a marquee win for our PolyOne Distribution, as we were named the Primary Distributor of Thermal Plastic Products for DuPont Engineering Polymers in North America. The fourth-quarter results include a full quarter of this new business, and we are pleased to report that the customer account transition is going very well.

Our Resin & Intermediates segment, which consists of our SunBelt joint venture, delivered operating income of $2 million, which is $2.4 million below the prior year and down almost $2 million from the third quarter of 2009. Sun Belt's earnings are disappointing and unfortunately they are tied directly to ECU pricing as the sales volume is effectively flat.

Corporate and other costs before special items were $5 million higher than last year, principally due to the reversal of long-term incentive accruals in the fourth quarter of 2008 and incremental pension expense in 2009, partially offset by reduced retiree medical benefit costs.

Turning now to cash, during the fourth quarter of 2009 cash declined $18 million as we made an $11 million advance contribution to our pension funds; acquired the specialty healthcare company, New England Urethane, for $11.5 million; and retired medium-term notes of $20 million. These were offset partially by proceeds from our sale of non-core assets and cash flow from operations.

At year end, cash and liquidity were $223 million and $336 million, respectively, which are both substantially higher than the $44 million of cash and $166 million of liquidity recorded at the beginning of 2009. While the sale of our equity investment in Geon Andinos and subsequent acquisition of NEU was slightly cash positive during the quarter, that is not the most significant communication point about these two deals. Rather, they are a perfect illustration of the ongoing portfolio repositioning at PolyOne toward a more specialized product portfolio.

Clearly, this repositioning slowed in 2009, as we focused on restructuring, preserving cash and liquidity. But as we move into 2010, and with substantially more cash on the balance sheet, we expect to engage in a more rigorous M&A process. We will focus on building our SPECIALTY platform in geographic markets such as Latin America and the Middle East.

While our priority is clearly to continue to add to our Specialty businesses, we will not overlook properly valued potential synergy plays in our other businesses.

With that, I'll now turn the call over to our Chairman and CEO, Steve Newlin.

Well, thanks, Bob, and good morning, everyone. The fourth quarter of 2009 brings to a close the most challenging fiscal year and economic environment I've ever seen in my career. Consumer confidence and industrial demand declined to their lowest level in decades. Two of our largest end markets, housing and auto, were particularly hard hit. I am proud to say that our management team responded swiftly to the crisis. And despite a 22% decline in demand, we finished the year with a better balance sheet than we've ever had, and full-year earnings well into the black.

For us, the first half of 2009 was consumed with implementing restructuring actions to permanently lower the Company's cost structure and improve our balance sheet. The results of these actions were immediately impactful as we generated substantial free cash flow and demonstrated sustainable earnings improvement. As a result, we were able to increase our focus on winning profitable new business and growing the top line during the second half of the year.

Since Bob focused on the quarterly results, I would like to make some remarks about our full-year accomplishments and our strategy and outlook as we move into the next decade.

For the full year, 2009 sales totaled $2.1 billion, reflecting a 25% decrease from '08 levels, as demand fell 22%. Despite the decline in demand and revenues, we delivered earnings per share of $0.37, just $0.04 shy of 2008.

Bob mentioned we began 2009 with $44 million of cash, $166 million of available liquidity and just over $500 million of debt. And we finished the year with $223 million of cash and $336 million of available liquidity, and debt was reduced to $457 million. This substantial improvement in our financial position resulted from a Company-wide effort to cut costs, proven unprofitable or high credit risk business and expand margins and reduce working capital. These improvements were facilitated and accelerated by our newly launched lean Six Sigma efforts.

We follow many companies out there and you frequently hear them reference Lean Six Sigma principles and initiatives they employ to reduce waste and improve efficiency across their business processes. Many do this very well and have been reaping benefits for years. Admittedly, PolyOne was late to the game in adopting this framework, but we are off to a really terrific start. In fact, we are apparently off to a better start than anyone else in 2009.

On January 19, of 2010, PolyOne was awarded the very prestigious Process Excellence Award for the best Lean Six Sigma startup program at the International Quality and Productivity Center's 11th Annual Lean Six Sigma and Process Improvement Summit. I am very proud to say this puts us in an elite group of impressive companies, such as Ecolab and ING, who are previous award winners.

This exclusive award acknowledged our program as the best out of over 400 applicants in setting organizational direction, delivering business benefits and initiating cultural change. But to us, it was much more than just an award. It is really a statement about the new PolyOne, and it symbolizes how we changed our corporate culture.

We've made voice of the customer the basis for our competitive differentiation and strategic execution. And Lean Six Sigma has helped in driving change in bringing rigor, discipline and accountability into our organization. And I think the results speak for themselves.

Gross margins for the full year 2009 before special items increased from 12.5% in '08 to 17.1% in the face of a 22% decline in demand. In addition, we reduced average working capital as a percent of sales from 13.4% in 2008 to 10.7% in 2009, again, in a down demand environment. We believe this is world-class performance and clearly distinguishes PolyOne from our peers.

We decreased our average days sales in inventory from 56 days exiting 2008 to 38 days exiting 2009, all while maintaining exemplary on-time delivery performance.

I can tell you these accomplishments would not have been possible without the implementation of LSS and specifically focused projects executed by our first-class black belts. But it doesn't end here.

PolyOne has already begun training its second class of black belts, and by the end of this year more than 25% of PolyOne's associates around the world will have completed training, including 1% of our employees who will hold LSS black belt certification. The expansive size and scope of the LSS training ensures global cross-business and cross-functional support and expertise for the process improvement projects.

And I would like to recognize and express my sincere thanks to Tom Kedrowski and the PolyOne leadership team and employees, without whom our Lean Six Sigma implementation success would not have been possible.

Next, I'd like to highlight the success of our distribution platform. 2009 marked an usual year as several of the largest global chemical companies consolidated their North American less than railcar polymer distribution and selected PolyOne as their national distributor. Our distribution business, which already had a leading position in this space, was able to secure distribution agreements with many marquee suppliers, including Bayer, INEOS and DuPont. We won this business and earned it by consistently demonstrating exemplary customer service and on-time delivery that we believe makes us the supplier of choice in the polymer industry.

These market share shifts have allowed our Distribution platform to overcome the traditionally seasonally slow fourth quarter and report top-line growth versus the third quarter of this year while achieving record profitability through mix improvements and leveraging our cost structure.

This business is scalable, and the results are evident as we have improved return on sales to 4% in 2009 and we are on a great trajectory toward achieving our stated goal of 5% return on sales for POD.

I'd also like to point out that the combination of improved working capital management and increased profitability resulted in this business delivering an impressive ROIC of 39% exiting 2009. If you look around the distribution space, I think you'll find this to be best in class performance.

We further believe we are winning new distribution business as a result of our specific and very successful focus on growing our healthcare business. Healthcare customers now represent 20% of POD sales. And our success in this industry is being noticed by suppliers who want PolyOne to help them expand their healthcare sales.

As you know, we selected healthcare as a target growth market three years ago for all of PolyOne, not just distribution. Our global healthcare team has grown to 24 dedicated marketing and sales resources. In 2009, healthcare sales exceeded $160 million and our acquisition of NEU in December only further cements our commitment to growing PolyOne's medical business.

The NEU acquisition provides us with valuable new technology and applications, as well as established healthcare customer relationships. I would like to publicly welcome all the NEU employees to the PolyOne team, and I am pleased to report that in the first 40 days, integration is on schedule.

Now for some comments about Performance Products & Solutions or PPS. This is our business most heavily connected to US housing and auto. With Geon as the recognized industry-leading brand, the PP&S team has responded most admirably to the significant downturn in the economy. Despite a 33% decline in sales from 2008, PP&S achieved profitability improvement over the prior year, earning 6.5% return on sales in 2009. I think this is a superb achievement, given the end market demand, and it gives us great confidence in our ability to reach or exceed our stated goal of 8% to 10% return on sales as housing and auto markets improve.

Our operational and commercial excellence strategies have played critical roles in the transformation of this platform. We have dramatically lowered the break-even point of this business and much of the increased profitability can be assigned to these savings.

However, in the midst of very trying times, there are also some great examples of commercial excellence and specialization in PP&S. The metallic-look vinyl compounds introduced at the NPE, National Plastics Exposition in June of this past year, is a great example. By combining our color master batch technology with our vinyl compounding knowledge, we have created a specialty application that has a metallic looking sheen that allows customers to eliminate costly and environmentally unfriendly painting operations from their production. This is a terrific example of listening to the customer, but it also illustrates the tremendous power and value of cross-selling.

No other PolyOne competitor has the breadth and depth of product offerings represented by our three platforms, nor the number of touch points -- customer touch points -- provided by our Distribution business. Be assured, cross-selling will become a much more important element of our sales and marketing efforts going forward. We expect to have more wins like this to tell you about in the future.

While cross-selling will help all of our platforms, I'm particularly energized about the opportunity to bring Specialty solutions to Distribution and PP&S customers. As you know, we have been on a mission to transform PolyOne into a specialty company. And the challenges of 2009 only served as fuel to accelerate this transformation.

During the second half of 2009, the Specialty platform achieved record levels of operating income, totaling $38 million or 8.3% of sales. The full-year sales of $863 million comprised over 40% of the consolidated Company sales, and operating margins expanded to 6.1% of sales for the full year 2009. We are on track for achieving our stated objective of double-digit return on sales for this business by 2012.

Last year's performance of this platform represents the fourth consecutive year in which we have expanded substantially the Specialty profitability. We attribute this to our relentless focus on innovation and competitive differentiation. As you know, you've heard us talk about how we measure our Specialty platform innovation success through our vitality index. The vitality index measures the percent of total sales from products introduced in the last five years. And exiting 2009, we achieved a new vitality index record of 39%. This is significant progress for when we introduced this metric in 2006. And I can't stress enough how important this is, as we must continually innovate and evolve our product portfolio to serve the changing needs of our customers.

Some examples of innovative new products driving the improvement in the vitality index and the overall performance of the specialty platform are color concentrates for wood plastic products and flame-retardant wire and cable solutions for use in alternative energy applications.

We have also expanded our offering of bio-derived materials with our Versaflex TPE product and our resound heat-resistant bio compounds.

During 2009, we advanced our joint development agreement with Archer Daniels Midland to develop bio-based plasticizers for durable goods as alternatives to the petroleum-based materials widely used today. Sales of bio-based or biodegradable products grew 52% in 2009. And while the base is small, we believe evolving trends in legislation will create demand for these products at growth rates that far exceed those of petroleum-based plasticizers. We believe we are uniquely positioned to capitalize on this growth.

Our focus on specialty growth is absolutely unwavering. And over the last three years we have overhauled our commercial philosophy, our leadership team, our innovation process and how we recognize and reward our people. And in doing so, we've radically shifted the earnings profile of our Company by reducing our dependence on traditionally cyclical commodity end markets and equity investment earnings.

Our full-year 2009 results demonstrate this as the specialty platform contributed 36% of total business unit operating income compared with just 2% in 2005. Our stated goal is to derive at least 50% of our earnings from the specialty platform by 2012.

So just to summarize 2009, it is no secret that we began the year in very treacherous waters. Having successfully navigated the storm by generating cash, reducing costs and restoring profitability during the first two quarters, we were able to shift our focus later in the year to top-line growth and winning new business. Managing through this economic crisis, we learned a lot about our true capabilities as a management team and as a Company, and I'm extremely proud of how our associates responded. We have clearly improved the Company's financial strength and demonstrated substantial and sustainable earnings improvement.

In 2010, our top priorities will be profitable top-line growth and the continued successful employment of LSS to reduce costs and working capital. We believe we are seeing positive momentum on both fronts and we expect to grow earnings from each of our three strategic platforms through increased sales next year.

To accelerate our performance, we made a series of major improvements to our organization structure effective January 1 of 2010. We believe these changes will help us better serve our global customers, drive execution of our four strategic pillars, and leverage our strong geographic footprint. Broadly, the Specialty platform has essentially been changed from regionally organized or along geographic lines to being globally organized around product and customer lines.

As fully detailed in today's release, Craig Nikrant is now leading our Global Specialty Engineered Materials business, and John Van Hulle is leading our Global Color and Additives and Inks business.

Bernard Baert has assumed the role of President of Europe and International, and Dr. Willie Chien has responsibility as President of Asia, our highest growth region. Tom Kedrowski assumed direct responsibility for global sourcing, overseeing the procurement of all raw materials, indirect materials and services on a global basis.

So all of our business units and functional areas are now organized globally, but we are also able to reap the strong benefits from international geographic leaders whose experience and leadership will help PolyOne deliver consistency and growth. I am very proud that we could make the announced changes to our global organization with team members we already have in place. We will be able to deliver our innovative global solutions with a local touch to better serve our more than 10,000 customers, operating in more than 130 countries around the world.

So let me just summarize by saying I am pleased with our fourth-quarter and full-year results for 2009, and I think we are seeing positive momentum heading into 2010. While we are confident we will be able to grow earnings from our strategic platforms next year, we remain cautious about the speed and extent of an economic recovery and we expect margin expansion may be challenged by raw material inflation, which we have not seen since 2008. That being said, I think we have the best team in the industry to deal with these challenges and look forward to seeing our 2010 results unfold.

This concludes our prepared remarks. And I would now like to call back to Michael to open the line for your questions.

(Operator Instructions). Frank Mitsch, BB&T Capital Markets.

Nice end to the year. I wanted to follow up. I guess, Bob, you offered some comments with respect to M&A for the coming year, and I thought you mentioned looking at opportunities in the Middle East. Can you expand a little bit more on your thoughts regarding possible 2010 M&A?

Let me take that one, Frank. I would say that we have consistently said the biggest hole that we have from our geographic footprint is in South America, and we are going to pursue that as a top priority. We are in the process of pursuing that as a top priority.

We also would like to strengthen and build a position in the Middle East. And so we are going to be doing those in parallel. That is not to say that we won't capture and capitalize on the right kinds of opportunities anywhere else in the world, but we have a very specific and dedicated focus that's been assigned to the leadership of Bernard Baert to pursue both of those regional markets with a lot of vigor. So that is where we are going to be putting focused energy and effort on our M&A front.

All right. Thanks, Steve. And with respect to the announcements this morning about moving to a more global platform for your Specialty businesses rather than a disjointed regional platform, can you talk about what your expectations are in terms of top-line benefit by this change?

And I guess also, there was an announcement about a global sourcing leader now. Were you not sourcing globally -- did you not have a person in charge of global sourcing before? And do you anticipate any accrued -- any benefits coming from your raw material purchasing?

Good questions, Frank, and I'm going to take the second part of your question first that relates to the global sourcing. Tom Kedrowski is responsible for that effort. It has not been -- it has been very loose up until this point.

I think I have mentioned in the past to our investors that while you might think of sourcing improvements as a top priority, I guess we felt we had to get our house in better order and build discipline into the pricing structure of the organization before we began to capture some of the benefits that a sourcing initiative could create.

And those are not all just direct financial benefits, by the way. There are opportunities to leverage our R&D efforts with some of the business partners that are out there and improve our delivery by getting shipments on time to us better. So it's not only just about direct dollars and cents.

But, Tom is now going to formally take over that effort on a global basis. And there's going to be a fair bit -- quite a bit of activity that launches in the second quarter of this year to guide our folks to work a little more closely to -- a lot more closer together and to leverage our spend.

Right now, we really look at this on a regional and business unit basis and we found that in some cases we're buying pretty small volumes; when aggregated can be substantially more attractive to suppliers. I hope that answers the supply-side question.

Back to the other part of your question, what do we expect to gain in terms of benefits from the new global structure?

You know, I could not honestly tell you that we can pin it down to an exact top-line dollar number or percentage. But what I can tell you is this is something our customers ask us for with a great degree of frequency. They need consistency from a global supplier. They want to make sure that PolyOne is there to take care of their needs wherever they may be in the world. And it ties very nicely to our approach of pursuing international global key accounts that have their legs and their footprints all around the world.

I think the other thing that it does, it allows us to share our knowledge very -- with a lot more fluid movement, whether that is resources or R&D achievements or innovation, et cetera. So it's going to result in a much more coordinated and smooth process. And I am confident that that is going to translate into top-line growth. I just can't really I would be making up a number to give you one, Frank.

I hope that answers your questions. Bob, do you want to add?

Yes, I would just make one last observation, and that is that for our LSS and operational excellence activities combined, we do expect to drive 100 basis points of gross margin expansion on an annualized basis for our manufacturing businesses. And that is pretty consistent with what we've said starting with our Investor Day back in June of this year. So hopefully that helps, Frank.

It sounds like the benefit that you're going to realize from this move are going to outweigh the hassle factor, Bob, for restating all the financials.

They will. And just for those of you who have modeled, we will be circulating historic financials going back a number of years so that you can readily update your information for the new segments.

Saul Ludwig, KeyBanc.

Bob, I wonder if you could comment on the restructuring benefits that were achieved in 2009 and when do they get anniversaried in 2010?

And along with that, a related question, your Company, as many others, really jammed all sorts of discretionary spending on lots of things in 2009 over and above the permanent type of restructuring initiatives. And now with the picture looking a little better, how much of those discretionary expenditures that were -- I call them of a temporary nature -- are we going to see come back or other investments being made in new initiatives that will be an expense in 2010?

Certainly. The first question related to restructuring, and we hit our annualized run rate of $15 million of savings in the third quarter of this year, achieved the same level of savings in the fourth quarter. That will anniversary itself really in the first month of the second quarter, if you will, for a total upside of about $10 million in 2010 versus 2009. So hopefully that answers the first question.

With respect to the second question, and I think it is largely more of a directional question about what would we see in 2010 versus 2009, there will be increases in expenses. And I do believe that SG&A will increase, and there's a couple reasons for that.

As you mentioned, there were certain items that were postponed or delayed and to some extent that relates to compensation. We do believe that in 2010, we will see increases in merit expenses as well as incentive compensation. And we further plan to invest in additional commercial and sourcing endeavors which were postponed in 2009. So there will be an increase in SG&A for those reasons in 2010.

What's the magnitude of this SG&A, if you will?

Well, I think that the magnitude of the increase is to some extent depending on how well we see first-quarter revenues developing in the first quarter. But I think just looking at on the incentive side and merit side, that could be a number that's around $10 million.

Okay. And my other question is if you think about the whole year of 2009, if you look at the relationship between price and raw material costs, I'm sure that was a benefit versus 2008. Any way that you could quantify what the benefit that you got from price versus lower raw material costs? And I think the congratulatory comment is being able to hold pricing maybe as well as you did and you get the gift of the lower raw material costs. But how would you quantify that benefit?

Well, I wouldn't publicly state a contribution margin, or excuse me, a material margin, if you will, for a number of different reasons. But you can see in our gross margin expansion year over year about two-thirds of that improvement does come from -- let me say it differently. A third of that comes from restructuring savings and then the remaining third are really price and mix improvements offsetting volume declines. That is how I would explain it year over year.

Okay, great. Thank you very much.

Rosemarie Morbelli, Ingalls & Snyder.

Congratulations on a good quarter. Steve, you talked about the unsustainable low level for housing and auto. Could you give us a little more? Because my perception based on what I read is that there are no signs on improvement in housing. There is an enormous amount of inventory out there. And we may never go back to the auto build level of about 70 million cars a year. So could you tell us what you are looking at, what you're hearing from your customers? And linked to that, is the Toyota mess having an impact on your business?

Okay, let me tackle that. That's a great question, and I am happy for the chance to respond. Here's how we kind of view this.

I don't know about the never go back part of the auto build, because these cars have a life and we crash them and they rust out, and we still are, with the exception of this last couple years, growing in terms of the number of people that are driving globally and even domestically. But our expectation for new car sales this year is right around 11.8 million. We are in the 11.5 million to 12 million. I think you'll find that is pretty well aligned with the consensus estimates.

Now, that doesn't sound like a lot compared to 16 million or 70 million, but it is substantially better than the 10.4 million that were built in 2009. So you can be looking at a 10% to 14% growth in auto. Those are the latest projections for this year.

Let me shift gears then over to housing. And again, we are very confident that the over 2 million units built in 2005 and probably the 1.8 million built in 2006 -- never may be the right word for that kind of production.

But we do feel, and this is sort of confirmed by people who are much more knowledgeable of this industry than we are, that overall net-net, the average demand, if you look at the demographics, will probably stabilize around 1.5 million units.

We have next year forecast about 700,000 units, and that is versus the estimates currently of 730,000 units. Less than half what we think this demand will stabilize at; but again, that is more than 20 -- it's almost 25% more than were built in 2009. So we built around 560,000 new housing starts in 2009. So if we get to the current estimates of 730,000, that is a nice improvement year over year for us. A long way from peak and a long way from where we think this will settle out, but certainly directionally correct and better than this past year. So we have some optimism about this.

I think the other thing we should mention when we look at housing starts, because that alone, that is a great indicator for us and we have some pretty good correlation between PP&S earnings and housing traditionally. But we also think that the foreclosures that have been -- if you look at the existing home sales, a substantial portion of those sales have been foreclosures. And a lot of those will become fixer-uppers. And that allows remodeling, and often with remodeling come new products that we provide, including window profiles, etc.

So I hope that that kind of answers our thoughts about housing. We aren't expecting -- we don't have high expectations about a return anywhere near where we think this will normalize. We are just looking at a year-over-year improvement in housing in the 20% to 25% range, which still has us below what the consensus estimates are externally right now. Does that answer your question?

Yes, that is very helpful. And could you touch on the Toyota?

Yes. Good news, bad news. I think I have been pretty open about our relationship and what we haven't been able to do with the Japanese and Korean auto suppliers. Our automotive business has been primarily big three and in Europe with a lot of renowned brands there.

So good news is, in this particular case, the slowdown from Toyota may actually benefit us because we have a small amount, relative small amount of business with Toyota. It's growing, but it's relatively small amount. And we think that people are going to buy cars and I guess they will decide where they are going to -- who they're going to buy them from. If there is any share shift, and I'm not predicting that, but if there is any share shift to a big three, we will stand to get some benefit from that.

But I think the better thing for us is longer term, we just have to keep working on penetrating the Asian auto producers, and that is something that we have front and center. So we see very little downside here, possibly a little upside, and that would be my remarks about the auto recall.

Thanks. And if I may ask one more question, you talked about your days sales in inventory going from 56 days to 38 days, if my memory is correct on those numbers. Is 38 days sustainable?

Oh, we think so. I'll give you some remarks and I'll let Bob jump in here. We think we are -- we've got our Company in a position now where a lot of heavy lifting has been done. But people that are good at Lean Six Sigma will find ways to continuously improve. And the prizes may be biggest at the outset, but it continues. And we have a quest to continue, as long as we don't get to the point that we are disruptive or not following the path of voice of the customer, meaning if we begin to add delivery problems as a result of those inventory levels then we would make adjustments. We have been able to do this without that issue up until now.

I think a bigger concern along those lines is really -- relates to raw material shortages that might surface and making sure we have the kind of relationships with our suppliers that allow us to get products that we can then produce and compound for our customers. Bob, do you want to comment on that?

I would just make one other broader observation, and that is that we measure total working capital efficiency based on percentage of sales. And our goal is to drive 50 to 100 basis points of continued improvement in 2010. So we do think that we will be able to continue to improve those metrics.

Christopher Butler, Sidoti.

You had mentioned in the press release that there was some benefit in the back half of '09 due to government stimulus. Do you have any -- can you quantify that at all for us, give us some more color on that, direction?

No, it was just a directional observation. And I sort of go back to our comments on the third quarter we were often asked about whether or not Cash for Clunkers helped us. I would say it's difficult to point to a specific number and say this is due to a program like that. There have been auto incentive programs in Europe as well. And we do think that those have helped us, but we can't quantify those for you numerically.

You know, I would to tell you on the auto side, we think auto bottomed in the second quarter of 2009 at about 8.5% of our total sales. And in the fourth quarter it was up to about 12.5%. So auto is definitely improving as a percentage of our business.

You know, we're really careful to get too excited about temporary lifts to our business that aren't sustainable. And I'm not going to get into a philosophical debate about Cash for Clunkers or tax credits for houses.

But I would just tell you, there's a lot of things -- you have to look at this thing in our business as a global company globally. Last year for the first time in history, China became the world's largest auto market and auto maker. So we have certainly needs to make sure that we are capturing this business globally, and we do have to look at this a lot more broadly than the 10 million, 11 million, 12 million units that are being produced in North America.

They were I think at 13.5 million units sold in China last year. So that's a pretty substantial shift. And our job is to be there to capture this business wherever it is. There's still pretty darn good demand for US auto.

The Cash for Clunkers, just to go back to that for a moment, Chris, is remember, that is embedded. Those actions are embedded in this 10.4 million units that were built last year. And the estimates for 2010 are on a consensus basis 11.8 million. So I don't think that it had a -- if you're looking at, did this put a little lump in '09, it's a big hurdle for '10, I don't really think so. I think '10 is going to be better than '09 on auto production and housing production.

If I'm thinking about auto production, though, as some of the auto makers are restocking inventories at this point, wouldn't it be safe to say that any premium demand for the back half of '09 might continue into the beginnings of 2010 and then dissipate for the end of the year?

I don't know that it's going to be that predictable. I would look at it as I think there is some inventory build that is going on. I think demand is picking up. I think it's more dependent on people's ability to get the kind of loans that you need for cars and houses than anything else, truthfully. That and making sure that they have some jobs so they can pay for this. But I don't know that I could seasonalize it as much as to say that it will taper off at the end of '10.

Right now, the estimates for 2011 for auto builds is 13.1 million. Still way below the 16 million, 17 million that we had, but remember that we still -- you don't always think of a car as something that has a lifespan, but they do. And we expire a lot of them every year around the world. So there will come a time where we are going to be back approaching the prior build rate.

And --

Certainly on a global basis.

Shifting gears over to Distribution, with the new business that you've won with DuPont, I remember it being said that there may be some add-on business just because of the customer win. Now that you have a quarter under your belt, do you have any better idea of what that may be as we look to 2010?

Well, certainly, we are getting some pull-through business that goes along with DuPont products. I would say to you the way this generally works, Chris, is that customers, if they need to go to you for specific product and they are switching for that primary motive, they are going to test you, and they're going to see how you do before they give you additional business. And it's up to you to execute and give them comfort and provide outstanding service before they are going to be throwing additional business your way.

So we are still early in that process. We are building the relationships with those new customers and trying to help them understand the kind of company that they are working with, and we hope that we earn that right to expand new business.

So the answer is we are getting some, but we expect it, and continue to expect some of the pull-through business to be earned with time and grade in a fulfillment sort of relational basis.

And looking at the SunBelt joint venture, exiting the one-time item, you're at about $4 million in the fourth quarter. Is that a good starting point to look at 2010 and then sort of overlay any chlorine demand assumption growth on top of that?

Yes, the R&I was $2 million for the fourth quarter. And I think that's a reasonable starting point for 2010. If you went back in time three months ago, I'd say we were more optimistic about ECU pricing giving us a bigger benefit in the first half of '10 than we are today. So I think the way you just described it is spot on.

I appreciate your time.

Dmitry Silversteyn, Longbow Research.

Congratulations on finishing the year on such a strong note. A couple of questions.

First of all, obviously, very impressive volumes and revenues you posted in the specialty platform, particularly your international business. You talked about growth in Asia and in Europe. How much of that do you think will carry over into the 2010 first quarter? And was this kind of organic or secular growth that you are seeing or was there some restocking taking place in some markets where shelves have gotten a little bare?

I think it's some of both. We expect -- we feel like the momentum is on solid footing at this point. But any of us can be surprised as we were a year and year and a half ago with an abrupt change in the economic climate. But absent that, we think we are on -- we've got a really good foundation under this business. There is a strong element of organic growth. But I would also say that just the fact that we weren't destocking alone played into our hands in this past quarter. I think the destocking is what really drove the big downdraft that we saw late '08 and clearly the first part of '09, and we're through that.

We just don't have, unfortunately, a great handle on is this inventory to meet demand or is it inventory to restock and put a little safety stock in.

I will tell you, though, customers learned a lot through this process, just like we did. They were forced to be better with their inventory management. And they order -- the order patterns are different than they've been in the past. Order quantities are more distinct and more strategic than they were in the past. So I don't think that we will return -- I don't have any plans or visions of seeing a return to the kind of stockpiles of products that used to be maintained in some of these industries by certain customers. So I think they kind of understand where the demand point is now.

That said, I think we are seeing some very early signs of some raw material tightness that will increase costs and will also test I think companies' ability to manage through that process and make sure that they can capture those critical raw materials in sufficient quantity to deliver to their customers. So there may be a little bit of that going on right now, but if you look at stock levels before all this downdraft started in stock levels today, there's a substantial difference in every customer that I know of.

Okay. You kind of led into my next question on the raw material expectations and your pricing power to offset that. Obviously, in the distribution business, there is a pass-through mechanism with some lag, and I'm sure that in the PP&S business there are some pass-through mechanisms as well. But as you go more towards specialty platforms, is the volume and the demand environment such that -- strong enough that you can push through higher pricing if needed to offset raw material pressures?

Yes, I think I'll answer that a couple of ways, and I appreciate the way you've framed it because distribution is really an area that we don't really worry about this. We do pass through [those] very, very quickly. And PP&S is governed. There is a bit of a lag in a substantial portion of our accounts in PP&S in terms of indexed contracts.

So then you kind of get into the specialty arena and say, well, how good are we going to be at executing and moving these costs on through? And I think we've proven over the last two or three years that we've gotten pretty good at this. Now, we've gotten good at it for a couple of reasons. One is training and teaching our sellers how. Two is having expectations and accountability to get it done.

But I think the other important reason is that the kinds of customers we are doing business with -- they are always pressing you to be competitive but at the same time, we are differentiating in service, in value for the money. And they want to be a part of this relationship. So I think we've proven our worth to customers.

And I think most customers, while they are always going to push you on price, they are reasonable and they understand if your unit costs go up that you're going to ask them to pay a little more for the value you are creating for them.

So we'll see how it plays out, but I like our chances. And I think we have certainly demonstrated to ourselves and I think the investment community that we are developing a pretty good track record on this front. Bob, do you want to add anything to that?

No.

Very good. And just one final book keeping question. What is your tax rate assumptions for 2010?

34% to 35%. That is a little higher than what we experienced in 2009, which I think rounds out to about 31%. And the biggest delta between the two years is an absence of FX-related benefits and principally with respect to our operations in Canada. So 34% to 35% I think is a good starting point for modeling 2010.

Got you. Thank you very much.

I think we've got time for one more question to keep this on time, knowing you all have other calls to deal with today as well.

Tarek Hamid, JPMorgan.

Most of my questions have been asked, but you talked a little bit on your prepared remarks about trying to be a little bit more acquisitive in 2010. I guess where are your heads at in terms of pursuing additional tuck-in acquisitions like the last one or something potentially a little bit more transformative?

Well, we like, as you call them, refer to them, as tuck-ins. We like acquisitions that are good business models that meet the financial profile that we are aspiring to achieve and that we are on a trajectory to achieve and it has more distinguished and differentiated product offering. And we feel that as a global provider, we can leverage those, so that is a high priority.

That said, I think we have publicly stated we feel we have the capacity and capability to tackle something much larger if the right opportunity came along at the right value. But we really like the way we are headed. We like where we're going. And we are not going to do something foolish that would disrupt that if it meant us stretching to pay for something substantial, you probably won't see it happen.

Okay. And then I guess balance sheet is obviously in great shape right now. Any updated thoughts on long-term targets in terms of leverage or base liquidity levels?

Well, I think that exiting 2009, our net debt to leverage ratio is about 1.6. I think that's very good. We are fortunate in the sense that we have effectively got an investment-grade debt package with limited near-term maturities.

At the present, we don't have any broad sweeping plans to change that. But a catalyst could be an acquisition of larger size like Steve mentioned. But at the moment, really nothing to report.

Anything in your minds, any leverage level that you would not want to go above or is that a moving target?

I think that just staying below 3 on a gross debt to EBITDA level is a good long-term way of describing our thinking on it. But we would go above that for an acquisition if we believed we could get it down below 3 in short order thereafter.

That's very helpful. Thanks.

Well, listen, I would just like to thank everyone for joining the call today. I appreciated the thoughtful questions. This is going to conclude our quarter and year-end 2009 conference call. Looking forward to updating our progress in 2010 in our first-quarter conference call scheduled for early May. So thank you again and have a great day.

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