Avient Corp (AVNT) 2010 Q4 法說會逐字稿

Good morning ladies and gentlemen, and welcome to the PolyOne Corporation fourth quarter 2010 conference call. My name is Michael 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 record 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 are based on management's expectations and involve a number of business risks and uncertainties, any of which could cause actual results to differ materially from those expressed in or implied by the forward-looking statements. Some of these risks and uncertainties can be found on the Company's filings with the Securities and Exchange Commission as well as in today's press release.

During the discussion today the Company will use both GAAP and non-GAAP financial measures. Please refer to the earnings release posted on the PolyOne website where the Company describes the non-GAAP measures and provides a reconciliation of them to the most comparable GAAP financial measures.

Operating results referenced during today's call will be comparing the fourth quarter of 2010 to the fourth 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 Executive Vice President and Chief Financial Officer, Bob Patterson. Now I will turn the call over to Bob, who will review the quarterly results.

Thanks, Joe, and thanks again to everyone who is joining us on the call this morning. As always we welcome the opportunity to speak to our investors and analysts about the recent performance of PolyOne. For the fourth quarter of 2010 we reported sales of $618 million, and net income of $97.5 million or $1 per share. This compares with the fourth quarter of 2009 when we reported sales of $553 million, net income of $20.8 million or $0.22 per share. Earnings in both periods include special items, the largest of which is the reversal of tax valuation allowances which I will discuss momentarily.

Consolidated revenues for the quarter grew 12% year-over-year driven by a 6% increase in volume and higher selling prices, principally associated with raw material cost increases. Each platform recorded double digit revenue expansion due to new business gains, improving demand conditions and higher selling prices. Fluctuations in foreign currency exchange rates, primarily a weaker euro, negatively impacted consolidated revenues by 1%. As a result of the increase in sales volume, improved operating margins and increased equity earnings, operating income before special items increased 30% to $31.6 million or 5.1% of sales for the fourth quarter of 2010, from $24.3 million or 4.4% of sales in the fourth quarter of last year.

Excluding special items and one-time tax adjustments in both periods, fourth quarter 2010 EPS increased 55% to $0.17 per diluted share compared with $0.11 per diluted share recorded in the fourth quarter of last year.

Last quarter we announced we added 103 permanent salaried positions, 63 of which are commercial, technical and sales resources. During the fourth quarter we added an additional 40 positions, 24 of which are directly responsible for winning new business and/or accelerating innovation. The net cost of these additions is approximately $5 million in the fourth quarter.

Compared to the prior year fourth quarter, SG&A was up only $2 million however, as this incremental expense associated with the personnel investment is partially offset by legal costs incurred in the fourth quarter of 2009 that did not recur this year, and lower pension expense. At an annualized cost of $20 million, or $0.13 per share, this investment in commercial resources is significant but will drive growth.

During the fourth quarter of 2010, our specialty platform grew revenues 10% versus the prior year to $251 million and accounted for over half of the Company's consolidated operating income. Specialty volumes in the fourth quarter of 2010 were flat versus fourth quarter of 2009 as a result of restocking that took place in the fourth quarter of last year primarily in our Asia electronics business. We do not expect this trend to continue and we forecast year-over-year volume growth again in the first quarter of 2011. As such, for the fourth quarter the primary revenue driver was price and mix of about 12% offset by a 2% reduction for FX.

From a profitability standpoint, Specialty Platform operating income expanded 13% over the prior year to $18.6 million, or 7.4% of sales, despite increased raw material pricing, the impact of prior year restocking and the incremental investment in SG&A.

Now, let's look at PP&S. Driven by an 11% increase in volume, our Performance Products and Solutions segment grew sales 11% over the prior year to $176 million for the fourth quarter of 2010. Price and mix impacts largely offset one another. Mix shifted towards the automotive end market and our producer services business which maintains an average selling price half that of the consolidated platform. PP&S platform operating income totaled $6.4 million or 3.6% of sales for the fourth quarter of 2010, which is seasonally weakest for this business. This is down slightly from the $6.8 million recorded in the prior year fourth quarter which included a $1 million benefit from a favorable inventory adjustment that did not occur in 2010. Were it not for this, year-over-year operating income would have improved. We remind investors that PP&S achieved record levels of profitability in the second and third quarters of this year and achieved 7% return on sales for the full year, also a new record.

Our distribution platform achieved the largest year-over-year revenue expansion of any of our businesses. Sales increased 14% on 3% higher volume. The remainder of the increase is driven principally by price increases associated with higher raw material costs which are largely passed through in this business. Contributing to the quarterly growth were the new 2010 supplier agreement wins with BASF, Dow Corning and ExxonMobil, focused specifically on healthcare products.

The 14% sales growth resulted in operating income of $9.6 million for the fourth quarter. Unfortunately, year-over-year profit expansion in this platform was muted by an incremental $1 million swing in bad debt expense as the prior year results included a $600,000 favorable adjustment for aged receivable collections. Despite this, distribution achieved a 4.5% return on sales during the quarter and for the full year achieved 4.6%. We now expect we will exceed the high end of our 2012 profitability target of 5% for this business.

In addition, we continue leveraging our invested capital base. As you recall POD has no fixed assets, and its only investment is working capital, which dropped from 18% of sales in 2008 to 12% in 2010. PolyOne Distribution achieved a 40% return on invested capital during 2010. From an end market perspective, POD's revenue growth was driven by healthcare, consumer, automotive and industrial end markets.

Overall, we are pleased with the fourth quarter performance. Each of our three strategic platforms delivered double digit revenue growth, driving a 55% expansion in EPS before special items. Consistent with our prior quarter comments, SunBelt fourth quarter volumes were below prior year and sequentially 35% below third quarter levels. However, continued improvement in ECU pricing resulted in better than anticipated equity earnings during the quarter. The recent recovery in ECU pricing should continue to favorably impact SunBelt earnings in 2011.

Other P&L items to report include corporate and other costs, before special items, of $7.4 million which decreased $3.1 million from last year, principally due to lower pension and post retirement expenses, timing of incentive cost recognition. At just under 30%, pre-special effective tax rate was a bit lower than expected as a result of geographic mix and favorable exchange. 34% we believe is still a good number to use for modeling going forward.

During the fourth quarter of 2010 special items and tax adjustments included the reversal of the remaining US deferred tax asset valuation allowance we initially recorded during the fourth quarter of 2008. We are pleased that with the significant profitability improvements we have achieved and a bright outlook for our future we fully expect to realize the benefit of these assets. The reversal of the valuation allowance was the primary driver of the $78 million favorable tax adjustment recorded and reported during the fourth quarter of 2010. Additionally, during the quarter we also recorded a $16 million gain on the sale of our BayOne joint venture investment.

Looking at the balance sheet on free cash flow, we exited the quarter with net debt including the SunBelt guarantee of $118 million and a net debt to EBITDA ratio of 0.5 times. Free cash flow during the quarter totaled $68 million including $33 million from the monetization of noncore assets, our seller note from Excel and the sale of BayOne. These proceeds more than offset the $21 million quarterly investment in capital expenditures.

As you know, we curtailed capital spending in 2009 and that carried through the first part of 2010. As we gained greater confidence in the economy and our own momentum we not only added commercial resources in the second half of the year as I previously mentioned but we also accelerated capital projects. Expenditures in the quarter reflect investments in integrated design centers in both North America and Europe, upgrading Europe color production equipment and implementing SAP in Asia. Full-year capital expenditures of $40 million remains a good number for modeling in future years.

We ended the quarter with $378 million in cash and $506 million in available liquidity. With 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 our primary use of cash. Our M&A activity remains focused on acquisitions in the specialty platform that expand our geographic presence and/or our exposure to attractive end markets.

In January and consistent with our M&A strategy we acquired our second company in Brazil, a specialty engineered material and thermoplastic distribution business called Uniplen. With approximately $34 million in annual revenues in 2010, the Uniplen acquisition, combined with our fourth quarter acquisition of Polimaster, firmly establishes PolyOne's presence in the attractive Brazilian market and provides a platform for growth in South America. We now have specialty engineered materials, color masterbatch, and distribution capabilities in Brazil, providing the necessary critical mass to serve our global customers in that region. Consistent with our globalization strategy, our expanded geographic footprint is capable of providing specialty solutions to customers anywhere in the world.

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

Thanks, Bob, and good morning. Since Bob has covered the fourth quarter financial performance of our Business, my remarks will focus on our record-breaking full year accomplishments, discuss our strategy and our outlook moving into 2011.

But before beginning I would like to thank our PolyOne associates around the world for their exceptional performance in 2010 and for their role in our transformation. Through their continued relentless execution of our four pillar strategy we expect to meet and/or exceed our 2012 objectives initially introduced publicly in 2007.

The fourth quarter of 2010 brings to a close a truly outstanding year for PolyOne and highlights the earnings growth potential of the new PolyOne as we continue to focus on profitable growth and becoming a specialty company. For the full year, 2010 sales totaled $2.6 billion, a 27% increase from 2009, driven by volume growth of 18%. As a result of the increase in sales volume and improved operating margins we delivered earnings per share of $0.88, more than triple 2009 earnings and nearly double pre-recession 2007 earnings. These full year results are particularly encouraging as they were generated by record-breaking performances by each of our three strategic platforms, more than offsetting the full year decline in equity earnings from our SunBelt joint venture.

Our Specialty Platform, at the heart of our transformation, achieved record levels of operating income totaling $87 million or 8.4% of sales. This marks the fifth consecutive year of expanding earnings and profitability for the Specialty Platform, achieving an operating income compound annual growth rate of 77% over the last five years. Full year 2010 specialty revenues totaled $1 billion with sales growing 21% versus prior year, and now comprising approximately 40% of the consolidated PolyOne sales and 43% of our operating income.

Operating margins in specialty have expanded approximately 700 basis points since our transformation began. We are on track for meeting or exceeding our stated 2012 financial objective of double digit return on sales for this business. Our ability to consistently expand profitability in our Specialty Platform is attributable to our relentless focus on innovation, competitive differentiation and our customers.

We measure our success in developing and selling new innovative products through our vitality index which measures the percentage of specialty sales generated from products developed in the last five years. Last year, we achieved a vitality index of 40% which is not only a record for PolyOne but also reflects a top tier innovation performance for a specialty company. Our "What If - Make It Possible" marketing campaign reflects our definition of innovation. "What If" is really a statement of an idea and "Make It Possible" is the transformation of that idea into a product, application or service solution that delivers value for our customers and our shareholders.

At PolyOne we are creating a dynamic culture of innovation and growth and we are investing heavily in both. As Bob mentioned we added marketing, sales and technical resources to support our innovation efforts and capture new business. We also invested in our network of customer facing innovation centers around the world that are designed to elevate service and improve interaction between customers and our technical support teams.

Ideas become reality in these collaborative centers located in North America, Asia and Europe. Just a few weeks ago I personally attended the grand opening of our innovation center in Gaggenau, Germany, near the heart of the European automotive industry. Construction will soon be complete on our innovation center located in Avon Lake, Ohio. These facilities showcase the breadth of PolyOne solutions and provide design support including color matching, computer-aided mold filling analysis, computer-aided design and extensive physical and analytical testing services. For our customers this means a streamlined design process, reducing time to market while optimizing efficiency and providing them with competitive advantage.

In our business, innovation means formulation. And when you think about specialization, you should think formulation. Anyone with a little plastics knowledge can buy a twin screw machine and start punching out pellets in a garage. That has plagued this industry for years. But what these small operators can't do is meet the needs of customers who demand engineered complexity or unique performance characteristics.

Don't get me wrong. We compound materials for our customers and through our award winning lean Six Sigma program we are the best in the industry. But our expertise is chemistry and materials science. We formulate specialty polymers that provide customers with unique product performance characteristics. And increasingly, we're doing this in highly technical engineered applications such as healthcare, electronics and alternative energy. Two examples of such innovations are ECCOH Solar-T compounds and OnColor solar color concentrate. These breakthrough technologies are part of PolyOne's sustainable solutions portfolio and demonstrate the Company's commitment to meeting the needs of the rapidly growing renewable energy industry.

We offer a full range of material solutions for the solar industry including products for photovoltaic wire and cable, photovoltaic back sheets, connectors, and housings. Photovoltaic components have stringent requirements. They have to stand up to harsh environments, provide long-term temperature resistance and meet the performance requirements of all electrical components. In addition the components must provide fire safety including low toxicity, low smoke emission, and low corrosion. Applications with this high degree of sophistication and performance specificity illustrate PolyOne's innovative design capabilities.

2010 revenues to the solar market grew 170% versus the prior year and generated gross margins well above the Specialty Platform average. In addition to our renewable energy product offerings we continue expanding our biopolymer business, also part of our sustainable solutions portfolio. Biopolymer sales grew 55% in 2010, and although the base is small, these applications cover multiple end markets and have terrific growth prospects. In time, we expect to grow these two markets in the same way we have grown our healthcare business.

2010 healthcare revenues grew 37% versus prior year, reaching $220 million and we now have 50 dedicated employees focused on this attractive end market. 18% of our distribution business is now directly tied to healthcare. And we have established ourselves as a healthcare industry expert. Distribution added new healthcare products to their offering in 2010 including new supplier agreements with Dow Corning, BASF and ExxonMobil.

Our superb commercial execution in the distribution business continues delivering both new business gains and new supplier agreements, driving record setting sales and profitability. 2010 distribution sales totaled $900 million, 46% above 2009 levels and 23% above 2007 pre-recession levels.

Operating income reached a new record of $42 million or 4.6% of sales for the year. The profitability of this business has expanded 200 basis points over the past four years and is already within our 2012 target range of 4% to 5%. But the distribution growth story is far from complete. During the second half of 2010 we began investing in commercial and marketing resources to further drive sales and continue penetrating the market. PolyOne Distribution achieved the leading market position in North America less than rail car thermoplastics distribution in 2010. We are confident that with our commercial excellence and comprehensive supplier offering PolyOne will continue taking market share and expanding profitability beyond the high end of the target range set for 2012.

Let me now turn to our PP&S segment. PP&S recorded 2010 sales of $776 million, up 16% from 2009 but 33% below its peak year in 2006, as new housing starts remained at trough levels for the second consecutive year. Despite the 33% decline in revenues from 2006 PP&S platform's 2010 profitability expanded 150 basis points over pre-recession levels to 7.0% of sales. This illustrates that our transformation strategy is not restricted to our specialty and distribution platforms. These results were made possible by the continued execution of our four pillar strategy and the restructuring efforts that were initiated in late 2008. Operational excellence in action has improved manufacturing efficiencies and our ability to better balance capacity and staffing utilization. As this business transitions its focus to profitable revenue growth and end markets recover, the platform profitability is forecasted to expand further and achieve our 2010 target of 8% to 10% return on sales.

The highlights of 2010 don't stop with platform profitability. We also substantially improved our balance sheet by refinancing our long-term debt and maintaining Best in Class working capital efficiency. As Bob mentioned, we are very well positioned to support M&A growth, and I would add at prudent prices. The recent acquisition of Uniplen is a perfect example and I would like to publicly welcome Managing Director Nasser Gorayb and all the Uniplen associates to the PolyOne family. Uniplen further enables our globalization strategy as we serve the needs of global customers operating in South America. I look forward to leveraging the combination of Uniplen and our fourth quarter 2010 acquisition of Polimaster into a larger and more profitable investment in Brazil, and more broadly, South America.

In summary, 2010 was a fantastic year for PolyOne. Embedded within each of the four pillars of our strategy is an underlying culture of discipline that we believe differentiates us from our peers. This discipline drives us to be the very best in everything that we do. For example, our Lean Six Sigma deployment was named the world's best LSF start-up program by an international process improvement organization. Our "What If - Make It Possible" ads were recognized by BtoB Magazine as one of the best marketing campaigns of the year. Our world class safety record was recognized by Liberty Mutual with a gold safety award. We also achieved Best in Class working capital efficiency in 2010 at 9.6% of sales.

As we look forward to 2011, we anticipate continued economic expansion in most if not all of our end markets. While US housing likely won't improve much, we expect US auto could grow double digits to 13 million new vehicles sold. Geographically we expect Asia and South America will see outsized growth versus other regions of the world. I'm pleased to say that we will capitalize on this with our strong position in China, growing presence in India and now Brazil.

Regardless of the macro economy, we are focused on executing our disciplined strategy and continue to deliver improved financial performance. Despite our measurable progress it is very important that investors understand our transformation is far from complete. We thoughtfully invested in commercial resources by adding 87 employees in the second half of 2010 and accelerated capital projects that will improve our ability to interface with customers and meet their needs. These investments were made with the same level of discipline our investors have come to appreciate and expect from PolyOne.

We anticipate delivering further margin expansion in each of our platforms during 2011 as we remain focused on innovation, winning new business, executing our world's best Lean Six Sigma program and pricing our products appropriately. We expect double digit EPS expansion in 2011 versus 2010 driven by new record-setting operating income or profitability from all three of our strategic platforms. More than ever, I am very confident that we have the right management team and strategy in place. As a result, we will continue to outperform in terms of revenue and earnings growth and deliver shareholder value.

This concludes our prepared remarks and now I would like to turn the call back to Mike [Drennin] who will open up the lines for your questions.

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

Good morning, gentlemen.

Good morning, Frank.

Nice end to the year.

Thanks.

Bob, you took pains to point out the stellar cash position that the Company ended up in as well as some M&A that you completed in the past four months. Can you offer some thoughts on the current environment and how we should think about PolyOne in the M&A space in 2011 and given the guidance of plus double digits what sort of impact might we expect out of these recent transactions?

Yes, well, to answer the first question, I feel more confident about the pipeline of opportunities now than if you had asked me the same question a year ago. And I think a lot of that just has to do with the amount of time and energy we have spent reviewing potential acquisitions. I think that in the future they will look like what we did in Brazil in terms of being specialty bolt-ons. With respect to your latter question about the impact of M&A, really it is probably going to be a net zero when you take into consideration that we divested of BayOne. I would say that Brazil investments add probably $0.01 to $0.02 in the first year of our direction in 2011 and BayOne is probably a loss of about $0.01.

So we shouldn't -- so the net impact for 2011 is not adding to the double digit plus growth that we should be expecting out of the Company?

Right, that is an organic statement.

All right, great. And Steve, you talked a little bit about the geographic growth, expecting greater growth out of Asia and Latin America. What should we expect the composition of PolyOne to be in another year or two or three in terms of how big can Asia and Latin America get as part of the overall PolyOne empire?

I mean great question, Frank. I can tell you this. We have got unlimited potential in Asia. We have got $2.5 billion of potential in South America. It really depends on two things, our degree of execution organically and our ability to find and capture and complete acquisitions in both those arenas. The sky is the limit. It is up to us. There is no doubt about it that the Asian operation has as much potential basically as we have in North America and growing at a very brisk pace. You can count on us -- here's what I'd say you can count on. You can count on investment heavily weighted towards those two regions versus other investment opportunities that we have.

The ironic thing about that is we still have great opportunities right here in our home base in North America. There is a lot of business that -- we have more business in other people's hands than we have in our own. We don't want to overlook that opportunity but we do have to get all over these high growth opportunities in other parts of the world.

All right. Okay. And then lastly you've mentioned in the past healthcare as a percent of your sales. Where did that stand in the fourth quarter and what should we expect in 2011?

We ended at $220 million. It's a little over 8% of PolyOne's sales and a higher percentage of profitability coming from that business and we will -- we have said that we expect strong double digit growth rates in healthcare going forward. We think we have good momentum in the space. It is a market that in and of itself is growing at a pretty nice pace and then we're going to grow faster than the growth rate of the market itself. I would expect -- I would guess at least mid teens or above growth in healthcare next year from us.

All right. Thank you.

Thanks, Frank.

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

Good morning. Very good results.

Thank you, Saul.

You talked about the $5 million increase in SG&A. It looks as though the SG&A increases that you incurred in the fourth quarter versus the fourth quarter a year ago were pretty commensurate with the pace of SG&A increases that you had in the first, second and third quarters. So I was wondering where this incremental $5 million showed up because it looked as though the pace of SG&A year-over-year was pretty similar in the fourth quarter to all preceding quarters.

There is really two impacts to note, Saul. And this is that in the fourth quarter of last year we did incur a legal charge of about $2 million that is in SG&A so as you look at the year-over-year comps that is one of the reasons why you don't see a $5 million uptick. Secondly, incentive costs in the fourth quarter of last year were about $2 million or $3 million higher than they were this year just due to timing of recognition and that is one of the reasons why you don't see the $5 million show up. In total, SG&A was up about $2 million versus last year and that is the reason why.

Got you. Could you quickly just say what was the volume change in each of the business segments? You gave us some combined numbers but if you look at the -- each of the operating segments, what was the volume change?

Yes, for the fourth quarter specialty engineered materials volume was just under 1%.

Down or up?

Specialty was flat, sorry. Specialty was flat. Distribution was up 2.6%. And PPS was up about 11%.

And you said specialty was what, flat?

Specialty was flat, I'm sorry, I misspoke initially.

And engineered materials was flat?

Engineered materials was up 1%, color was down 1%.

Got you. And then, refresh us again on your pension expense in 2010 and expected 2011.

In total the pension expense is basically about break even in 2010 when you net it against post retirement costs and we expect that will inch up a bit. Probably I think in the third quarter you asked that question I said about a $5 million increase and I think it won't be that significant in 2011. It will be a little bit below that.

Okay. And then finally, what -- I realize in estimating SunBelt that is a dangerous thing -- but where are you starting out thinking SunBelt is going to be in 2011 versus 2010 and that may change, but what is your initial thoughts?

Last quarter we talked about what we believed was a pretty good ongoing assumption for SunBelt, assuming normalized volumes based on our Oxy contract for chlorine and I think that is going to be about $6 million or so on a quarterly basis. Sometimes that has a tendency to more heavily weight itself in the second and third quarters versus first and fourth. But I think at current pricing and normalized volumes that is probably a fair estimate of what next year looks like.

$24 million for the year.

Hopefully.

Okay, terrific, thank you.

Thanks Saul. I would like to just hitchhike for a moment on Bob's remarks about volume. I just want to remind our investors that we have consistently stated that specialty volumes are something that we need to be careful in the analysis of because we continue to go through and prune and mix up business opportunities for us where we are exiting businesses that were higher volume and lower profitability or very transactional customer relationships where we weren't unique or differentiated. So I think we want to be a little careful when we analyze Volumes in specialty that upgrades happen throughout the year and I think we are beginning to see a little more of that now particularly in Europe with our global organization. So I just wanted to add that. So we'll take the next question.

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

Hi, guys. Nice end to 2010.

Thanks.

Steve, when you think about generating double digit EPS expansion in 2011, broadly what type of volume growth sort of underpins that outlook. Is there sort of a range we should think about?

We challenge our businesses and again I'm going to preface this answer with reiterating my last comment. We want to be very careful about the word "volume" particularly in our specialty business because it is very easy for us to go get volume but it would be the wrong thing to do and it would not support our strategy and it wouldn't help us long term. That said, we do want to penetrate markets with the new innovative platforms that we have and we are looking -- I would say if you look at volume growth for us next year I would look in the mid to high single digit range on volume.

Wow, okay. And then when you think about your 2012 goals that you have noted, you are in striking distance with specialty and performance products. What do you think needs to happen just to hit that sort of low end of the range over the next couple of years?

Well Mike, I'm not thinking about hitting the low end. We are trying to hit the ball out of the park here and I think we are on track to do that. I think what has to happen really for us is continued execution and no economic collapse that would work against us. If these markets continue to recover we are going be there. And if we get any help from housing, maybe in 2012, I think it makes it all that much easier for us. But we are confident of those numbers. If you look at the trajectory and where we were when we published those and look at the progression, it is pretty easy to see we just continue on the path we are on and we will make them.

Okay. And there hasn't been a lot of commentary on rising resin costs which I sort of take as a positive. Any issues there? Are you seeing some pressure heading into the first quarter? Is your pricing keeping pace?

I think we are going to do fine versus raw material costs in all three of our platforms. Obviously PP&S is the largest consumer of PVC but we don't see any challenges beyond what they normally are when we have an inflationary environment.

Right. Okay. And then last question. I was encouraged to hear about the solar business. How big is that and what do you think the -- how big can that business get, the growth rates going forward seem pretty exciting for that market in total.

It is a great market. I mean we have identified almost $250 million of opportunity for us. It is a $40 billion market when you look at photovoltaic. Sales, we're already at $19 million, that's up $12 million versus 2009 and very attractive gross margins. So we're very optimistic about solar. Will we continue to grow 170% a year as our base moves up? I don't think so. But I can tell you, we are going to grow very solidly in this market. We've have got a terrific portfolio and offering and we are capturing a lot of new applications from it. And so it is my hope that we get a fourth of that market over the next three years or so.

Is there opportunities for acquisitions or do you think you can just pretty much go at it on your own?

I think it is more value creative for us and more attractive for us to do this organically. I'm sure there are acquisition opportunities but some of what is driving this is it is some unique capabilities that we have internally developed in this space as well as I think our focus on the area. So I'm not sure I would want to pay for something that, if we are just a little patient here, Mike, I think we can capture on our own and not have to spend so much money and use the balance sheet to do some other things.

Great, thanks, guys.

Thank you.

Thanks, Mike.

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

Good morning all and congratulations.

Thanks.

Thanks Rosemarie.

Just following up on the solar business, what size do you expect it to be by, let's say, five years out? Because as you pointed out, $19 million is small at the moment and does not really, I'm assuming, have an impact on the bottom line at this point.

It's a great question. It's a difficult one to answer for a couple of reasons, Rosemarie. First of all, I can't tell you five years from now, how fast this market is going to continue to grow. This $250 million that we have identified that is business for us to go get today, regulations change this, customer buying habits change this, energy prices change this. So I wouldn't want to predict the growth rate of this marketplace but it appears to be large and it appears to be sustainable. Of the alternative energies it seems to be one of the most attractive.

That said, when we go after a market like this and we get focused like we are, I would expect us over the next five years to have close to a fourth of the market share that exists and I think we have proven, we have demonstrated we can do that if we dedicate the resources and if we get our heads around doing it and that is where we are right now. So, if you call that -- if you say the market just stays flat, which I would be surprised, at $250 million, we are going be looking at $60 million, $70 million in this space over the next five years. We will see. We'll see how the market grows. But I'm really making more of a statement about our ability to capture share of an attractive market and we feel very confident with that.

And at which revenue level, Steve, do you feel that it will have an impact on the bottom line? I mean, visible.

I'm sorry, Rosemarie, could you repeat that?

Sure. At which revenue level do you feel that it will be large enough for us to see an impact on earnings per share?

Well, I mean the margins are some of the highest that we have in our Specialty Platform. So -- and SG&A expenses are pretty consistent with the rest of the platform so it is a very profitable, very attractive business. I mean we are already seeing a little bit of impact and so I don't know what you mean by measurable. I think as the business gets up to around that $50 million mark it starts to show up and you will take notice. If I had to pick a number, that is probably about where I would put it before we can begin to consistently talk about it.

Okay. That is fair. And could you talk about the raw material supply which was tight in 2010 and what you are seeing for 2011?

Yes, I think that -- this is Bob. I think that we are continuing to see tightness in butadiene and TiO2 probably is the principal markets. In general I would say that there is likely to be inflation across a broad basket of our raw material purchases and that is what we are expecting for the first quarter.

And if you look at the percent increase of your raw materials in 2010 and what you were able to do on pricing how much are you lagging and do you think that you can accelerate the selling price increase and catch up by, let's say, the middle of this year?

Well, I would say that, first of all, I mean we don't site direct raw material cost increases for our business. If you just took sort of a broad-based index of pricing for the basket of raw materials that we have they are probably up around 15% or so this year and we think we have done a good job of staying ahead of that with respect to price. I think we are going to continue to see the same level of performance going forward in 2011. That is what we have to do. Where we really have a noticeable lag can be in our PP&S platform where we do have some index contracts and the lag period is usually between 30 and 90 days for about 35% of that business.

I would just add Rosemarie, I think this is, again, an opportunity for PolyOne for this reason. I think we have gotten quite good at managing pricing and managing price increases and helping our customers understand the value that they are getting from PolyOne for what they purchase. I would say this, that a lot of the price increase and raw material inflation that is going on in our space, it's really supply and demand driven. In many cases when you have shortness of supply customers want a supplier, a partner they can count on. And PolyOne has a global network. We have a lot of relationships with suppliers and I believe that we have done a really good job of managing those relationships to keep our customers supplied in areas of real tightness and we expect to continue this. And I think customers appreciate that and that is how you build loyalty and brand.

Do you -- did you build up some inventory in order to make sure that should there be a kink somewhere you will be able to supply your customers so you have enough suppliers that if one has a problem you can still get your products from somewhere else?

We did make some investment in inventory in the second half of the year and the primary reason for doing that was we wanted to continue to deliver at an on-time rate of 95% to customer requests and that did slip to a certain extent in 2010 and some of that was due to raw material shortages. It is not a significant investment. At this point we don't expect making any other.

Okay.

We need -- thanks, Rosemarie. We need to move on to the next caller.

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

Good morning, guys.

Hi, Steve.

I guess my first question, Bob, cash on the balance sheet, you are running about 23% of your assets in cash. Before the downturn you guys used to run at 2% to 3%. What do you expect to do with the money?

The primary expectation is again to support our M&A growth and the types of deals that we have recently announced such as the two in Brazil. That is our principal expectation. You know, I would point out that there is always a return of some of that cash in the first part of the year as we make a working capital investment and get some of that back at the end of the year. So, at this point it really is M&A and our operating needs through the course of the year.

Okay. And on Brazil. It is only about $40 million in revenue you've acquired but to what extent if you put capital into those businesses could you boost the revenue coming out of those properties you have purchased?

Well, I think it is too early to say what, you know, what type of revenue increase we could get just specifically as a result of capital expenditures but there are certainly projects we are reviewing right now, specifically with growing our consumer end market exposure in the TPE business is a high priority for us.

Steve, I would just add that while we don't know how far we can take this, we are getting unsolicited calls from customers who have been waiting for us to enter the market directly and we are very encouraged by the opportunities that those global customers are presenting us. So, we are excited about Brazil. We are excited about Latin America. The growth rates there are well above the norm for our marketplace. And so we are in a really nice position here to expand our business at an accelerated rate throughout Brazil and South America.

Okay and just as my follow on, Steve, if you could help us with the sales and marketing additions you have made. I'm sure this number changes from segment to segment but first I'm going to presume that their addition means you expect market share gains from their efforts and I guess do you have a general number per person in how much revenue each add brings in?

Well, first of all, Steve, if you look at the additions, the 87 commercial adds that happened in the second half of 2010, 78 of those are in specialty. We added six in POD. And, yes, of course, we have expectations and we don't publicly proclaim what those are but each business has a different number and expectation, the average load per person and how much new business can be delivered by new heads.

But, I would also tell you that, and you know this from your past experience, you can't just bring someone in off the street and expect immediate productivity. The way we do it today at PolyOne, there is a lot of training involved. Understanding our culture. Understanding our strategy. Understanding our technology, our product lines. How we go to market. How we pursue business with different customers. Our selling philosophy. Our EVE training tools. There is a lot to preparing and getting feet on the street before they can produce and deliver new business. That is the reason that we started adding in the second half is our business was growing. We don't want our existing sellers overburdened with service to the point that they don't have time to go knock on doors and pursue this $30 billion global opportunity that we have. So yes, we have productivity metrics for each business but we don't externalize those.

Okay, that is understandable. Thanks for taking the questions.

Sure.

Thanks, Steve.

Your next question comes from the line of Dan Garofalo of Piper Jaffray. You may proceed.

Good morning, guys.

Hi Dan.

I'm on for Tom today. Most of my questions have been answered. Nice performance in PP&S and just wondering if you can let us know kind of about your expectations for housing and kind of that key end market. I know obviously not overwhelmingly positive but has anything changed from 3Q?

We have been as bearish as I think the lowest end of the consensus forecast for the last two, three years now on housing and I would say that we are feeling a little better about housing but not a lot. We would probably anticipate -- I think our forecast for next year is sort of the high 600,000 range which is an uptick from this year and so I think we are feeling a little better about it. There is still an awful lot of inventory in the hands of banks. About a fourth of the existing housing out there is sitting in the hands of banks, generally vacant. So we need to continue to work through that inventory. But longer term, we still believe that the norm is going to be about 1.4 to 1.5 million houses built a year on average and I think we will get back to that point. There is some demand that is being pent up but we need more jobs created and we need to get some of this inventory that is sitting out there continued to be worked through. And so, I would say, intermediate term it is a little more positive. Longer term it is much more positive. But for 2011, we are expecting some modest growth. But it will be nice to see some growth again. And we didn't feel that way when we started talking about this for 2010.

Sure. And just looking at volume kind of, it looks like 11% volume growth. Do you feel like you are maybe taking some share in that segment because it seems like the market is not moving upward obviously. So is that why the volume is going up?

I'll remind you that a big element of the business in PP&S is auto and that is up considerably year-over-year and expect the same thing to be the case in 2011. So, I'm not sure I would make an observation about share gains in housing. I don't believe that would be a large number driving that volume change. Principally it is auto.

Okay, very good. One last quick question. Just in terms of -- obviously your priority with capital is internal and external growth opportunities and it sounds like there is a lot to be had there. I'm just wondering in terms of buybacks, Bob, have you -- is there any thought towards doing some buybacks just to kind of control dilution in terms of the share count?

Well, we are always considering shareholder return initiatives. At this point we really don't have any new information to share with you. Again, our priority really is around M&A and there are a lot of opportunities out there where we would like to redirect our capital I think, first and foremost.

Very good. Thanks for taking the questions.

I think we have time for one more caller.

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

Good morning gentlemen, made it under the wire. Thanks for taking my call.

Sure, Dmitry.

A lot of my questions have been answered but I just want to follow up your SunBelt joint venture. We have been hearing that in the PVC market there has been some upward volume, not so much from domestic markets but from export capabilities that the US companies seem to have rediscovered with lower natural gas pricing and declining what looks like chlorine pricing right now. Are you participating in that or is your SunBelt joint venture in the PP&S business really geared more towards domestic markets?

It is domestic.

Just domestic. Okay. So you're not -- is the ability of other larger players to export making it any easier for you to grow this business in the US?

We think what happens is the increased demand certainly supports pricing and we would benefit from that because the pricing has a pretty global element to it.

Okay. You talked about your raw materials being up I think about 15% or so, you said, year-over-year in 2010. I don't think your pricing was up quite that strong nor did it need to be I guess to keep the dollar profitability on track. As you get into 2011, I understand that you talked about expecting kind of a similar level of inflation just as a starting point for your planning purposes. Are you seeing any changes in your ability to pass pricing through as you get customers more used to buying value and solutions from you as opposed to kind of a cost plus business model? Does it make it more difficult for you to pass through pricing or do you get new products into the market enough to allow you to recalibrate pricing with the new generation?

Dmitry, first I just want to make a clarifying statement with respect to the 15% number. When I made that, that really was in reference to quoted pricing for the basket of raw materials that we purchase. It is not a direct number for what we experienced in terms of raw material inflation so you shouldn't apply that to our financial results to try to drive some correlation between that and a relationship between selling prices and what we were able to achieve in terms of margin expansion. It really was more of a broader observation around raw material inflation.

Fair enough.

And also I'm not sure we would really say 15% in 2011. I think probably high single digits is a decent starting point in terms of what we are already seeing in the first part of this year. I will let Steve help me out with this but I think it is always difficult to deal with raw material inflation from a pricing standpoint and I think that it varies by each one of our platforms. And where we have unique products and specialty products we believe we have got more ability to do that and in those cases where we don't it is more challenging.

So that would be a little bit contrary to what I would have thought because I would have thought that in the lower value part of your portfolio where customers are used to kind of seeing the lowest possible price they would understand the raw material pass-through argument but as you get higher up into your value chain and you're really selling specialty products and unique products it becomes a little bit more difficult to convince customers that you are raising pricing because your raw materials are pressuring you. That is not the case?

I don't believe that is the case, Dmitry because we are in critical parts and components and customers understand that what we are delivering to them really adds to their competitive position, their uniqueness, their differentiation, and they are willing to pay us a fair and appropriate price for it. I think those more attractive markets tend to be more resilient and we have more pricing elasticity in those than we do I think in some of the commodities. The commodities, the prices are pretty well known. And yes, it's sometimes -- it's never easy to get pricing from customers these days, I don't care what markets you are in. It is something you have to deal with appropriately and professionally, and you've got to have some skill sets in your sellers to go in and make it happen. I think the farther you are up the value chain the more I think success you will have in capturing pricing in today's market. It might sound counterintuitive but that is our experience.

Thank you, I appreciate the color. Very helpful.

You're welcome. I think it is time to conclude our fourth quarter 2010 conference call. I would like to thank all of you for joining the call today and we look forward to updating you on our progress in 2011 during our first quarter conference call which is scheduled for early May. So thanks again, everyone, and have a great day.

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