Avient Corp (AVNT) 2010 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the PolyOne Corporation Third Quarter 2010 Conference Call. My name is Mike and I will be your Operator for today. At this time all participants are in listen-only mode. We will have a question and answer session at the end of the conference. 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 to 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're 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 and-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 third quarter of 2010 to the third quarter of 2009 unless otherwise stated. All prior year financial references will be based on restated financial statements with a 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 and Chief Financial Officer, Bob Patterson. Now I will turn the call over to Bob who will review the quarterly results.

Thanks, Joe. 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.

For the third quarter of 2010 we reported sales of $681 million and net income of $1 million or $0.01 per share including special charges related to early debt retirement. This compares with the third quarter of 2009 when we reported sales of $548 million and net income of $48.3 million or $0.51 per share including special items related to gains associated with environmental cost reimbursement and curtailment of retirement benefits.

For the quarter, consolidated revenues grew 24% year over year driven by a 15% increase in volume and higher selling prices associated with raw material cost increases. Each platform recorded significant revenue expansion due to new business gains, improving demand conditions, and the higher selling prices I just mentioned.

Fluctuations in foreign currency exchange rates, primarily a weaker euro, negatively impacted consolidated revenues by 1%. As a result of the increase in volume, improved operating margins, and increased equity earnings, operating income before special items increased 83% to $50.1 million or 7.4% of sales for the third quarter of 2010 from $27.4 million or 5% of sales in the third quarter of last year.

Excluding special items and one-time tax adjustments in both periods in the third quarter, EPS increased 115% to $0.28 per diluted share for the third quarter of 2010 compared with $0.13 per diluted share recorded in the third quarter of last year. The $0.15 year over year increase in earnings per share was driven predominantly by the earnings growth of our three strategic platforms which combine for an operating profit of $54.2 million, a 47% increase over the prior year.

Our specialty platform recorded quarterly operating income of $24.1 million. This is a new record and during the quarter specialty accounted for nearly half of the strategic platform operating income. Versus the prior year, specialty revenues grew 18% to $272 million for the third quarter of 2010 driven by an 11% pickup in volume. Price mix added 11% while a weaker euro reduced sales 3%.

The specialty platform growth was led by gains in several end markets including appliance, healthcare, packaging, transportation, and electrical. From a profitability standpoint, specialty platform operating income as a percentage of sales increased to 8.9% from 7.6% in the prior year. The increase was driven by the previously described revenue growth.

Now let's look at PP&S. Driven by a 13% increase in volume our Performance Products and Solutions segment grew sales 10% over prior year to $198 million for the third quarter of 2010. Price mix reduced revenues 3% as our producer services business which maintains an average selling price half that of the consolidated platform grew revenue 21% over prior year levels.

Looking at revenue growth by end market increases in packaging, appliance, and healthcare markets expanded while building and construction revenues declined. PP&S platform operating income expanded to $17.9 million or 9% of sales from the $12.8 million or 7.1% of sales reported in our third quarter of last year. At 9% return on sales, PP&S achieved a new record in profitability for the second consecutive quarter. The expansion in profitability from the prior year was driven by improved mix, volume gains, and the continued realization of Lean Six Sigma benefits.

Our distribution segment achieved the largest year over year revenue expansion of any of our businesses. Sales increased 46% on 17% higher volume. The remainder of the increase in revenue is driven principally by mix and price increases associated with higher raw material costs which as largely pass through in this business. About 40% of the platform sales growth is attributable to new business gains through new supplier agreements won in 2009 with DuPont, Bayer, and Ineos ABS. In addition to these new gains, POD won supplier agreements in 2010 with BASF, Dow Corning, and now Exxon Mobil focused specifically on healthcare products.

The 46% sales growth resulted in operating income of $12.2 million or 5.1% of sales--almost double that of the prior year amount. The increase profit level of this platform was a direct result of scale as we leverage our invested capital base and SG&A. Recall that distribution has no fixed assets and its only investment is working capital which dropped from 18% of sales in 2008 to 12% this year. POD achieved a 39% return on invested capital on a trailing 12 month basis. From an end market perspective POD's revenue growth is driven by automotive, industrial, healthcare, and consumer.

Overall we're very pleased with our third quarter performance from our three strategic platforms. We were also encouraged to see that for the first time this year operating income from our 50% share of SunBelt improved over the prior year to $8.6 million up from $3.8 million in the third quarter of 2009. While ECU pricing has improved over the prior year, the primary driver of SunBelt's higher earnings was that 34% increase in volume.

We remind our investors and analysts that SunBelt has an annual take or pay contract with its largest customer and historically quarterly volumes have approximated the normalized take or pay level. During both the second and third quarters of this year, SunBelt delivered volumes in excess of the take or pay amount. The primary driver of this was SunBelt's largest customer taking chlorine ahead of their planned plant shutdown in the fourth quarter.

As such, we expect that fourth quarter volumes will fall below the normalized take or pay level to balance the year. This will likely result in a drop of sequential SunBelt earnings of $6 million. We are encouraged by the recent recovery in ECU pricing and while we expect SunBelt earnings to decline in the fourth quarter, at current prices and the minimum take or pay volume level, we expect SunBelt net of allocations will deliver $20 million to $24 million of income in 2011.

Other P&L items to report include corporate and other costs before special items which decreased $1 million from last year principally due to lower pension and post retirement expenses related to the restructuring of retirement benefits completed in the third quarter of 2009.

During the third quarter of this year, special items included the $29.4 million premium on the early extinguishment of debt plus environmental charges and previously announced restructuring expenses. Prior year special items included a $23.9 million gain from reimbursement of previously incurred environmental costs and a $21.1 million gain on the curtailment of post employment benefits.

Finally, our effective tax rate for the quarter excluding special items and the tax valuation allowance adjustments was 35% bringing our year to date effective rate to 34% which we believe is a good rate to use for modeling. Cash taxes paid in the quarter are well below the 35% due to NOLs in the US.

Looking at the balance sheet or more specifically our capital structure, the third quarter included a number of improvements. In July we repaid $40 million of borrowings and terminated our Citibank credit facility ahead of its previously scheduled maturity in 2011. In September we issued $360 million in senior notes at par with a coupon of 7.375 and scheduled maturity in 2020. A portion of the proceeds were utilized to repurchase 256 million of our outstanding 280 million senior notes with a coupon of 8.875 scheduled to mature in 2012. The net effect of our increased borrowings, partially offset by lower interest rates should increase our annual interest expense by about $1.5 million.

We exited the quarter with net debt including the SunBelt guarantee of $195 million and a net debt to EBITDA ratio of 0.9 times. We were pleased with the note issuance as we have effectively been able to secure long-term capital at attractive rates with improved covenant features and eliminated a future risk of refinancing. These changes combined with the continued improvement in our earnings mix were again noticed by Standard & Poor's as evidenced by their September upgrade of our credit rating to B+.

We ended the quarter with $308 million in cash, $447 million in available liquidity, and limited debt maturities between now and 2020. We have ample cash to support our operating needs and fund bolt-on acquisitions which we view as the primary uses of cash for now. Our M&A focus is on bolt-on acquisitions on the specialty platform that expand our geographic presence and-or our exposure to attractive end markets.

In October we acquired our first Company in Brazil, a specialty color business called Polimaster. Although it is small with only $4 million in sales, Polimaster not only gives us a starting presence in Brazil but does so in attractive consumer and healthcare end markets.

During the quarter we also made incremental investments in human resources, adding 103 permanent salaried positions, 63 of which are in commercial roles such as sales, marketing, and research and development. At an annualized cost of $15 million, we believe this is the best investment we can make today to support our organic growth strategy.

I will now turn the call over to our Chairman, President, and CEO, Steve Newlin, who will have more to say on both of these subjects.

Thanks, Bob, and good morning.

Bob's covered the financial performance of our businesses in depth and so I'd like to spend some time talking about our organization and what's driving our success.

Let me begin by thanking our PolyOne associates around the world for their exceptional performance in the third quarter and by welcoming the Polimaster team to the PolyOne family. Marco Reichert and his team have created a niche business that combined with our financial strength and specialty expertise we can leverage into a larger and more profitable investment in Brazil and more broadly in South America. I'd also like to welcome the newly hired associates around the world. More than half of these new hires Bob mentioned were outside the US where we see tremendous growth opportunities.

Now I realize this incremental investment may be met with some skepticism but we believe we are taking a balanced approach to hiring that considers the intermediate and long-term goals of the Company. Further, we've established a track record of generating exceptional returns from our commercial resource investments. With an addressable market of over $30 billion we have a lot of room to grow and our new associates will help us drive new business gains, accelerate innovation and drive greater efficiencies through Lean Six Sigma deployment. In fact, we think now is the perfect time to add quality personnel in key positions and we may not get a hiring opportunity like this again for a very long time. It's an exciting time to be at PolyOne and we're confident about our future.

Our ability to deliver record levels of profitability from our strategic platforms despite continued low levels of demand from the US building and construction market demonstrates the diversity of our end markets and the earnings power of the new PolyOne. Our success in end market diversification is best highlighted by our focused expansion into healthcare which now makes up 8.5% of our revenues. We now have 50 employees dedicated specifically to this very attractive end market.

In October we announced a new agreement with Exxon Mobil to distribute their medical grade Sanoprene products. In addition, Exxon Mobil has selected PolyOne as its exclusive global compounding specialist to develop custom medical grade formulations to be marketed and sold under the PolyOne GLS brand. PolyOne was selected for our extensive R&D and compounding capabilities and our strategic focus and reach into the healthcare market.

For the last week the new PolyOne was on display for the world to see at the K show in Dusseldorf, Germany. The K show which ranks as the world's largest plastics exhibition was the ideal setting to showcase a number of our groundbreaking innovations. Under the theme "Make It Possible", we showcased PolyOne's continuing commitment to enhancing our customers' operations and creating competitive advantage for them.

A host of solutions that can improve our customers' ability to win business, differentiate their products, and improve operating efficiencies were demonstrated. Recent innovations such as our reSound family of biopolymers, our liquid color solutions, and a portfolio of alternative energy polymer solutions were among those featured.

Now let me briefly describe our reSound product line. reSound is our trademark brand for biopolymer compounds for durable applications. These innovative materials which incorporate a minimum of 30% bio derived content by weight enable manufacturers in the durable consumer product sector to reduce their environmental impact while delivering performance equal to or better than conventional engineering resins and superior to other biopolymers on the market today.

Our customers are increasingly focused on reducing their carbon footprint to meet consumer's growing preference for greener products. Until now they had few options because biopolymers did not provide the desired performance properties. Our reSound compounds solve this dilemma by providing both a high percentage of renewable content with excellent mechanical properties.

The K show exhibit not only highlighted our new innovative technology offerings but it also showcased our best in class global commercial teams. Our newly aligned global organization is capable of providing the highest quality service with product specific expertise anywhere in the world. I'll remind you that it was just January of this year when we aligned our specialty engineered materials business into color additives and inks businesses into global business segments.

This structural change enables us to provide the appropriate level of service to our customers and ensures we are leveraging our product line and technology expertise across all geographies. The change to globalize our specialty business segments has allowed us to more effectively translate pockets of excellence across geographic boundaries, whether it's best practice commercial tools used in the US or our research and design capabilities in Europe, we continue to leverage local skills for global advantage.

Our ECCOH business is perhaps the best example of a center of excellence which is now being leveraged globally. ECCOH is a fire resistant, low smoke, halogen-free solution serving specialty niche customers in the wire and cable markets. In Europe we developed design capabilities combined with the commercial marketing expertise to provide value to niche customers in an otherwise commoditized market of low smoke, halogen-free wire and cable.

Our European team recognized the market need to provide a differentiated product to customers in the solar and nuclear markets, just to name a few. They then leveraged local design capabilities to develop application specific solutions and built a specialty business with over $50 million in annual sales and operating profit margins in excess of 15%. This combination of local commercial market knowledge and product specific design expertise is being transferred to our Asian operations as we speak and will be rolled out in North America early next year. ECCOH is just one example of how our globalization effort is driving revenue growth and improving profitability.

Another example is the globalization of our purchasing function. In January of this year we announced the centralization of global sourcing under Tom Kedrowski, our Senior Vice President of Supply Chain and Operations. I'm pleased to report the change is advancing on schedule and already delivering benefits.

In September we hosted representatives from over 150 companies in our second annual supplier symposium. This was really a first-class event and we not only communicated supplier performance expectations, but more importantly we educated our suppliers on the PolyOne strategy and the role that they play in achieving our strategic objectives.

Tom's team also received our award-winning Lean Six Sigma initiative and global safety program. We were delighted to win the award for the world's best startup program for Lean Six Sigma in January of this year and I'm further pleased to announce two new awards recognizing PolyOne.

First, we recently received the Liberty Mutual Gold Safety Award. This prestigious award was presented to PolyOne for achieving a safety rating in our US facilities that is 84% better than our industry average. PolyOne takes safety very seriously and it's rewarding to be publicly recognized for our accomplishments in keeping our employees and our workplace safe.

We're committed to improving the safety of our work environment and since 2006 we've reduced our global incident rate to a world-class 0.6. And just to put this in context, this compares to an industry average of 5.7. The improved safety environment not only delivers financial benefits but also has a tremendous impact on employee morale and overall employee engagement levels. We look forward to sustaining the world-class safety environment we've created.

The second award was earned by our marketing team. In October BtoB Magazine awarded PolyOne the top award in business to business marketing category for our "What If?" advertising campaign that you've probably seen in Plastics News or elsewhere. The Best of 2010 print campaigns competition is kind of like the Emmys for BtoB marketing. This puts us in an elite class as other marketing efforts honored by the magazine this year included Cisco Systems, IBM Corporation, Accenture, and Sybase among others. So, I'd like to congratulate our marketing team for a job well done.

As we look to the balance of 2010 and into 2011, we expect to continue delivering both sales and earnings growth despite the more challenging year over year comparisons. Our PolyOne distribution year over year sales growth will soften as the marquee new business gains of late 2009 lap themselves.

Additionally, and as Bob outlined, we forecast SunBelt volumes to decline sequentially as volumes are adjusted in line with our annual take or pay contract volumes. Last quarter we mentioned that we expect seasonality to return to our business during the third quarter and this was observed in our PP&S and distribution segments. Historically the fourth quarter is seasonally weaker than the third. And that impacts our specialty platform as well.

Given the recent refinancing and investment in commercial resources, let me just summarize our near and intermediate term expectations. For the fourth quarter, seasonality is back and we expect fourth quarter sales to be 10% below the third quarter as a result. We also expect SunBelt earnings to decline about $6 million for the third quarter to the fourth quarter for the reasons we previously cited but should recover to normalized levels in the first quarter of 2011.

Interest expense will increase about $1.5 million per year as a result of the incremental borrowing in the third quarter and finally we expect our new hire investments will add $15 million to annualized expenses. All in, combined with the other items I just described, seasonality will likely reduce our fourth quarter sales approximately 10% and EPS before special items and adjustments, approximately 50% when compared to the third quarter. That being said, this represents greater than 20% expansion of EPS before special items and adjustments over the prior year fourth quarter.

We further expect continued profitable growth next year including double digit EPS expansion in 2011 versus 2010 driven by new record operating income or profitability from our three strategic platforms. More than ever I'm confident that we have the right management team and strategy in place and as a result we will continue to outperform in terms of revenue and earnings growth. We've made substantial progress over the past few years but we still have plenty to do as we strive to meet or exceed our well known 2012 objectives. It's really and exciting time to work at PolyOne and to be part of a winning culture.

That concludes our prepared remarks and I'd like to turn the call back to Mike who will open up the lines for your questions. Mike?

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

Good morning, gentlemen. Nice result there. Steve, you talked a little bit about seasonality in the fourth quarter and I guess one of the things we've been hearing at least with respect to Europe and autos is the third quarter really didn't see much seasonality. Can you talk about what specifically you saw there? But more importantly, here we are into early November. Are you basing the statement on seasonality based on what you've already seen for the month of October or is it more of an expectation of what you're going to see in November and December?

This happens for us every year. I will tell you that while auto still seems to be holding up fairly well and Europe is strong, particularly Germany, housing is really in difficult straits right now. So, there's very little activity in new housing construction going on right now.

We've also, as you've--if you've followed some of the appliance manufacturers you'll notice that they've had some inventory build. That's kind of related to housing as well. We'll see some challenges in those markets. So, we're continuing to sort of round out and diversify our end markets into healthcare, et cetera. I'm not really referring to auto but clearly housing and a few other markets.

And then I think, Frank, additionally there's still a little bit of an air of caution by our customers. They've become much better and more astute at managing working capital and inventory. And I think they're going to want to minimize their inventory and the tie up of working capital as the year ends. So, that's really what we're alluding to. It's historical coupled--put into context of the business environment that we're in today.

But as we stand here today, you've certainly seen some seasonal slowdown on the construction side but that's about it, at least at this point?

That's correct.

And then last thing, obviously your balance sheet metrics are improving on a daily basis here and you did acknowledge that you made a small acquisition in Brazil. Can you talk about what you're seeing out there on the M&A environment and how likely is PolyOne going to be a participant in that market?

Hi, Frank. This is Bob. We are actively engaged in a number of discussions and obviously can't go into detail on anything specifically. The one thing I would say about the environment right now is that I do think that sellers have gotten more reasonable with respect to their price expectations, however there is a struggle in terms of coming up with valuation given that LTM performance is still probably below where people think it should be on a normalized level. So, while I think expectations for selling prices have moderated, I think there's still a struggle to bridge the gap between buyer and seller prices but I can assure you that we will be involved and that we do plan to do more deals here in the near-term.

Terrific. Thank you.

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

Good morning. I will join my congratulations to Frank's. Just following up on the acquisitions. Are you mostly looking overseas or are there opportunities in the US--I mean Europe that you might be interested in. I guess by "overseas" I meant faster developing countries as opposed to the US and Europe.

Yes. Rosemarie, it's Steve. Good morning. I think what we've said about it and continue to view our acquisition strategy is first of all geographies were we don't have a presence get priority. That's, right now for PolyOne, it's South America.

At the same time we continue to scour parts of Asia and Eastern Europe and even sort of Western Europe if the opportunity arises and then on the front in North America, we'd be looking more for one of two plays; either some unique technology that broadens our portfolio and our technology base and our offering or a strong synergy play where we had a lot of confidence that combination would give us a great opportunity to improve efficiencies. So, I'd say geographic dimension is the first priority for us coupled with, shortly behind that is new technology and innovative opportunities for us to broaden our offering.

It sounds as if most of them would be bolt-on except for the synergy play which could entice a larger acquisition. Am I looking at this properly?

I think that's a fair assessment, yes.

And then going back to the seasonality, there was really not much of a seasonality in Q3 versus Q2. Was there any particular reason? Do you feel there was some pre-buying because of selling price increases coming? Attached to that if you could touch on your raw material costs?

This is Bob. I would say that we did see seasonality in two of our three platforms. So, when you look at the consolidation it's possible that the seasonality effect appears muted because specialty actually did grow from the second quarter to the third. I would also highlight that historically auto has probably played a greater role of seasonality than it did this year as well as Europe. Both of those actually improved for us from the second quarter to the third quarter. And I would say that's not going to be the case in the fourth quarter.

Your second question I believe was with respect to raw material costs and we do continue to see inflation of raw material costs and we also continue to see tightness in supply in certain materials that I would say as a percentage of our total spend are very small but nevertheless critical, particularly in our engineered materials business.

Do you find that in this environment you are having no real difficulties passing through those raw material costs in the shape of selling price increases?

I've got to tell you it's always a dog fight to get pricing. Buyers are smart. Corporations are--it creates a lot of relationship tension. But we've gotten much better at this than we ever were in the past. Our sellers are trained. They're providing great value for our customers. And when we sit down and have a reasonable conversation with our customers and talk about it and justify the increase, we succeed. If we don't handle it that way we will have difficulty.

But I'm confident that our team has the skill set. It has, I think, the support behind them to continue to succeed in getting price increases where it's appropriate and fair. I'd also say that it is not our objective just to pass through, that we are on a margin expansion track and it is our expectation that when we add value that we get some reward for our shareholders when we do that. So, we do ask for our pricing to improve in sort of parallel with our gross margin targets.

And do you anticipate those raw material costs will still increase or have they stabilized?

We do continue to expect some level of inflation in the fourth quarter, not necessarily to the same level of increase that we saw year over year but we do expect it to increase.

Thank you. I'll get back in the queue.

Thank you.

Thank you, Rosemarie.

Your next question comes from the line of Saul Ludwig of Northcoast Research. You may proceed.

Good morning, guys.

Hi, Saul.

Bob, what was the--maybe give the volume change in each of the specialty segments?

Yes. In color, year over year, volume was up 6.3%. EM was up 15.1%.

Great. Thank you. Next question. Your approach to pricing has been working very well. When you get a raw material cost increase you move very quickly to discuss new pricing with your customers. Because we've had this surge in raw materials and you are on FIFO accounting, do you think you got any benefit in the third quarter from realizing higher prices but putting lower cost of raw materials through cost of goods sold?

We actually do disclose that in our 10Q, Saul. I think the effect from accounting FIFO versus LIFO was again pretty small this quarter, less than $1 million.

I think, Saul, what happens and your point is well made and articulated. I think we have a little bit of an offset on the PP&S side where we have a stronger lag. That's usually--those contracts usually have a one quarter lag. Maybe it offsets and counterbalances a little bit some of the more aggressive increases that we get in a few of our other businesses.

Okay. And then, Bob, what can you tell us about the pension expense this year and pension expense next year given long-term rate of returns that haven't anywhere near matched what assumed long-term rate of returns have been and lower discount rate?

First of all, as you know this year our net pension and post retirement expense is effectively break even as we continue to amortize credits from the post retirement plan changes we made last year. Our best estimate right now for pension costs in 2011 is that with a lower discount rate which is primarily what would drive the change in expense for us, that would probably add $5 million to $6 million of expense next year.

Okay. And then finally, Steve, predicting the future is pretty hard. As you set your plans for 2011 and you're probably knee deep in that process, what is the macro assumptions that you're using as the baseline for your managers to set their plans.

Saul, for us the bigger macro numbers that we have to rely on to have some basis of a plan are really around housing and auto. And right now the forecast--they're both dropping--housing is dropping by the way and auto is holding pretty strong and so for housing I think in our plan next year we had what? 700? 720,000 units, housing starts? Which again, it doesn't sound like a big number and that's below, by the way, the consensus median. But for us it's going to be a 20% pick up in housing versus 2010. And auto I think we're around 12.5 million units, something like this, probably another 10% pick up in auto.

So, I think we're in pretty good shape in terms of conservatism built into our assumptions. Beyond that we don't really--we look at GDP growth rates but we think we have so much opportunity to grow that GDP growth rate is going to have a de minimis effect on us if we continue to win the kind of new business gains that we've been achieving in the last year. I don't know if that answers your question or not, Saul. If not, let me know. I'll try to take another run at it.

Just finally, you said that the fourth quarter might be down 50% for the third which would put it around $0.14. Then you said that was going to be up 50% from a year ago. I thought year ago was like $0.11.

No. What I said was--what we said was it'll be up over 20% from a year ago, same quarter, Saul. Sorry.

Thank you very much, guys.

You're welcome. Thank you.

Thanks, Saul.

Your next question comes from the line of Tom Hayes of Piper Jaffray. You may proceed.

Great. Thank you. Good morning, gentlemen.

Hi, Tom.

I was just wondering a couple things. One, if you could just kind of remind us, you had indicated that for example healthcare represents about 8.5% of revenue. We spent a lot of time talking about housing this morning. It's kind of--what percent of revenue does housing represent?

It's about 12% building and construction.

Okay. And maybe if you could provide a little bit more color, maybe on the Exxon program you announced as far as maybe timing and magnitude?

Sure. First of all, let me just go back a second on this healthcare housing question. I think you got the healthcare right. The housing at 12% now, that's just an absolute direct link to housing. There's a lot of peripheral business that's housing related. For example, our appliance business. There's a pretty strong correlation between appliance and new housing starts. There's a fairly decent correlation between wire and cable and even electrical for PolyOne with housing. So, all in, we certainly want housing to do well. It will impact us beyond the direct 12%. And at one point, by the way, it was--we were about 40% connected to housing. So, just to clarify that.

Moving on--yes, moving on to your question around Exxon Mobil, this is a pretty important step for us. This is obviously a world-class supplier. They're very selective about who they hook up with. We gained this opportunity. We've been working on it for a long time. But we were just awarded this opportunity to be their exclusive compounder globally and to be their distributor specifically into the healthcare arena. You know, it's not going to be huge this year and next but it's going to build. I think we'll probably run a few million, $3 million or more next year in terms of revenue. Hopefully we can do better than that but that's kind of the early scale of it. And they're going to have both PolyOne distribution and GLS involved in this distribution arrangement.

So, to give you some examples of typical applications, it could be medical tubing or syringe tips or stoppers, seals, or other applications that require some pretty stringent approvals, an ISO 10993 approval or a USP approval. So, this is exclusive and it's attractive and it's got some uniqueness to it. So, we're quite excited about it.

Great. Sounds like a wonderful opportunity. Shifting gears a little bit if I could ask one more question. On the PP&S segment you've had two nice sequential gains in operating, 9% for this quarter. You mentioned a couple things that are driving it. One was mix, volume, and then the Six Sigma changes. I guess I'd like to get your thoughts on how much of that increase over the last couple of quarters is structural meaning that if you get the mix in volumes fluctuating, can you still see some growth at 9% or the 8% that we saw the previous quarter without the large reliance on mix in volumes?

Tom, this is Bob. The one thing that I would say could impact the operating margin percent more than anything else is a comeback in housing. Typically our building construction is lower margin relative to our other end markets. So, as we talk about achieving our 2012 objectives we always say one of the biggest challenges we have is if housing and auto--housing. Excuse me. Not auto. Housing comes roaring back. But we view that as a good problem to have. Ultimately it does drive EPS but you could see a little bit of margin pressure there as a result.

With respect to Lean Six Sigma, we believe those are structural and in place and not going anywhere.

Great. Thank you.

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

Good morning, everybody. A lot of my questions have been answered already but I'd just like to follow-up on the raw material pricing. A couple of questions. First of all, the trends that you're seeing in the US versus Europe versus Asia, are there some differences in terms of timing or significant raw materials moving pricing in different ways in these different regions?

And then secondly, you obviously have been very good at getting pricing to offset raw material costs. Are you fully caught up at this point on pricing or do you still have some legs to go assuming that fourth quarter versus third quarter is going to be most single digit increase if any?

Hi, Dmitry. This is Bob. I guess I'd tell you that just in looking at each one of the regions I'd say we're probably seeing some of the highest price increases outside of the US and we are seeing particular stresses in rare earth metals coming out of China. And so, potentially that's what's driving that. So, year over year we've seen increases around the world but I would say probably the most significant being in Asia, then Europe, and then the US. And like I said, we are seeing some tightness in supply on rare earth metals as well as other--what I would describe as low volume spend for us but nevertheless important relative to our engineering materials and color businesses.

Okay. And as far as the trajectories of these price curves, are they flattening out in the US and still growing in Europe or how would you characterize that?

I think we still believe we're going to see increases just across the board. I wouldn't say that there's any kind of pullback geographically and then I think your last question which I may have missed inadvertently really was around pricing and we don't look at pricing really as something that's won and done. For us pricing is something that we just have to continue to live with and to the extent that we're going to see raw material inflation we need to take proactive measures to ensure that we have pricing increases and that we get material margin expansion which as Steve said earlier in the call is very difficult to do.

I think the rate of inflation of the raw is perhaps slowing a bit but there still is raw material inflation. You've got some very tight supplies. TiO2 is very tight due to a lack of global supply and we think that's going to have a pretty long period of time before we work through that. Plasticizer has been in tight supply and there are even some sales control situations that are in the marketplace. And then you've got nylon that's in sort of a global shortage situation. Butadiene is another one which is of course the core building block for our TPE business. Very tight straits. And that's the largest cost driver of TPEs. So, we're hoping TPEs may stabilize in Q4 but a lot of these other products are going to be I think tight for some time and that certainly effects pricing. That's why we have to be nimble, adaptable, and aggressive as we move through and protect our shareholders and at the same time be fair in working with our customers. So, that's the balance we're trying to strike and I think up till now we've done a pretty good job with it and we don't have any intentions of deviating from that.

Yes. So, no time to take a breath yet in terms of pushing through price increases it sounds like?

Not in this time horizon, no.

Got you. Second question on the distribution volumes which--they were up 17% this quarter. They've been pretty strong obviously as you gained a lot of business in 2009. You've gained some incremental business now again here in 2010. So, would you expect that I would say uncharacteristically strong growth in distribution which is mainly leveraged to the industrial economy and therefore should grow at a little bit higher than GDP but not at 17%? Would you expect this type of growth to continue well into 2011? Maybe not--I'm not asking you to say it's going to be 17%. But it's going to be certainly something stronger than low to mid single digits, that the industrial economy is perhaps growing it globally?

If by uncharacteristically large you mean what we've delivered so far this year I think the most significant impact obviously has been some of the new business gains that we had in 2009 and remember that the principle win being that with DuPont which we announced in the third quarter of last year. That's effectively lapped itself. So, really when you look at year over year growth relative to that it's going to be same store sales. We did have some new business gains this year which will help us grow faster than that. It's hard for me to characterize for you, Dmitry, whether or not that's unusually large or not. I don't have a good definition for that.

Here's what I would add, Dmitry, is that you know--I think we have--there's no question we have great momentum in our distribution business and we're growing faster than the competition for a variety of reasons. It is the kind of arrangements that we've earned from suppliers. It's the way we're executing. It's the way the sales force is performing versus the competition. And I think it's our real stable of--line card of great suppliers that work very closely with us. So, I would expect us to grow faster than GDP growth rates. I think that we can clearly say that. But I could also say with equal confidence that this past year's level of growth rate is not sustainable. So, it's somewhere in between that range. We're comfortable with the team. We're going to continue to invest in sellers because we think--we've got about a 15%, no more than 20% share out there. There's lots of doors to knock on. And we just have to get motivated and professional sellers out there to make it happen.

Got you. That's very helpful. Thanks a lot for that color. On the SunBelt joint venture obviously you have some recovering profitability as people keep pushing up prices in the chlor-alkali segment. Can you refresh us on what the exit strategy for this business is and what the timing may be and whether or not it's changed given the sharp drop in profitability that you experienced last year and the recovery here this year. Are you more or less happy owning this business or part of this business?

I think it's hard to refresh something that doesn't really have a clear strategy. The one thing I'd say is that we've always described our investment in SunBelt as noncore and to the extent that we could monetize it for a fair price we would go ahead and do that. The one thing that I would clarify relative to your remarks is that pricing is actually improving and the business is getting better and we believe that there's improving demand conditions as well. So, it is earning a good return on our investment and we're not unhappy relative to the level of earnings. It's just that from a priority standpoint we would rather invest in our specialty platform if we had additional resources to do so.

Got you. And one final question as a courtesy, you've been good enough to provide us with the percentage of sales from healthcare and from housing construction. Would you care to update us on what the percentage of sales from automotive is these days?

It's about 14%.

Thank you very much. That's all I have.

Thank you.

Your next question comes from the line of Mike Sison of KeyBanc. You may proceed.

Hi, guys. Great quarter.

Thanks, Mike.

In terms of volume growth that you've had either in the third quarter year to date, you've talked about new product wins being an area that you've been pretty proud of. So, how much of the growth that you're seeing this year is coming from new products?

The one thing that I'd tell you is that if you look at the total volume expansion for PolyOne is about 15%. I would tell you that new business gains and this is inclusive of the distribution wins, was probably around 3%.

3%. Okay. And, Steve, as you head into 2011 I'm encouraged to see that you're pretty confident already, giving us sort of a soft outlook for '11. How much of the growth in volume next year will sort of continue to reoccur for new products? Is this sort of--is 2% to 3% sort of the goal in terms of volume generation?

We hope to do better. I mean we have a lot of initiatives in our Company to drive innovation and create more new products that have a higher degree of uniqueness. If we can capture a few acquisitions along the way that have, again, differentiated technologies, we think we can do better than that over time. That's our goal. So, we just keep driving for that. But we don't announce a specific targeted numerical goal for that.

When I think about '11 in terms of the growth that you're looking for in earnings, can you give us a little bit of feel of to some degree is the confidence coming from what you see in the volume potential next year? Costs savings? Productivity? Sort of maybe frame up some of the major variables that are looking positive to you heading into '11?

I'll take a shot and then let Bob have his say on this. For me it's all about momentum and execution. We've got--we're adding sellers, we're investing in sellers, the time to productivity is a little bit slow so those new hires that are coming on right now probably won't have much impact until the latter part of next year. But we've still got a lot of momentum from new business gains. We're winning a good share of new business. We're at higher rates than we have been in the past in our new business. We're executing very well out in the field. I have a lot of confidence in the ability of our sellers to go capture new business. I've got a lot of confidence in our management team to continue to invest in new innovation and R&D and technology that gives us uniqueness.

That's sort of the basis for my enthusiasm and optimism for the future. It's less macro economic and we're realistic. If the economy goes real soft it's going to of course effect us like it will anyone else. But I'm looking inside the house here at what I feel instinctively and intuitively about our business position and where our people--where their minds are right now and where their hearts are. And they're out there attacking the competition and selling plastics conversions from metal and it feels like we've got good solid momentum going into the year.

I would add that as we look towards achieving our 2012 operating margin goals we usually reference the continued benefit from Lean Six Sigma adding 100 basis points to gross margin expansion. But longer-term where we really see the best opportunity for sustainable margin growth really is going to come through innovation and technology advancements. We talked about the resources that we added to PolyOne in the third quarter, hiring incrementally over 100 people, 60% of which are in commercial roles. You don't necessarily see the technology effect from those hires in year one but certainly expect to thereafter in helping us get to our 2012 goals.

Great. Then final question. When you think about where you're at in your base business, volumes have recovered pretty well for you and I'm trying to get a feel for what sort of the potential is in terms of recovery in the base volume over time. Are your operating 70%? 80%? Sort of give us a framework of where you're at on a base business?

It really does vary by segment. We don't disclose our capacity utilization or operating rates. One of the things, if I may, just to kind of go back to a comment Steve made earlier is that when we think about our growth we really don't think about GDP plus two or something like that formulaic. Our expectations are for higher growth than that given the investment that we've made and the additional resources that we have. We think that's achievable.

Would it be fair to say you still have a good amount of capacity that you can fill up with good leverage down the road?

We do have capacity. I wouldn't describe that capacity as vacant floor space. I would say we have capacity to add shifts, increase line utilization and grow that way more than anything else.

Great. Thank you.

I think we can take one more caller.

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

Hi. Good morning, guys.

Hi, Chris.

A lot's been answered thus far, but kind of wanted to circle back to SG&A a little bit. You had pointed to $15 million of added expense for the personnel investment, 5% to 6% from pension. Looking forward to 2011 is that how we should be looking at this, about $81 million per quarter of SG&A? Or is there anything else that's possible to slide in there?

With respect to the two items we mentioned, yes. You can use those for modeling next year. Didn't make any other observations about in total SG&A. But I think incrementally that's probably a fair start.

And you had pointed out seasonality, but just to be clear, the emphasis that you've put on seasonality isn't an indication that there's something extra that you're seeing going into this winter? It's just basically just to keep everybody on top of sort of normal purchasing behavior?

I believe that's correct.

I appreciate your time.

Thanks, Chris.

This concludes our third quarter 2010 conference call. I'd like to thank all of you for joining the call today. We look forward to updating you on our 2010 progress, the complete year during our fourth quarter conference call which is scheduled for early February. Thanks again, have a great day.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a good day.