Avient Corp (AVNT) 2010 Q1 法說會逐字稿

Good morning, ladies and gentlemen and welcome to the PolyOne first quarter 2010 conference call. My name is Michael and I will be your operator for today. (Operator Instructions) 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 called to. 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 forecast of future events and are not guarantees of future performance. They're based on management's expectation and involve a number of business risks and uncertainties, any of which could cause actual results to differ materially from those expressed in o implied by the forward-looking statements. Some of these risks and uncertain it is can be found in the company's filings with the Securities &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 Web site 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 first quarter of 2010 to the first quarter of 2009, unless otherwise stated. All prior year financial references will be based on restated financial statements for the change in inventory valuation accounting to the FIFO method, adopted by the Company effective January 1, 2010 joining me today on the call is our Chairman, President and Chief Executive Officer, Steve Newlin and Senior Vice-President, Chief Financial Officer Bob Patterson. Now I will turn the call over to Bob who will review the quarterly results.

Thank, Joe, and to everyone who is joining us on the called today. As always, we welcome the opportunity to speak to our investors and analyze about the recent performance of PolyOne. For the first quarter of 2010, we reported sales of $630 million and net income of $18.4 million or $0.19 per share. This compares favorably with the first quarter of 2009 when we reported sales of $463 million and a net loss of $17.7 million in losses of $0.19 per share. Consolidated revenues grew 36% year-over-year driven by 27% increase in volume. Each platform recorded double-digit sales increases, due to new business gains and improving demand conditions. Despite a steep decline inequity earnings from our Sun Belt joint venture, operating income, before special items, increased to $34.4 million or 5.5% of sales for the first quarter of 2010 from $5.5 million or 1.2% of sales in the first quarter of 2009.

As a result of the increase in sales volume, improved mix and profitability, earnings per share before special items and one-time tax adjustments increased to .19 per diluted share for the first quarter of 2010 compared to a loss of $0.10 per diluted share in the first quarter of 2009. The $0.29 increase in EPS was driven by the earnings growth of our three strategic platforms which combine for record-setting operating profit of $41.7 million compared to only $5.9 million in the prior year first quarter. This growth more than offset the $12 million year-over-year decline in sun belt profits. While we were disappointed with sun belt's results, we are excited to report the growth in our three strategic platforms and subsequently the best mix of earnings in PolyOne's history and highest level of EPS we have reported since second quarter of 2006.

There is no doubtthat improving demand conditions are contributing to our sales growth this year. Most notable improvements were automotive and electronics end markets where sales doubled over prior year levels. On a geographic basis and percentage terms, Asia led our growth with a 66% improvement over the prior year first quarter. It is also meaningful to report that sales grew 14% versus the fourth quarter of 2009, and EPS improved to $0.19 from $0.11. This was as a result of a 12% uptick in volume but also continued gross margin expansion as we leveraged our new and innovative product portfolio for a better mix of sales. Our specialty platform continues to be at the heart of our mix improvement. Versus the prior year first quarter, specialty revenues grew 35% to $257 million for the first quarter of 2010. Similar to our consolidated results, the primary goal driver was a 31% pickup in volume and a 3% increase due to FX.

The most significant first quarter specialty revenue gains were achieved in consumer product, automotive, and electronics end markets. Specialty platform operating income increased to a new record level of $21 million or 8.2% of sales, compared to near break-even results in the first quarter of 2009 and 7.2% of sales during the fourth quarter of last year. Our performance products and solutions segment grew 16% to $184 million for the first quarter of 2010. While we are seeing limited signs of improvement in US housing, domestic auto and industrial sales have advanced driving 70% of the revenue growth. We believe this is a positive for us and the broader North American economy. PPS platform operating income expanded to $12.1 million or 6.6% of sales from the $1.1 million or .7% of sales reported in the first quarter of last year. We continue to realize efficiencies from the previously announced restructuring actions, segment initiatives and we are just now seeing the benefits of improving volume. Our distribution business reported the largest year-over-year gain in sales of any of our businesses.

About half of the year-over-year increase from $137 million to $216 million of sales this year was attributively to marquis business wins we announced throughout 2009 with suppliers Du Pont, Buyer and --, as many view POD as a barometer for the overall market demand and we have our first quarter performance as another positive indicator of the overall status of North American economy. However, we clearly delivered growth well beyond economic expansion due to these new business gains. The significant sales growth resulted in operating income expanding 76% to $8.6 million. POD increased sales across all end markets, but we are particularly proud of our recent success in the healthcare market which has grown 23% over the prior year first quarter to $39 million in the first quarter of 2010. Suppliers are now seeking us out as experts in serving healthcare customers.

And during the first quarter of 2010, we announced a new agreement with BASF to distribute their healthcare specific products. Overall, we are very pleased with the performance of our three strategic platforms but we are disappointed by the earning decline of $12 million from our Sun Belt joint venture, and $2.3 million decline from the fourth quarter of 2009. Sun Belt's declining earnings resulted from a 67% drop in cost of soda pricing, versus the first quarter of last year. Other P&L items to report include corporate and other costs before special items which declined $5.1 million from last year, principally due to a $3.2 million insurance recovery gain and lower pension impulse retirement expense which was partially offset by higher incentive accruals related to improved performance in 2010. And finally, our effective tax rate for the quarter, excluding special items and the valuation allowance adjustment, was 30%, which is about four percentage points lower than forecast due to positive impacts of Foreign Exchange on taxes in the quarter.

We still think that 34% is a good rate to use for modeling, and of course cash taxes are well below this due to net operating losses in the US. From a balance sheet perspective we ended the quarter with $210 million of cash. This is down $13 million from year end, and is principally due to $20 million in medium term notes that were retired in the your. This is partially offset by cash from operations and the sale of our remaining investment in O'Sullivan Films for $9.8 million. This sale reflects our ongoing repositions of PolyOne for a more specialized product portfolio. And as we move through 2010 we expect to continue focusing our investments and M&A process on building our specialty platform and improving our geographic market presence. Net debt includes the Sun Belt guarantee was reduced to $229 million, resulting in a net debt to EBITDA ratio of 1.5 times. This has not gone unnoticed by the rating agencies as S & P just upgraded us citing improved profitability from our three strategic platforms, expanded liquidity and improving business conditions. Like our investors, S & P was pleased to see that we are no longer dependent on equity earnings from our joint ventures and that we have a positive outlook in future growth of each of our three platforms. I will now turn the call over to our Chairman, President and CEO, Steve Newlin.

Thanks, Bob. Good morning. The first quarter of 2010 represents the fourth consecutive quarter we have increased both revenues and profits. All three of our strategic platforms delivered double-digit revenue growth over both prior year and the fourth quarter of 2009. We're pleased with the quarterly earnings, but the growth is even more impressive when you analyze the mix of earnings and properly calibrate them from a historical perspective. Over the past few years, we've been executing on a four pillar strategy designed to transform PolyOne into a specialty company. Associated with this, we said that our specialty platform, distribution business, and performance product and solutions are core to this strategy and integral to our transformation. On the other hand, we categorized our equity investments in pure commodity products with volatile earnings and limited ability for differentiation as non-core to PolyOne.

Despite the fact that these equity investments historically generated the majority of the Company's operating profits. Since we identified our strategic platforms and certain assets as non-core, we've taken the following actions. In 2007 we sold our 24% stake in Oxy vinyls for $261 million and retired our high yield notes, which would have been due this year. In 2008 we acquired GLS, a terrific specialty company and a great acquisition for PolyOne. In 2009, we sold Geonadenis, and acquired NEU, and in 2010 we sold the remaining investment in O'Sullivan Films. As a result of substantial organic improvements in each of our three platforms and this portfolio repositioning, we're now reporting the best mix of earnings in PolyOne history. Our first quarter 2010 operating income recorded by the three strategic platforms totaled $41.7 million, the highest level in Company history.

We think it's time to think differently about PolyOne. We certainly do internally, and so do our customers. We're rapidly becoming a specialty company and beginning to leverage our three global strategic platforms. And I want to talk about what we're doing now in this regard. In the first quarter, we realigned our specialty platform along global product lines and centralized key global corporate functions. I'm pleased to report that this change is progressing very well and we're already beginning to seat benefits. For example, we're streamlining our innovation processes to accelerate new product introductions by assigning R&D and technical resources globally rather than locally. Innovation is a critical component of any specialty company, and we recognize this and invest our resources accordingly. We're investing approximately $8 million over the next 12 months in technical design centers, in Germany, Shanghai, China and Avon lake, Ohio.

These centers provide showcase opportunities for customer interaction where local presence is helpful to allow customers to see innovation in action and to work with us to develop solutions for them. Our uniform capability to address regionally specific mandates and innovation needs with local resources is key to meeting the needs of global customers. As you know, we consistently track our success in innovation through the vitality index, which measures the percent of specialty products sales introduced in the last five years. The index is now at 40%, a performance that also meets our stated 2012 goal of 35% to 40%. Similar to our organizational realignment announced in the first quarter, which leverages our global footprint, we believe there's a significant opportunity to expand sales through cross selling.

No other PolyOne competitor possesses the full range of products and number of customer touch points that we do. It is time we turn this to our advantage. During the quarter, a new sales incentive program was launched that rewards PolyOne sellers for introducing other PolyOne sales association from other business units to a customer they've not met. Three years ago, many of the sellers in the same geographies did not even know each other. Today they're working together with a common set of tools to help each other close and win new business. Finally, the global deployment moment of lean Six Sigma across our organization continues. During 2010, we will conduct LSS training for additional 300 employees and we currently have over 150 active projects across other function at areas of the Company. We are taking our success and momentum from launching true world-class start-up program and embedding it as a permanent and integral part of the new PolyOne D.N.A. Our lean Six Sigma success is clearly reflected in the year-over-year quarterly financial performance, as working capital efficiency improved from 16.1% of sales to 9.1% of sales and gross margins expanded from 13.4% to 16.9%, despite inflationary pressure. The fundamental core driving, or LSS initiatives, in every project is the voice of the customer.

We're leveraging LSS to increase the quantity and quality of customer face time, by improving time territory efficiency, and reducing non-value-added steps needed to fulfill an order and accelerating our cross-selling initiative. These actions will directly impact our ability to leverage customer feedback and into innovation and ultimately into big business gains, just like we're seeing in our distribution business. Distribution has done a phenomenal job of winning new business, and I couldn't be more proud of this team's accomplishments. As Bob mentioned, last year we expanded our distribution relationships with Du Pont, Buyer and -- to name a few. We estimate that these combined new business gains in POD added over $50 million in revenue over the first quarter. But you should know it isn't a simple task of signing up the suppliers and the work of the business comes to us, we cultivate new relationships with each of these customers and effectively win the business on an account by account basis. These are marquis suppliers who chose us to distribute their products, we believe, because we have the best customer relationships and service in the industry. Our POD team has put the voice of the customer first and that's a key competitive differentiator for us and what we believe is attracting customers and suppliers to PolyOne.

During the first quarter, we announced a new supplier win in distribution as BSF selected us to distribute their healthcare products. Key premiere suppliers are seeking us out now, not only because of the customer relation and service I just talked about, but also because we're quickly expanding our healthcare business. They were impressed by our commitment and focus to this end market and also by our depth of product knowledge, strong image, and expertise in healthcare applications. Late last year, the acquisition of NEU further broadened our technology and resources in this attractive end market. We now have 32 dedicated employees, focused solely on healthcare across all of PolyOne. First quarter 2010 healthcare sales totaled $54 million for the Company. That's a 31% increase over prior year levels.

We continue to make progress on many fronts, but we're very far from finished. The same strategies executed to transform this company, are now being deployed to grow the new PolyOne. I want to remind you we're on schedule to achieve all of our 2010 financial performance targets. And despite the significant profit improvement RA realized, additional margin expansion is targeted for all strategic platforms. Specialty platform 2012 targeted operating income margins of 10% to 12% represent further margin expansion to 204 basis points from the 8.2% achieved during the first quarter of 2010. The 2012 targeted operating profit margin for the PP&S segment of 8% to 10% represents a similar opportunity for margin expansion. The success in achieving this target will depend not only on our execution, but additionally on some level of increased end market demand for the current trough levels in housing starts. At 4% of sales, our distribution business is already at the low end of our 2012 expectations for 4% to 5% return.

So we now have our sights set on the high-end of this range an we're confident that in new growth demand, new business gains, and improving mix, we're going to reach that high-end. We've already reached our goals of delivering more than 50% of our earnings from the specialty platform, but we recognize this is partially due to the low levels of demand in housing and auto. Growth in these end markets will make this a more challenging goal to continue to beat. But we view this as a good problem to have. As we look to the balance of 2010 and beyond, it is very difficult to project quarterly sales and earnings with clarity. We believe that while auto demand is certainly picking up, new housing starts and construction will remain at very low levels in the near future. But we don't expect the same level of seasonal revenue increase in our second and third quarters as we've seen historically. That being said, general demand conditions certainly appear to be improving, and that may help us more than we anticipate.

The downside of such growth, coupled with government stimulus actions and certain raw materials shortages, we think it's entirely reasonable to expect higher inflation, and that could make near-term incremental margin expansion more challenging, particularly in the PPS business. Like all companies, these are the uncertainties we have to deal with. And we'll focus on that which we can control and influence. Our three priorities are first, to win more new profitable business in 2010. Next, to continue improving our Company, our cost base, and working capital efficiency through the successful deployment of lean Six Sigma, and finally, to drive innovation to support and expand our speculation strategy. We have shifted the earnings profile of our Company by reduction our dependence on traditionally cyclical commodity end markets and equity investment earnings, and have grown our specialty platform. We will continue allowing the voice of the customer to drive our innovation efforts and continue executing our four pillar strategy. With a strong performance and the best mix of earnings in our history, despite these trough positions for housing and core alkali , we believe it is time to start thinking differently about PolyOne.

So with that, that concludes our prepared remarks and now I'd like to turn the call back to Mike who will open up the lines for your

The call lines are now open. (Operator Instructions) . Your first call comes from the line of Frank Mitsch of BB&T Capital Markets. You may

Good morning, gentlemen.

Hi, Fred.

Hey, in the release you talked a little bit about the fact that typically you see a seasonal uptick in the second quarter and the third quarter due to construction activity. However, I think you noted that it would be a bit more muted. Now, having said that, it does appear that, as you highlighted Sun Belt wasn't all that strong in the first quarter. But my understanding is that Sun Belt tends to implement the costing set of price increases fairly quickly, and so therefore you should be looking at a material improvement in that part of your commodity portfolio. And so having said that, and there will be some level of construction activity pickup in the spring. With that said, are you being overly cautious there in terms of that statement? Or do you not believe you're going to see a benefit from construction in the second quarter?

Frank, this is Bob. I'm not sure if that's one or two questions. But I'll answer the first, which is that I think it is reasonable to assume that Sun Belt's earnings will improve in the second quarter, and that should be driven by pricing. There was some association of that with construction in your remarks. And some of that price increase could be of course on the heels of just seasonal improvement, as you mentioned. So, I do believe that we'll see improving revenue, we just don't believe it's going to be to the extent that we would have seen it in years past. So, it's hard to gauge whether or not we're being overly cautious. I would say this is simply how we're planning for the next two quarters.

All right. And I noted that SG&A had picked up, which would not be surprising given the incentives that you've put in place. But also along with that obviously gross profits picked up as well. Are we now in a new level, that 74 of SG&A, is that what we should be thinking about a baseline, or is that kind of a one off situation?

Well, the one thing that we would point out is that we did have a $3.2 million insurance recovery gain in the first quarter. We mentioned that in our prepared remarks. And so to a certain extent you could see SG&A going up as a result of that not replicating itself in the future. Historically, we've had a little bit higher SG&A in the second and third quarters, just due to recognition of incentive accruals, and so I think some of that relationship could still hold. But pretty close to the run rate that I think we can expect for the year. We do want to point out the $3.2 million of insurance recovery gain, because that should not be perceived as recurring.

All right. Great. And that was baked into your $0.15 pre announcement back in March?

Well, I think you can consider the earnings, look, we did $0.19 a share. If you backed out the 3.2 you'd be at roughly $0.17, and a little bit of a good guy on the tax rate. So we're probably somewhere between $0.16 and $0.17 ultimately for the quarter.

Terrific. And then lastly, Steve, you mentioned that 40% of sales and specialty are from new products developed in the last five years. Can you touch on one of two of those that are most germain to that number?

Yeah. It's more or less across the board with the innovations that we've come up with. But we've got some bio polymers, our Trillian product made exclusively with Eastman. So when we're compounding their product, that's gone very well. Our resound biopolymers for durable goods, it's a biopolymer compound and it's about 30% bioderived content doing very well. Then I would say our Eccoh compounds for optical fiber applications is ECCOH, that was sort of coming out of our European operations and seems to be getting good leverage around the world and hitting on a lot of cylinders right now. So those would be I think some key ones that would help us develop that 40%, Frank.

Terrific. Thank you.

Thanks, Frank.

Your next call comes from the line of Saul Ludwig of Net Coast Research. You may proceed.

Hey, good morning, guys. Nice quarter.

Thank you.

Just to clarify, so we should look at corporate expense being $10 million a quarter going forward?

I would certainly add-back the $3.2 million. Historically it's actually ticked up some in the second and third quarters. That relationship could ultimately hold for this year as well. But that's directionally correct.

Okay. And then I notice that your D&A was down $6 million versus a year ago. Now, was that real honest to goodness drop which benefited some segments, or was the $20 million last year inflated because of some accelerated depreciation? What would be the true D&A year to year change?

The $20 million did include I think roughly $5.5 to $6 million of accelerated depreciation last year. So the ultimate year-over-year delta in depreciation is pretty small.

Okay. And what was your pension expense in the quarter compared to a year ago?

Pension expense in the quarter was actually , if you combine that with OPEB, was nearly break-even. And recall that when we implemented our changes to our pulse retirement plans last year, we would ultimately be accreting income on the pulse retirement side, so that's effectively negating the pension expense. So all in it's about a zero for the first

And what was it a year ago?

A year ago it was about $8.5 million.

$8.5 million. So that pension thing alone gave you a pretty good bump in your earnings.

Yes.

Okay. And then finally, do you have the volume changes in each of the segments?

We do. We prefer not to just go through all that in that detail but total volume --

Is it in the queue?

It's not in the queue.

Okay. We can do that offline.

Okay.

Okay. Thank you very much.

All right. Thanks, Saul.

Your next call comes from the line of Seaver Wang of HFP Capital Markets. You may proceed.

Good morning, guys,.

Good morning, Seaver.

Quick question on just an overview of the businesses on different geographies, volume in all the major continents, and profitability?

Say that one more time? I'm sorry.

The businesses in terms of changes in volume and also profitability in each continent.

Well, since you're sort of the second requester of volume data and that sound like a popular request, I'll give you what I can by platform, all right? On the specialty side, we have total revenue increase of 35%, 31% of that was volume. I believe we made those remarks in our prepared discussion today. PP&S volume actually slightly higher than the revenue gains, due to mixed changes largely in our toll manufacturing business is which is producer services. And then distribution had a 58% increase in revenue with a 29% pickup in volume.

Okay. And then excluding for distribution, if you kind of xed out the big wins that you got in the second half of the year, what would I guess the regular increase would have been?

The new business gains accounted for about half of the volume increase.

Okay. So mid-teens type of increase organically?

Yep.

Okay. Thank you.

Your next call comes from the line of Mike Fisson of E Bank. You may proceed.

Hi, guys. Nice start to the year.

Thanks, Mike.

In terms of the monthly trend within the quarter, I've heard March has tended to be pretty stronger than, let's say January and February for most companies. Did you see a similar trend and could you give us a little bit of idea what the delta was? And is that March level continuing into April?

March was better than January and February. Early indications are that April is about the same. So the comment that we made earlier today I think is true, which is that we continue to see positive momentum going into the second quarter. But really early indications are April is about the same as March.

Okay. And I didn't hear too much commentary of raw materials so encouraged by that it sound like you're getting your price initiatives through raw materials going forward, and do you have an outlook is it expected to peak at some point and Mabel stabilize as the year unfolds?

I think our earnings for the first quarter do illustrate that we held the raw material cost increases, while we did see inflation in the first quarter, we think we'll continue to see inflation during the second quarter that will level off in the second half of the year. We are also concerned about certain raw material shortages in ABS resins, Butadiene and even TIO2 to a lesser extent, so those things continue to concern us. But when we think about raw material inflation and how that gets managed, it really does vary by platform. And our distribution business is largely a pass-through for raw material costs, and in many cases the suppliers themselves are setting the pricing. In our specialty business where we have a more differentiated products, our ability to get price increases is better than compared to, let's say PPS, for example. And in PPS, we also do have some level of business that's index, which means that we can get price increases but it can often be on a quarterly lag. And so as we look forward we always are probably most concerned about the PPS business. The tone of that being a timing more than anything else due to the index nature of those contracts.

Let me just add, Mike, that we didn't really call it out much because we're managing it effectively. But there is indeed raw material inflation going on in all three continents, specifically Asia at the top of the list followed by North America and Europe. I think our organization is capable of managing that inflation and working with our customers to manage that inflation. The bigger concern for us are the shortages that Bob alluded to. Nylon is also in quite short supply. So, this is where we think our good relationships we have with our suppliers is paying off, and they're working with us closely. But there are hiccups along the way as you see demand increase like this with so many people in the supply chain taking inventory down, it's just not a lot of free board to operate within. So the demand uptick is a wonderful thing, but it's not without its challenges.

Right. Okay. And then last question, if April demand holds up as you suggested relative to March, and that holds up in May and June, wouldn't you have a pretty good increase sequentially for demand since March levels are better than January and February? And if that's the case, any reason that earnings wouldn't continue to improve sequentially?

Well, the one thing that I do highlight is that historically we have a bit higher SG&A in the second and third quarters, just due to the recognition of incentive accruals, so that's one thing. But generally speaking we have seen positives in the second and third quarter. I would, again, call out the fact that we had a $3.2 million insurance recovery gain in the first quarter that doesn't replicate itself in the second, and we continue to think that a 34% tax rate is appropriate for modeling purposes. So, I guess I would look at those three things as probably the principal headwind, but certainly higher sales would lead to better results all things held equal.

Great. Thanks you guys,. Thank you.

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

Congratulations on the first quarter.

Thank you.

Am I reading what you said properly, that you would be kind of happy if the level of earnings were flat in Q-2 and Q-3, versus Q-1 considering all of the different items that you just mentioned right now?

That's a great question, Rosemarie. I'm not sure we're ever happy with anything that's positive that becomes flat. I think that's sort of the nature of our character and how we view business. So, we're always pushing to optimize. We are happy with the first quarter performance, that's for sure. But it's just really a difficult time to predict. If, while I think we have great capabilities to manage inflation, there are limits to what you can do in a short-term time horizon. And particularly there in the PP&S segment of the business. So we're cautious about how much shortages of raw material might influence our ability to even produce products in certain cases. We're caution about our ability to get inflation pass through quickly in every one of our end markets.

We think ultimately we're in great shape to do just that, but we're being a little careful about getting overly exuberant about a single quarter. And we've been building this now for the last three or four, but it's just a world in which we're inexperienced in terms of operating, where you go through this major down draft that we all saw and we're starting to recover and you don't know what degree is restocking, and you know how much new business is coming in and happy about that. I think is really difficult for a management team to make sort of prediction about the future, near-term for sure.

Thanks, Steve. And you just touched on my next question. I was wondering if you were seeing any inventory buildup at your customer sites and whether, in that same vein, you are satisfied withy our level of inventory.

Well, let me take the second part of that question first. We're absolutely delighted with our level of inventory. Because we've lowered this inventory and working capital as percent of sales down to a high single-digit number, which was a few years ago something that I don't think anybody, including ourselves, would have believed could have been done, an maintained the great service levels that we have. So on that end we're feeling really good about things. What we don't have as much insight into is the level of inventory in customer plants and in supply chain side. And so here's what we've done. We've had about 150 of our customers, we asked people to inquire about what they're doing in terms of their inventory levels to try to get a sense of how much of this is restocking. And rough cut, this is what we found. About half of them said not restocking, steady state. A fourth said they were still restocking, and a fourth said they were taking inventories down.

So I don't know what you could conclude from that, but it feels like with this volume of growth there is some restocking. At the same time, when I compare this performance to peers, particularly in the specialty front, I don't know why only our customers would restock and others wouldn't, when you look at our volume increases. So, I would say there's probably some restocking, I just don't think you can grow this rapidly in a business like this without a certain element of that. But it's certainly in our opinion, by no means, the majority of our growth.

Okay. And do you feel that as part of this partial inventory restocking, there could be some pre-buying in anticipation of price increases that would have given this very strong volume performance in the first quarter?

I mean, it's entirely possible. When there is inflation, the better supply chain folks will kind of do the tradeoff on tying up cash versus how rapidly is something going up. So, there's certainly the possibility some of that's going on. I would say the probability, if it is happening, it's higher in distribution than elsewhere. But then again, I'd go back to sort of looking at the peer performance and say we're sort of separating ourselves here in terms of volume growth. So, I think the behaviors of groups of customers tend to roll through industries, and it's usually not just the PolyOne customers that behave one way. Usually groups of them behave collectively across the entire supply chain in a similar manner. So, it's really difficult to say. I suppose there's certainly some pre-buying. But I think that for us the most exciting part of our growth is the new business gains that we're achieving in the mix of those business gains.

Okay. Thank you. And if I may ask one last question, could you talk about the potential impact from the credit crisis in Europe? If this takes a life of its own which it seems to-be doing?

Yeah, it's a concern. It's a concern for Europe, and I personally think it's a global concern. And this is something I guess that we've been watching for some time, all of us, and you want it to go away, but it isn't. So you saw great evidence of that yesterday in the market. And while we're still confident of our position in Europe, and that we're going to do well in the context of Europe, this thing can get a life of its own and can be very painful to the general overall economy. So yeah, we're concerned about it.

Can you remind us of the portion, the percentage of your business in Europe?

Yes. We had sales of, I believe it was about $110 million in the first quarter. So $110 at 6/30.

Okay. Thank you.

Your next call comes from the line of Dmitrey Silversteyn of Longbow Research.

Good morning, gentlemen. Congratulations on getting the year off to an excellent start here. A couple of questions on this realignment of businesses that you've gone through. Do you expect to get any cost savings out of this in a short to mid-term, or was this more kind of a market facing change rather than internal change?

Yeah. I mean it's really market basing, customer oriented, ability to leverage resources, R&D. Ultimately I think it's going to make it a little easier for us to get after supply chain savings to facilitate sort of coordinated efforts of purchasing. But we're just getting started to get organized around that front. But the real driver of this change is all about growth, customers, getting new applications, getting consistency so that you can have a company in this space that can deliver the same quality and types of products for our global customers anywhere in the world.

So the way to look at this is that near-term benefits are going to be more from sales sinner just and the cross selling you were talking about, rather than the footprint or the operational efficiency improvements?

That's correct.

Okay. My second question, you touched on the inflation of raw materials and you talked about some of the things that are a concern to you. Can you give us an idea of how much your raw material pricing has gone up, either sequentially or year-over-year, and where that increase stood versus your expectations on a fourth quarter conference call, or at the beginning of 2010?

The remark I would make on that is we don't like to disclose our own individual raw material costs for a lot of different reasons. But from a quoted pricing standpoint, year-over-year pricing, let's just say our total composition of spend was probably up 13% or 14% year-over-year. And I don't believe that we saw that much of an increase in our first quarter. But again, some of that could simply be timing and the rest of that comes in the second quarter.

So obviously despite the fact that distribution may have had a direct pass through, you made comments that it takes some time to get your own price into the market. Did you start out with price increases ahead of these increases in raw material costs? Or was just the volume recovery and the mix improvement that much stronger, that you were able to post positive margins despite let's say a high single-digit headwind in terms of costs?

Well, we can say definitively we did have improving margins on top of raw material inflation. So the pricing environment, we were able to either get ahead of those or get on top of those in the first quarter.

Our PPS would be the exception. There's just always been a lag in that business of inflation to getting price increases. Again, I think nearly half of our business is indexed. And the index has a 90-day lag, which is become more or less a standard for that industry. So there's a little retardation in that segment in terms of capturing inflation and margin on top.

Got it. Okay. And then the last question on the sun belt joint venture and clear alkaline market. There have been some price increases implemented on the chlorine side at least, I know the cost is still suffering, so I would like to kind of find out if you are participating in those price increases, and what you see on a price for chlorine going forward, as well as I think you mentioned there were some customer outages in those business. Have those customers come back online and are they taking normal volumes now?

You know, we have assumed pricing improvement in the second quarter. And we're probably too conservative on the chlorine side and with a 10% it 12% uptick on the caustic soda side. So, that's what we think could be achieved in the second quarter. But really does remain to be seen. We haven't, like I said, I think we've seen some of these shortages. We've still been able to get the supply that we need to continue to operate. So, hopefully I'm answering that second part of your question correctly.

Thank you. That's all.

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

Hi. Good morning, guys.

Hi, Chris.

I wanted to circle back on the inventory question a little bit, noticed that your inventory has come up, assume that some of that's due to some of the shortages that you talked about. But was there any pre-buying that you did ahead of price increases expected?

I would say that we really haven't done much in the way of pre buying, but I could make some remarks in general about inventory. Certainly, from a quantity standpoint it's up 11.6% from the end of the year. I always hesitate to quote end of the year stats because I think that that's our lowest point of inventory. Typically, that's true in the industry. If you look at what our inventory level is versus first quarter of last year, we're actually down 5%, again in quantities despite a 36% increase in sales. So I think on the quantity side, we're continuing to improve our overall efficiency of inventory. And again maybe just to answer your first question, I don't believe there's really been a lot of pre-buying activity.

And outside of the Sun Belt joint venture, your outlook on the housing market? Has that changed materially since three months ago when we last spoke?

Not really. We have kind of held to a consecutive number. I think last quarter we indicated our view was a little bit more conservative than the consensus view. The consensus view has dropped and ours has kind of held the same. I think right now the consensus is at 670,000 units estimated for 2010. So right in the range, they came off of a higher number close to 750,000.

So your comments on muted benefit of seasonality aren't a change in your outlook?

No. We've just been looking at a more conservative housing start number than sort of the rest of the world has. Not that we're smarter than anybody, we're just kind of planning for a worst case. And if it's better than that so be it. So I don't think that seasonality. I just think that this whole notion of, gosh, it's Q-2 now so we're going to start building houses again like we did for many, many years is probably not very valued anymore. It's going to be driven by demand and ability to get mortgages and a healthy economy, not based on when it's the easiest time of the year to build a house.

And shifting gears a little bit, CapEx came in a little lighter than what I was looking for. Is this just a symptom of more CapEx in the fourth quarter, or are you looking to be a little light again this year? And could you pair that with comments on acquisitions in your strategy there?

Well, first on CapEx there are two major items of spend that we expect to incur this year, and really haven't spent much on those at all. Which the first is the $8 million that we mentioned on the design centers. And the second is we're implementing SAP in Asia. The SAP price tag is roughly $5 to $7 million, so I think those two things will certainly increase CapEx in the second half of the year. Beyond that, I'd say that I think we continue to sort of test what our new maintenance level of spending is, and that probably comes down from what we've quoted historically as $20 to $25 million and that's largely just driven by having fewer facilities now than we did. So I think there's still some calibration to come on that. And then lastly, I think your question was just to make some remarks on M&A. Our stated intention is to continue to grow our specialty platform and improve our geographic platform and our first priority would be to be in South America, probably in Brazil. So hopefully that answers those questions.

All right. Appreciate your time.

Thank you, Chris.

Your next call comes from the line of Steve Schwartz of First Analysis. You may proceed.

Hi. Good morning, guys.

Hi, Steve.

Bob, do you have a target debt level for the end of the year? You paid off some debt this quarter just out of obligation.

Yeah. That's actually all we would intend to pay is really just to continue with our scheduled maturities. And we don't have anything else due until the first quarter of next year.

Okay. Looking at the queue and so forth here, I don't see details on pricing but can you give the percentage at consolidated? For price?

No. We can't tell you what the total price, we do was. We believe we got pricing improvement over raw material inflation during this first quarter. If you look at the 13.4% gross margin we had first quarter last year, versus 16.9 this year, don't forget that we did have restructuring saving because we put that in place. And I would say about $8 million of that probably was a step up this quarter versus last. And then really there's some level of improving profitability as a result of the volume increase. But the balance is really price mix over raws.

Okay. And then in PP&S, though, can you at least confirm price was a negative component in that business?

Price was not a negative component. I mean, it's more challenged than our other platforms. But I still believe we had some level of pricing improvement there.

Okay. About 16% total growth and 22% volume growth in PP&S?

Well, the biggest delta there, Steve, is that the highest volume improvement was actually in our producer services business, which is toll manufacturing. And so, when you see that volume go up more than revenues, you really have to focus in on the growth of the toll business. So you don't see a dollar for dollar increase in revenues as pounds go up there. And that was the largest contributor to volume growth in the quarter.

Okay.

more of a mix than price.

Okay. That's interesting. All right. Thanks for the color.

Thank you.

Your next call comes from the line of Kristen McDuffy of Goldman Sachs. You may proceed.

Yes. Outside of the negative pledge of limitations contained within your bond, is there a reason that going forward you wouldn't want to have a layer of bank debt in your structures?

Is there a reason why we wouldn't want to have a layer of bank debt?

Yes. It just peoples like you could opt Mississippi your pricing costs with bank debt in your structure and I am just wondering if there is there a reason you would be considering or is there a reason you don't prefer to have bank debt as part of your capital structure?

I really like an asset-backed loan. That's what we have right now effectively by borrowing against our receivable when we need to. And it's hard to beat prime plus 50 basis points which is the rate that we have on that. If we went out to do a bank deal today, we wouldn't get those kind of terms. In fact, if I wanted to do something it would ultimately probably try to leverage inventory as further collateral for borrowing, and we do have a lien limitation in our $40 million revolver which makes it challenging to do that. So I think before anything else we've probably got to get past that $40 million. So I don't see anything happening from a bank deal standpoint anytime in the near future.

Okay. And you mentioned in your queue that you changed from LIFO to FIFO accounting in the third quarter. Why did you change your accounting method and could you give us the impact of this change?

First of all I would direct you to our 8k, which we filed on March 29 which actually provided the impact by quarter going back for three years. So you can get that information right off of there. The primary reason why we mutual moved from LIFO to FIFO was to harmonize the accounting policy across our businesses in conjunction with the segment realignment that Steve spoke to earlier. So as we globalized our color and engineer materials businesses, we didn't want to have our US operations be on a different basis of accounting from international. And LIFO is an US concept only, it doesn't exist outside of the US. So that's the principal reason. To put it in perspective, last year on a LIFO basis we reported a loss of $0.04. On a FIFO basis a loss at $0.10, so it was a big impact in Q-1 of last year. A lot of disclosure on this in the 10Q as required by GAAP. And had we been on LIFO, it would have been a million dollar bad guy in the first quarter this year.

Okay. Great. And just one last question. Just going back to your remarks on M&A. In the past you've stated that you don't intend to lever up the Company more than three times. Do you still see this to be sort of a threshold? Do you see the probability of a transformational action anytime this year?

I think those are still accurate stated capitalization goals. And I'm not quite sure what the second portion of that question was. But we would do a Synergy transaction or a larger deal if we believed that there was a compelling reason to do so. Obviously we can't talk about anything specifically but we're not opposed to it.

Okay. Great, thanks.

I think we have time for one more.

Correct.

Your next call comes from the line of Bill Hoffmann of RBC Capital Markets. You may proceed.

Oh, yeah, great. Good morning.

Hi, Bob.

Just a quick follow-up from a cash standpoint on your balance sheet, working capital was pretty meaningful use of cash in the quarter. Just want to get a sense of your thoughts as you go forward it. Sound to me like the end markets here have basically stabilized, and I guess this is sort of two questions. One, on a month to month basis do we think you're that more stable position, ie,are you not getting the kind of seasonality you're used to, and two, just from a cash standpoint is the balance sheet also going to run stable with where we are?

As revenues increase we are going to invest in working capital to support debt increase. What we hold ourselves really accountable to is a continuing improvement in efficiency, and so we mentioned today that our working capital is a percentage of sales is now 9.1%. In 2008 it was 15.4%. So usually what I say is that as you think about revenues increasing, our goal is to invest at a lower percentage than our existing run rate. So, I would say that simply said that as revenues increase we will invest in work capital something like 9% or better.

Let me just add, Bob, that I think the underlying tone of the question that demand has stabilized, I would say that let's take housing starts for a moment. The consensus forecast today for 2010 is 20% greater starts than in 2009. And for 2011, the projection is 960,000 units. That's 43% over the 2010 projection. So I'm not sure that we can assume that there's a stable demand in some of these markets that have been sitting out the trough just to put it in this context.

Right. I guess the context if we take the auto sector for example, obviously you've had a big jump up. Do you think that sector is a better and more stable run rate at this point?

You know, it's kind of surprised us on the up side. It's looking at probably around 12 million units off of sort of a sub 10 last year. Still a far cry from 17 million, but headed up and it's been a surprise to us, it's been a surprise to the auto makers. So I think it's really hard to consider that to be stabilized at this point.

Okay. Great. Thanks for the color.

There appear to be no further questions, so at this time I will turn the call back to Steve Newlin for closing comments.

This is Bob Patterson. I'm sorry. We'll just say thank you to everyone for joining us on the called to. This concludes our conference call. We certainly look forward to having everyone listen again on our second quarter results.

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