Avient Corp (AVNT) 2011 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the PolyOne Corporation First Quarter 2011 Conference Call. My name is Steve and I will be your operator for today. At this time, all participants are in a 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 Kelly, Vice President of Planning and Investor Relations. Please proceed.

Thank you, Steve. 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 forecast of future events and are not guarantees of future performance. They are based on management's expectation and involve a number of business risks and uncertainties, any of which would cause actual results to differ materially from those expressed in or implied by the forward-looking statements. Some of these risks and uncertainties can be found in the Company's filings with the Securities and Exchange Commission, as well as in today's press release.

During the discussion today, the Company will use both GAAP and non-GAAP financial measures. Please refer to the earnings release posted on the PolyOne website where the Company describes the non-GAAP measures and provides a reconciliation of them to the most comparable GAAP financial measures. Operating results referenced during today's call will be comparing the first quarter of 2011 to the first quarter of 2010, unless otherwise stated. All prior year financial references will be based on restated financial statements for the change in pension accounting to the mark to market method adopted by the Company effective January 1, 2011. 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 also to everyone who is joining us on the call today. As always, we welcome the opportunity to speak to our investors and analysts about the recent performance of PolyOne.

For the first quarter of 2011, we reported sales of $719 million and net income of $110 million, or $1.14 per share. This compares favorably with the first quarter of 2010 when we report sales of $630 million, net income of $21 million, or $0.22 per share. Earnings in both periods include special items, the largest of which is this year's first quarter gain from the sale of our SunBelt joint venture. Consolidated revenues for the quarter grew 14% year-over-year driven by improved product mix, higher selling prices associated with raw material cost increases, and a 5% increase in organic volume.

Each platform recorded double-digit revenue and operating income gains versus the prior year. Fluctuations in FX did not have a significant impact on our first quarter revenue growth. As a result of the increase in sales, improved operating margins and increased equity earnings, operating income before special items, and nonrecurring matters in 2010 increased 56% to $52.6 million or 7.3% of sales for the first quarter of 2011 from $33.7 million or 5.3% of sales in the first quarter of 2010.

Excluding these special items and one-time tax adjustments in both periods, first quarter 2011 EPS increased 67% to $0.30 per diluted share, compared with $0.18 per diluted share recorded in the first quarter of last year.

Special items, as I mentioned, included the gain on the sale of SunBelt for $128 million. In February, we sold our 50% interest in the Chlor--Alkali/SunBelt partnership to Olin Corporation for $175 million consisting of $132 million in cash and $43 million in assumed debt guarantees, with an additional earn out over the next three years if certain performance metrics are achieved. The sale of SunBelt represents the last of our legacy equity investments and commodity businesses, and our focus now lies solely on our three strategic platforms. Pro forma for the SunBelt divestiture this year and the sale of Oxy Vinyls in 2007, we are now reporting the highest quarterly earnings per share in PolyOne history and the best mix of earnings ever lead by the growth in Specialty.

During the first quarter, Specialty revenues increased 14% over the prior year to $292 million and accounted for nearly half of the Company's consolidated operating income before corporate charges. Excluding the acquisitions of Uniplen and Polimaster in Brazil, sales increased 10%.

I want to highlight that our mix improvements were significant as organic volume declined by 3% and yet we achieved record level operating income. Our relentless focus on specialization continues, and during the first quarter, we selectively pruned lower margin, commodity-oriented business, and this improved both gross margins and operating margins, as well. Excluding these selective pruning actions, same store sales coupled with new business gains added 4% to volumes in the specialty platform. From a profitability standpoint, Specialty operating income expanded 22% over the prior year to $25.7 million, the highest level of quarterly profits ever recorded by this platform. And this marks the fifth quarter of the last seven where our Specialty platform has established a new record high level of operating income.

Our Distribution platform also delivered a 14% revenue increase and recorded $14.7 million in operating profit, also the highest level of quarterly operating income ever recorded by Distribution. Distribution revenue expansion was primarily driven by increased pricing associated with raw material cost inflation and improved mix as volume was flat versus the prior year. As with our Specialty platform, we selectively exited certain customer accounts during the first quarter. Had we not done this, volume would have been up 6% over the prior year. As a result of this improved mix and about $1 million positive FIFO effect, operating margins expanded to 5.9% of sales for the first quarter of 2011.

Our Performance, Products and Solutions platform grew revenues 14% versus prior year to $209 million for the first quarter of this year. Unlike Specialty and Distribution, the growth was primarily driven by a 12% volume increase led by industrial, building and construction and wire and cable end markets. This platform is the most challenged by raw material inflation, but due to mix improvements, volume leverage, and lean Six Sigma benefits, PP&S operating income expanded 18% to $14.3 million or 6.9% of sales. This compares to $12.1 million or 6.6% of sales in the first quarter of last year.

Other P&L items to report include corporate and other costs before special items of $7.1 million, which decreased about $1 million from last year principally due to lower incentive costs offset partially by increased investment in commercial and sourcing resources.

Our improved earnings mix, combined with the continued improvement in our balance sheet, were again noticed by Standard & Poor's as evidenced by their April upgrade of PolyOne's credit rating to double B minus from B plus. This makes the third S&P upgrade in the past 13 months.

Looking at the balance sheet and free cash flow, we ended the quarter with $412 million in cash and net debt of only $21 million. With limited debt maturities between now and 2020, we have ample cash to support our operating needs and fund acquisitions, which we continue to view as the two primary uses of cash.

Our M&A focus remains on Specialty platform acquisitions that expand our geographic presence, our Specialty product offering, and/or our exposure to attractive end markets. We remain disciplined in confirming strategic fit and prudent regarding valuations and financial return assumptions careful to not overpay. During the first quarter of this year, we also initiated a quarterly dividend for the first time since 2002. The $0.04 per share cash dividend not only illustrates the improvement in our balance sheet, but more importantly reflects the greater confidence we have in the sustainability and growth prospects of our improved earnings mix. In addition to initiating a cash dividend, we also repurchased 1 million shares in the open market. We intend to continue balancing both share repurchases and dividends as viable alternatives to rewarding our shareholders.

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 first quarter financial performance of our business, my remarks will focus on a strategic update and discussions about our outlook for the remainder of 2011. I am extremely pleased with our first quarter results. Revenues grew 14% and operating profits grew 56% versus the prior year. We are reporting the highest level of quarterly earnings in the history of our Company, pro forma for sale of SunBelt and Oxy Vinyls. We are truly off to a great start in 2011 and building nicely off the momentum we gained with our outstanding 2010 performance.

Our ability to consistently deliver record-setting profits and profitability is a direct result of our relentless focus on becoming a specialty company. Over the past several years, we have been diligently transforming PolyOne from a commodity compounder focused on volume into a specialty formulator focused on providing our customers with unique and differentiated solutions.

Let me review with you some first quarter 2011 achievements that highlight our continued transformational progress. I'm going to start with our portfolio repositioning. During the quarter, we sold our 50% ownership interest in SunBelt to our partner, Olin Corporation. The SunBelt sale was truly a win-win transaction for both firms. SunBelt was the last legacy equity investment in our portfolio, and we had consistently communicated that this investment was noncore. For PolyOne, the sale of SunBelt improves the quality of our earnings stream and frees up cash for further investment. One such investment completed during the quarter was the acquisition of Uniplen, a Brazilian engineered materials and distribution business. Combined with our fourth quarter acquisition of Polimaster, also in Brazil, PolyOne now has color master batch, engineered materials, and distribution capabilities in Brazil.

We are pleased to report that the integration of these two businesses is progressing well, and they will serve as an excellent platform to leverage PolyOne's growth in Brazil and, more broadly, the South America region. I would like to remind our investors that in 2005, over half of PolyOne's earnings were generated from equity investments in SunBelt and Oxy Vinyls. This exposed us to highly cyclical commodity end markets, the investments we did not own or control. Today, we are consistently producing record-setting profits as we've more than replaced these investment equity earnings with that of our Specialty platform coupled with strong growth in POD and PP&S.

I have been with PolyOne for just over five years now, and let me tell you, driving a specialty strategy that improves the quality of earnings is tough. It includes making hard decisions every day and never, ever quitting. When I first arrived, we were our own worst enemy, focused only on volume. To combat this, we took a long-term view and invested in commercial and technical resources and in training. We altered our incentive plans to align everyone with profitable growth. We funded expansion into niche end markets and high growth emerging geographies. We established internal and external metrics to demonstrate commitment, create accountability, and ensure that we never slip backwards toward that high volume commodity trap.

Most importantly, we replaced the culture of complacency and mediocrity with one of discipline and continuous improvement that serves as the underpinning of our success. One of the best illustrations of this discipline in action is the continued pruning of low margin accounts. Because of our commitment to specialization, we are forced to continuously reassess our product offering and improve our mix towards specialty products where we offer unique and differentiated solutions. On the surface, this might sound like Management 101.

Walking away from business may be the toughest decision we make. In the short-term, we give up revenue and earnings and we know it. But in the long-term, we are able to shift our attention away from these low margin accounts and focus on creating new and innovative solutions for our customers who value them. This is our story, and more than anything else, mix improvements have led not only to record operating income in our Specialty platform, but for all of PolyOne. And I'm very proud to say that at PolyOne we walk, talk, eat, sleep, and breathe specialization, and we've spent considerable time and energy to drive this philosophy deep into our organization.

We are shifting our focus increasingly to winning new business and adding resources to do so. During the second half of 2010, we made significant investments in expanding our commercial, marketing, and technical research capabilities with the addition of 87 salaried resources. We had an additional 18 resources during the first quarter of 2011. Our commercial teams are highly trained professionals, clearly focused on selling the value proposition of our product offering.

We arm and motivate sellers with skills and tools like our proprietary economic value estimator, or EVE tool, that help them best articulate the customer benefits and profit enhancement potential of our solutions and services. Selling value is most easily accomplished by offering innovative new products that respond to customer needs. Subsequently, we've added technical resource capabilities over the past several quarters focused on formulating new and differentiated product offerings.

In 2010, we spent approximately $30 million on research and development in our Specialty platform, which represents nearly 3% of platform sales. This level of investment in technical research and development capabilities far exceeds that of our competition and is more in line with that of a true specialty company, and it is paying off. Let me give you a couple of recent examples of new product launches that leverage our formulating expertise and address the specific customer needs. Versaflex OM is a thermoplastic elastomer which enables our customers to meet strict design criteria while maintaining manufacturing efficiency in the development of an innovative pre-filled syringe system for patients with rheumatoid arthritis. The PolyOne application assists in addressing dexterity challenges some patients feel and face when administering their medication.

This innovation enabled a key customer to win an IDEA Silver Design Award from the Industrial Designer Society of America, which is considered the preeminent design competition and attracts entrants from around the world. Previous winners of IDEA awards include Apple, Mitsubishi, and Samsung, just to name a few. OnColor HC Plus, our pre-certified colorants that meet healthcare bio compatibility requirements and allow our customers to expedite regulatory testing to bring their products to market faster. The globally available palette of standard and custom colors is pre-approved to meet regulatory requirements in seven different medical grade resin carriers, as well as liquids.

These two new innovations highlight not only our formulating expertise, but also our continued dedication to growing our presence in healthcare. Directly related to our Specialty transformation, we have been focusing on attractive, high growth end markets that value innovation and service. We have been very successful in penetrating the healthcare market and establishing ourselves as a supplier of choice. Our first quarter sales into healthcare were 17% higher than the first quarter of last year, and are on pace to exceed $250 million for the year.

So while these are just a couple specific highlights, in summary, the first quarter of 2011 was a fantastic start to the year and it included numerous accomplishments. I am pleased to say that we are on a great trajectory and ahead of schedule in achieving our ambitious 2012 financial targets. We just recently completed our annual sales meetings in North America, Europe, and Asia, and I can tell you that our sellers are enthusiastic, they're engaged, and they're equipped to execute on our strategy. The PolyOne sales team gets it. Our sellers are sufficiently armed with tools, information, training, back-office support, and, most importantly, new innovative products allowing them to gain and win new business.

Our priorities to drive EPS growth moving forward are very clear. First of all, innovate to differentiate our offering through the introduction of new value added solutions and services. Second, expanding into more attractive, less cyclical high growth end markets like healthcare, consumer, and electronics, and in emerging markets such as Asia and South America. Third, investing in sales marketing and technical resources to fuel future growth. Fourth and finally, executing Lean Six Sigma throughout the Company to improve quality, efficiency, and profitability. Today, our LSS trained associates represent more than 33% of our global employee base and the ranks are growing.

These priorities are perfectly aligned with our four pillar strategy and will continue driving double-digit EPS expansion as we achieve or exceed our 2012 financial targets. More than ever, I am confident we will continue to outperform in terms of revenue and earnings growth and deliver shareholder value. Our stakeholders now think differently about us. Where we were once viewed as a plastics compounder, we are now increasingly seen as a value added formulator. Stakeholders understand the improvements in earnings mix and what this means to our future growth prospects.

We are no longer a commodity company chasing volumes, and we are reporting the best mix of earnings in our history. We have a disciplined management team focused relentlessly on specialization and continuous improvement in every aspect of our business. We set high expectations and we aim to exceed them. We worked hard to earn our stakeholders' trust and we expect to keep it.

So that concludes our prepared remarks, and I would now like to turn the call back to Steve Webb who will open up the lines for your questions this morning.

(Operator Instructions). The first question comes from the line of Frank Mitsch with BB&T Capital Markets.

Good morning, and congrats on a nice start to the year.

Thanks, good morning.

On the specialty materials, can you provide a little more color in terms of which industries in particular you are seeing some material growth? And along those lines, how did -- here we are in early part of May, how was April?

I guess I will take the second question first. April continues to look good. We had good momentum in the first quarter, and we don't see that abating going into the second quarter, so we are still optimistic about expansion for the balance of the year. With respect to the end market drivers within Specialty, we did see increases in transportation, wire and cable, as well as in healthcare as being the three primary drivers year-over-year.

And any geographies there or is that broad-based?

We are seeing transportation picking up in the US as certainly one of the notable drivers and then beyond that, it would be healthcare in the US, as well, and then a global observation about wire and cable.

Great. You talked about on target to achieve some of the margin targets that you laid out there. On the specialty side, you guys were looking at 10% to 12% margins; you were at 8.8% in the first quarter. How confident are you that you're going to be able to achieve those targets?

Yeah, we continue to push. It was a long headwind we had to fight to get up there. I think we were starting at about 3%. So if you kind of do the math on 2007 to 2012, we're right on plan to try and hit the middle of that range and that's what our objective is. I don't see any reason why we can't get that done.

And along those lines, any plans to raise the margin targets on the Distribution side since you are above that now?

Yeah, we are above it and that doesn't mean we stop and Mike Rademacher and his team are prepared to continue to drive forward. So they got there early and good for them, but we'll keep pushing and we will come out with some new targets in the next few quarters or so that will probably push us out through 2015. And I can tell you our plans at this moment are to elevate every one of those targets we think we can accomplish. We can do better.

Great, thank you.

Thanks, Frank.

And your next question comes from the line of Saul Ludwig of Northcoast Research.

Hey, good morning, everybody.

Hi, Saul.

A couple of questions. The move to exit the low margin business is paying off very nicely and it sounds like that's on track. How much more of that is there to grind out in the system?

Yeah, That's a great question, Saul. I can't honestly tell you that I know. I can tell you instinctively how we feel about it. It is probably going to be an iterative process and we are going to -- really we look at it on a couple of fronts. One is what are the margins? And two, what is our position, how distinct is our proposition? But even more than that is what kind of customer is this? Is this a customer that is always going to be transactional and always looking for the lowest cost alternative even if it might mean sacrifice in quality or service or in some cases, some differentiation that might give them advantage? And there are just certain cultural combinations, even with customers, that don't always work. It's always a tough thing. But I have grown up on the customer side of the business, and a tough thing to have a conversation with customers like this. But I think it will continue; it will be a continuous process. We still have a lot of work to do. And as your margins improve, those early day margins that were at 10% or so don't look nearly as attractive when the bar is higher. So we will continue to grind through and understand better where we have something that is unique to offer customers and where we are just sort of me-too-ing things.

Well, you have been doing this for a while very successfully. Do you think we are coming down to the last 5% of your volume maybe yet to grind out, or is it 15%? I realize your can't be precise, but are we at a single digit yet to go or double-digit yet to go?

It is difficult to estimate on a percentage basis, but I will reflect for a moment on what you said, Saul, which is that we've been doing this for some time now. If you actually go back over the course of 2009 and 2010, I think you saw less pruning than what we're talking about today. Some of this is being driven by inflation. As Steve mentioned, where you have customer relationships entirely based on a transactional nature, inflation is starting to highlight those customers that might only be looking for the lowest price and not appreciating the other aspects of service or quality, etc. So I think you are seeing those numbers a little bit bigger as a result of that.

It is certainly more than a single digit number, Saul. I mean, if you look at percentage of our business that still remains on the commodity side, there is a lot of transactional business that goes on on that side of the business. And even in some of the Specialty platforms, we have legacy business that we have been sort of nurturing along and trying to sell the value of our offering whether, in those cases, it may be delivery or service or quality. But if we are not distinguished from a technology standpoint, you know, those are the attributes that we push for, and in some cases we have great success and customers appreciate those attributes. In other cases, they're going to be always shopping, and those are not the kind of customers that long-term are going to take us where we are driving the Company. So it will be an ongoing process and we will continue to try and balance this. We are careful about how much we take in any given month, quarter, or year, but we will continue to prune business until we get to a point where we are satisfied with the relationship we have, on both sides, with all of our customers.

Thank you. Bob, could you clarify -- I know you went over these numbers at the beginning. What was the volume change in your Specialty businesses organic and then acquired?

The acquisition affect overall for Specialty was about 3.5%, and then the organic volume change was a drop of about 3%.

But you said something about -- oh, volume up 5%. That was for the total Company.

That was for all of PolyOne; that's right.

Saul, and I know you know this, but I would careful about looking too deeply at volumes and especially for the reasons we just cited. We are going to prune, and guess what, it is the higher volume business that is generally more transactional. It is still the legacy business that tends to be higher volumes, and that's what makes it difficult to walk away from. It is never easy to walk away from business and we try to be professional and polite about it and helpful with the customer, but we are going to continue to have that going on. So if we're looking at volume metric comparisons -- we look at same store sales ourselves here, too, and we separate internally our volumes from what is it that we have thoughtfully decided to prune, and how much new business is coming in and how much are same store sales? And we dissect it to that level internally; we don't broadcast those numbers publicly.

My final question is there is so much concern about rising raw material costs and it looks like you guys are just doing a great job and not letting any grass grow under your feet in terms of passing on those higher raw material costs in your selling prices. Do you see any impediments to being able to continue to do that as you look through the balance of the year considering the recent increases that we have seen in the thermoplastics?

Well, we're going to continue to see inflation; there is no question about it. Our job, as we have been doing, is continue to manage that on both fronts and working with suppliers and dealing with alternative suppliers where we need to, and managing those costs, but also working with our customers. And in some cases, our customers are in very difficult conditions where they may have a bad contract with their customer, and we even help them with that, and for those that need the help, most of them don't, but some do. You talk with them about how they have to go and get pricing from their customer. We have never viewed ourselves as being squeezed in the middle, and I don't see any reason why that would change, and I think our margins in this quarter and the last several quarter in a rising environment really support that. So it's our job to continue to get the pricing. We will have trouble on some of these more transactional accounts and we will manage it.

Great. Thank you very much, guys.

Thank you, Saul.

And your next question comes from the line of Mike Sison with KeyBanc.

Hey, guys, great start to the year.

Thanks, Mike.

In terms of global specialty engineering materials, your volumes there were flat and global color additives were down 5.4%. Is most of the pruning in the color and additive side of the business versus engineering materials?

There was one specific action item related to commodity business in Asia that was entirely contained within color and that does -- I would say define the preponderance of the pruning in the Specialty platform.

Got it. And then so for specialty engineering materials, it's an area that -- it was an area that you're expected to see some pretty good new product growth and I was a little surprised that volumes were flat there. Anything going on in that business or where we should have seen more growth?

Well, just to be clear, you know, Steve has mentioned in his remarks to Saul that we do track volume growth internally on a few different measures and when you combine same store sales with new business gains, we actually had volume growth of about 4%. It just happens to be offset by some of the pruning actions we took to combine for flat volume year-over-year. So we are getting volume growth as a result of new product introductions and new customer wins. I think that on the surface, you just have to take that in concert of the pruning actions.

I have to step in here. We continue and have for five years gotten volume questions, and I appreciate that. But I will tell you once again, if you want to really understand what is going on in PolyOne, you really can't put too much weight on volumes. I have said this consistently every quarter. There are many reasons for it, not the least of which is the pruning, but there is also an ongoing mix up situation. I can give you lots of examples.

One would be volume of liquid color versus pellet. When you replace a pelletized color additive, a concentrate with liquid, your volume goes down but your profitability goes up. And that is just the way it works. So you can really get, I think, a misread on what has been going on and what will continue to go on in this Company if we scrutinize volumes on tonnage. And we don't talk about volumes much inside the Company. I'll tell you, when I got here that's all we talked about, and we basically said we are not talking about that anymore. We are talking about mixing up and improving the quality of these earnings. It's not, and you can see this is not a cost-cutting profitability improvement. This is about what kind of business you pursue, technology improvements and innovation, and mixing up the quality of earnings on those fronts. So I would just caution all of our listeners that -- and analyzing our volumes to death is probably not going to be the best way to really view what is going on inside the Company in my judgment.

Right. Okay, then when you move on to the second quarter, it tends to be your best quarter in terms of profitability and overall seasonality. The $5 million in resin and media -- that goes away, right?

Correct.

So sequentially that's sort of a headwind with everything else maybe doing better given product rationalization and seasonality. Do you expect sequential improvement in earnings, or is that $5 million too much of a headwind, too?

There are two things to think about as we go through the quarter sequentially. Number one is SunBelt, as you just mentioned, which we sold. That added about $0.04 to the bottom line in the first quarter which goes away. Secondly, our SG&A does increase in the second and third quarters due to pro-rata incentive expense recognition. Historically, that has been $4 million to $5 million. And so those two things combined, obviously, create additional headwinds for us, but nevertheless, I think we can still continue to see improvement, but it is going to be driven by revenue and margin expansion.

And then one last question on PP&S. I apologize volume question, but they were very good in the quarter, up 12%. Can you just give a little bit of -- a little background what is happening there? Is a lot of that new product gains, just recovering end markets?

Yeah, we had -- within PP&S, we are seeing strong growth in transportation followed by industrial and building and construction. Remember, this is really a North American business, so as you understand our end market exposure that is really what's driving it. Auto has really been the leader for us, but the other two markets have picked up, as well.

You know, I'd just add, Mike, that it is kind of interesting and it's probably too early to draw a conclusion from it, but rising energy costs help provide pretty compelling justification to move to PVC where you can versus some alternative materials. And the reason is pretty simple. PVC is only 43% hydrocarbon feed stock compared to some of these alternatives, which are like 90% plus hydrocarbon feed stock. So the incremental increase in oil while even PVC goes up based on chlor alkali chain, not in proportion to those hydrocarbon-based feed stocks. So people are looking today at conversions to PVC. And I think it is just a really good economical material of choice. It's got outstanding performance attributes. And we think that in the quarter, we began to see a little bit of that conversion. So that might be hard to draw that conclusion, but we are kind of weaving this together, and it appears as though we are getting help from that front.

You are seeing some stalling in construction side?

I'm sorry?

You are seeing some stalling in demand in construction then?

Yeah, I mean new housing starts are projected to be up a little bit this year versus last year, but more importantly, I think we are penetrating the markets a little better than we have in the past. The projection for the US consensus forecast is now 640,000 units. That's up 8% over last year. Don't know if that will develop or not. But that's a pretty wide range by the way on those estimates right now ranging from basically 480,000 to 860,000. So who knows where that's going to end up. All I know is we've got lots of potential; we've got $30 billion of potential to sell. And if housing helps us, great. If it doesn't, we'll figure out a way to get it in other markets. But I think we're satisfied with our performance in the context of the housing market as it is today.

Got it, great. Thank you.

Thanks, Mike.

And your next question is from the line of Thomas Hayes from Piper Jaffray.

Thanks. It's Dan Garofalo for Tom this morning. Congratulations, guys.

Thanks, Dan.

Bob, you have spoken in the past, and I know you touched on this in your prepared remarks, but you have spoken about seeing really a very robust pipeline of potential acquisitions. I guess my question is how would you describe what you are seeing today relative to the past quarters?

I think the most important difference is that now that we have say one year to 18 months of recovery-type revenues and EBITDA levels, that's giving sellers a little bit more comfort around valuation given historical cash flow contribution whereas if you went back a year ago and you were trying to price an acquisition off 2009 earnings levels, I think sellers were very reluctant to part ways unless they had to. So I think we're entering a period now where sellers are more amenable to actually entering into a sale, but, of course, valuations are higher than they would have been a year ago just based on the improved earnings. So the pipeline does continue to look healthy, but it is competitive out there, and so we remain prudent with respect to pricing so that we don't overpay.

And I don't know if you have ever given any guidance, but is there a target range in terms of just the types of -- the magnitude of the acquisitions you are looking at that you can provide for us?

There really isn't, and candidly when we go through our M&A list, we don't exclude something because of size, big or small. And the only thing I'd say is that as we focus on bolt-on acquisitions within the Specialty platform, most likely these are deals that we are going to be able to pay cash for. It wouldn't mean we wouldn't do something larger if we had the opportunity to do so.

Okay. And then I wanted to ask and this is kind of changing gears. Just wondering if you could give us a sense for your bio-base blends volume, either as a percentage of revenue or tons?

Yeah, our bio-base was about -- truly bio-based, I think it was around $4 million or $5 million in revenue.

In the quarter.

In the quarter.

Okay.

Another 40% versus prior year in the quarter. We also kind of look at sustainable solutions, which is a broader umbrella that goes into markets like alternative energy, etc. And sales in that front for the first quarter were $52 million, and I think we grew nicely last year about 30% to about almost $200 million. So we continue to see growth on those fronts. Solar was not as strong in the first quarter as we have been seeing, and I think you have probably throughout the space of seeing that, it is nothing that is unique to PolyOne. Biopolymers are kind of at a point here we've got very nice growth off a small base, but, nevertheless, we think that these oil prices will drive some further interest in biopolymers. It is always one of those arenas where you have this sort of two different drivers. One is environmental consciousness, and the other one is -- which is sometimes an offset -- sometimes offset by economic advantage. And the tipping point is generally an $85- to $125-a-barrel oil is usually where the economics make some justification a little more appeasable.

And just building off that, you kind of touched on my next question. It seems like the blends, you can get to a comparable performance with the blends whereas the purely bio-based, it seems like there are performance issues that come up. So as petroleum prices do increase, you do see that there would be opportunities, maybe margin opportunities or to preserve pricing for customers and potentially preserve and expand internal margins just from maybe substituting a bio-based type of blend that does have a comparable performance?

That certainly is an opportunity that exists depending on oil pricing. You are right. We aren't providing these products for garbage bags. Those are low value sort of high volume applications. And so you could go 100% with garbage bags, but if you are going to put this under the hood of an automobile, you are going to deal with a blend. And we have ability to move our blend rate up we think as high as anybody out there if not higher. So that's attractive to the customers. But they often do this. At this point, it still has been more of a hybrid sort of environmental awareness marketing, part of their marketing campaign, and cost has not been the driver. But if we get economic advantage, that's yet another driver for certainly these bio applications. So we'll see. I think, you know, prices have to settle in and nestle in at a point that people believe they're going to be sustained for awhile before they start retooling or changing the blends that they're looking for and changing their specifications. So I'd say stay tuned on that front to see how much the oil impact has, but I would certainly say it's favorable right now.

Thanks for taking the questions.

Thanks, Dan.

And your next question comes from the line of Eugene Fedotoff with Longbow Research.

Good morning, guys, congratulations on the great quarter.

Thank you.

I had a question on the PP&S. You mentioned that -- you talked about a strong item -- what if -- or transportation sales in the first quarter. Just wondering if the recent shutdowns in the automotive industry are having any impact on your sales in the second quarter?

Well, here's what we are hearing from these customers is that -- and what the industry is forecast at. The US production is going to be hit somewhat. It was expected to grow 18% year-over-year in the second quarter and it's now expected to grow about 10.6%. So you can figure 7 points or so of less growth in the automotive industry. Our penetration in that market has been higher than the growth rate of the industry itself. So we're still happy that the industry is still going to grow and that we're going to grow, we hope, faster than the rate of growth of the industry itself. But that should give you a little bit of a flavor for what the expected impact is on US auto production. Probably going to knock it off 7% from what was forecast, but still year-over-year comparability of 10% to maybe 11% growth.

Thanks. And the second question on the distribution business first quarter trading margin was at record level there. Is this a level that you expect going forward, or was there a one-time benefit this quarter that you don't expect in the second quarter?

We mentioned in our prepared remarks there was about $1 million of benefit that we describe as FIFO effect for lack of a better description. Really, just in terms of changes in pricing and timing with respect to sales, and that probably influenced margins to about say half a point.

Okay, that's helpful. Thank you.

And your next question comes from the line of Steve Schwartz with First Analysis.

Good morning, guys.

Hi, Steve.

I guess my first question and most of the heavies have been answered, but just going back on the pruning, Steve, I think in your prepared remarks you mentioned assessing the product offering, and I just wanted to make sure you are primarily dealing with customers, managing customers and not necessarily getting rid of certain product groups or so forth?

We do both, Steve. We certainly, on the customer front, we have to have a relationship that works for both sides, and you know all about that, but certainly that's important to us. At the same time, we have to manage our portfolio. It is one thing to be happy to have so many products in the portfolio; it's another to manage them and to keep track of them and to improve them. And so we work that internally on both fronts. I think the other thing that happens is obsolescence occurs when you have a pretty strong and robust innovation process and you come up with products that are functionally advanced from some of the existing products. It is not that hard to convince your customer how to improve their operation with this new technology, and there is no sense in continuing to have that old product in the portfolio. I mean, every product costs us money to maintain. So your question is a good one, and I would answer it -- we work it on both fronts.

Okay. And then, Steve, I think you put out a number for healthcare in 2011 of about $250 million in sales. Did I hear that correctly?

Yes, you did.

Okay. If you look at just the consensus revenue estimates for the year, that would put healthcare at maybe 8% or so. Just help me understand -- you guys have had an impressive initiative into this end market, but that 8% number has been consistent over the past couple years. So how -- in what other ways can we look at your initiatives there and kind of quantify the advances?

Steve, this is Bob. I think for the first quarter, healthcare was about 9% of sales, and that is actually up over the course of the last two years. I think if you went back to 2009, it was about 7% of sales. So there has been sequential improvement on a growing top line, so I think we have had improvement and it has not been stagnant. Those are the numbers as we understand them, but we certainly have had a focused effort on driving growth in healthcare.

Yeah, I would add, Steve, that if you go back to my rival here, I think we didn't really break out healthcare and measure it, but looking back at it, I think we had about 3% of our Company's revenues in healthcare. It doesn't sound like a lot going from 3% to 8% or 9%, but I tell you what, it is a lot of progress, and we are very proud of it. And I guess the example would be this quarter, we grew 17.3% versus the 14% for the Company. So we expect our growth rate in healthcare to continue to exceed that of the core growth in the Company, and we will continue to invest in this platform and our profitability continues to grow very nicely. Again, we've got some mix issues going on here, as well, but just on an absolute basis, we are pleased with healthcare penetration.

Okay. And then if I may, just one last one just to clarify the terminology we're using here or just in terms of the same store sales concept. Since you guys don't have traditional store fronts where that is normally used, are you just looking at your ERP system and looking at customers you sold to last year versus customers you are selling to -- the same customers this year?

Effectively that's the case, yes.

That's great. Thanks.

And the next question comes from the line of Rosemarie Morbelli and Gabelli & Company.

Good morning, congratulations, and thank you for taking my question.

Thank you, Rosemarie.

When your margins are up, your raw materials costs have been increasing, you have been getting pricing, but you also have been improving your mix. Is it fair to say that you may not have gotten all of the raw materials cost increases in -- via pricing and the benefit we saw was more the result from mix? Could you help us understand where you stand between where your costs are versus last year and where your prices are?

This is Bob. I think it varies by platform. The best illustration of where we have not been able to cover raw material inflation is within the PP&S platform. I think we've been fairly open about that being the one where we're most challenged in doing so. Clearly, with gross margins being at 13.5% last year and 13% this year, you know, we did lose a half point of gross margin and I would assign most of that to inflation. So, we have had the greatest challenge within PP&S. In our other businesses, we've done a better job of getting pricing improvement in the face of inflation, but I couldn't specifically break that down for you between mix and price. We don't do that.

Rosemarie, I'll just make a couple comments here. We are very active in monitoring feed stock prices of raws and getting our sourcing teams to work with understanding actual raw materials and communicating the information to the commercial teams so that they have awareness of the market forces that are there. And we focus on improving our speed to reacting to the situation. In fact, we have two LSS black belt projects that are dedicated full-time to improving our speed to react to inflationary price pressures in our raw materials and that impact that's going to have on our finished good pricing, and then the key is to get that in the hands of the sellers and get it to the customers. And we are getting I think -- we are getting increasingly successful at this. Our skill set has improved. Our reaction time has improved. And so I feel like we are doing everything that we can on that front with the exception of cases where we have these 90-day contracts in certain -- in one of our segments that kind of bind us whether materials go up or down where we are sort of obligated to the practices of that business, and we will continue to manage those on a little bit of a retarded basis.

But we are pretty swift at understanding what's going on, and I think we have gotten quite effective at taking this to the customers. We are seeing inflation in a magnitude of year-over-year certainly double-digit inflation. There's no question about that. How long it will continue? We don't know. But we're going to be nimble and adapt. And again, the easiest kind of transactions you have are those involving a differentiated offering where customers understand. Customers every day know that oil prices are going up. They know TI02 is in tight supply, that butadiene is a challenge right now. So while they don't appreciate or like getting a price increase, they also do appreciate the fact that you keep them in supply and that you have a great service and great quality products. So that's what our mission really is. And now that we've trained our sellers how to take the pricing to the customer, I think it's more now about continuing to have the good offering that we have for all these customers.

Do you have a feel for -- and I'm only talking about a feel, obviously, for whether or not your raw material costs will somehow flatten out in the second half of the year, or are you seeing price increase -- I mean cost increases, rather announcements, through the end of the year?

We are forecasting raw material inflation to take place through at least I would say the second and third quarters of this year, and so we are not expecting anything flattening out before that.

I think -- let me just add, Rosemarie, that it is important to understand that even this Japan impact may indirectly get to us because suppliers might not be directly impacted, but there are going to be obstacles to overcome, including energy consumption, loss of feed stock materials, and indirectly the loss of capacity of key feed stocks in that region is -- these are global markets now, and it is probably going to impact global pricing and availability. Frankly, I think that's to our advantage. I think we know how to play pretty well in this arena relative to others that are out there. So we will manage it; we'll deal with it. But I would expect continued inflation going on in this space.

And the first quarter was stronger than I expected. Was it stronger than you expected? Did you have any surprises, and in which area? And then linked to that, did you see any pre-buying in anticipation of price increases?

I think the first quarter was a little bit better than we expected if you went back and asked us the same question at the fourth quarter in terms of how we do, we don't give guidance, of course, but I would say that's a fair representation of how we feel about the results. You know, I'd tell you on pre-buying, I think customers really are focused on managing their working capital still and keeping inventory levels as low as they possibly can. It is possible you could see some of that in advance of price increases, but I think the inventory level is probably driving more of their behavior than raw material inflation.

We didn't see, as we mentioned and spoke about April, we didn't see the effect of first quarter pre-buying there, but you know you always have that phenomena potentially going on. But with inflation continuing to occur, I guess you would say if that's the strategy by the customer, they're going to have to continue it because inflation is not slowing down.

Right. Any particular -- well, just one quick last question. When you gave us the total Company revenues of 14%, could you give us the impact from acquisition on the Company overall?

Yeah, it was 1.5%.

Okay, thanks.

Yeah, we are actually bumped up here at the end of the hour, so we need to bring this to close. This does conclude our first quarter 2011 conference call, and just want to say thanks to everyone who joined us today. We look forward to updating you on our 2011 progress during our second quarter conference call scheduled for early August.

Thanks, everyone, have a great day.

Thanks for your participation in today's conference. That does conclude today's presentation. You may now disconnect. Good day.