Avient Corp (AVNT) 2011 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the PolyOne Corporation fourth-quarter 2011 conference call. My name is Shantele and I will be your operator for today. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

At this time, I would like to turn the call over to Cynthia Tomasch, Vice President of Planning and Investor Relations. Please proceed.

Thank you, Shantele. Good morning and welcome to everyone joining us on the call today.

Before beginning, we would like to remind you that statements made during this conference call which are not historical facts may be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements will give current expectations or forecasts of future events and are not guarantees of future performance. They're based on management's expectation and involve a number of business risks and uncertainties, any of which could cause actual results to differ materially from those expressed in or implied by the forward-looking statements. Some of these risks and uncertainties can be found in the Company's filings with the Securities and Exchange Commission, as well as in today's press release.

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

Operating results referenced during today's call will be comparing the fourth quarter of 2011 to the fourth 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 our 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, Cynthia, and 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.

And I'd like to begin today by introducing Cynthia to those of you who have not met her. She is PolyOne's new Vice President of Planning and Investor Relations. For the past three years, Cynthia was General Manager of our specialty coatings and specialty resins businesses within our Performance Products and Solutions segment.

Through her leadership, she turned around two businesses that were collectively losing money in 2008 into two of our most profitable in 2011. In fact, she won our prestigious Chairman's Leadership Award in 2009. Prior to that, in Cynthia's 19 years of experience with PolyOne, she held numerous leadership roles in finance, marketing, and sales. She earned a bachelor's degree in physics from Denison University and an MBA from Case Western Reserve University. I am pleased to have Cynthia in this new capacity and serving as the point person for investors and analysts.

With that, let's get into the quarter. For the fourth quarter of 2011, we reported sales of $640 million and income before special items of $16.7 million, versus sales of $618 million and income before special items of $14.4 million for the fourth quarter of 2010.

This resulted in a 20% expansion in adjusted EPS to $0.18 this year versus $0.15 last year. And this marks an impressive ninth quarter in a row that we have reported double-digit adjusted EPS growth over the prior year, and brings to close a record year for PolyOne in terms of both sales and adjusted EPS.

And please note that the ColorMatrix transaction, which closed on December 21, had effectively no impact on PolyOne's income.

Performance Products and Solutions expanded revenues by 7% over prior-year fourth quarter to $189 million. The increase in sales was due primarily to higher selling prices associated with raw material inflation. As we have shared before, residential housing construction is a significant demand driver for the PP&S segment, and in 2011 U.S. housing starts were estimated to be at 600,000 units for the third year in a row.

Despite this and continued intense competitive pressure, PP&S expanded operating income versus the prior-year fourth quarter by 60% to $10.1 million, or 5.3% of sales. Operating margins improved by 170 basis points due to our ongoing successful deployment of Lean Six Sigma and strategic sourcing initiatives.

Revenues from our Specialty Platform were effectively flat versus the prior-year fourth quarter, primarily associated with pruning actions taken in previous quarters, reduced consumer demand for our higher-end margin products, and reduced demand for solar and nuclear end markets. While the selective reduction of less specialized, more transactional business continues to be an important part of our transformation, the pruning actions that we have spoken of the past two quarters had diminished significantly. Although some -- and also some amount of pruning can also be -- always be expected, the majority of the actions taken this year should lap themselves by the third quarter of 2012.

As we break down the Specialty Platform into its two segments, the benefit of mix improvement is clearly demonstrated in the Global Color, Additives and Inks segment, which expanded operating margins by 140 basis points over the prior year. And I repeat my earlier statement that there was effectively no impact for ColorMatrix, which was acquired on December 21.

In Global Specialty Engineered Materials, you can see the impact of the economic slowdown and reduced demand for certain higher-margin product lines. As consumer companies have experienced softening demand for their premium-priced product categories, demand for our soft-touch TPEs was impacted, and as I mentioned, we also experienced slowdown in demand in the solar and nuclear end markets.

Our distribution business grew revenues by 6% and operating income by 24% over the prior-year fourth quarter. The revenue increase was due to higher prices associated with raw-material inflation with operating margins expanding on SG&A leverage.

Moving onto other P&L items, corporate and other costs before special items were unchanged from prior year. Special items and tax adjustments in the quarter netted to a charge of $4.4 million, or $0.05 per share of expense, and they included a pension charge, a tax gain related to a prior asset divestiture, and an estimated earnout from the sale of SunBelt.

Recall that during the first quarter of 2011, we changed our pension accounting policy to the mark-to-market method. Under this new method, we now recognize actuarial gains or losses on pension obligations annually in the fourth quarter, as opposed to the previous method of determining and amortizing these gains and losses over future periods. As a result of lower discount rates and market performance of equities in 2011, we recorded a pension charge of $83.8 million, which is the largest of our special items.

And as a reminder, the Company's qualified and nonqualified U.S. pension plans are closed to new participants and frozen with respect to grandfathered employees, and we expect pension contributions and remaining obligations to decline over time.

We also recorded tax gains of $40.9 million in the fourth quarter, primarily due to U.S. tax benefits related to the prior divestiture of our investment in O'Sullivan Engineered Films and state valuation allowance reversals.

Third, and finally, we are very pleased to report our estimate of the first-year earnout of $18.1 million from the sale of our equity interest in SunBelt. Recall that we sold our portion of SunBelt to Olin in February for an upfront purchase price of $175 million with potential upside for a three-year earnout, and we expect to receive the first year's proceed soon.

The divestiture of SunBelt was part of our transformation strategy, as we sold our last remaining equity investment in the commodity business. The funds from this sale were redirected to our Specialty Platform, enabling us to complete the ColorMatrix acquisition on December 21. In connection with the acquisition, we secured a new $300 million term loan B, replaced our accounts receivable securitization facility with a new $300 million asset base revolver, and prepaid the remaining 2012 senior notes. It was encouraging to see that there was substantial investor interest in our new credit facilities, and we are pleased that we were able to secure both at better-than-expected rates.

During the quarter, we also paid cash dividends of $3.6 million and spent $21 million to repurchase 2 million shares of PolyOne stock on the open market at an average price of $10.50 per share.

We continue to believe that dividends and share repurchases provide a balanced means of rewarding our shareholders. In fact earlier this week, as a result of our improved performance, we announced that we will be increasing our dividend by 25% to $0.05 per quarter.

All in, we ended the quarter with $192 million of cash and liquidity of $340 million, giving us ample flexibility to fund organic initiatives, continue pursuing M&A, and return cash to shareholders.

This concludes my prepared remarks on the fourth quarter. I will now turn the call over to Steve.

Thanks, Bob, and good morning.

Well, the fourth quarter of 2011 brings to a close another strong year for PolyOne and, I think, highlights the earnings-growth potential of the new PolyOne as we continue to focus on profitable growth in becoming a specialty company that consistently delivers year-over-year earnings growth.

Since Bob's already covered our fourth-quarter financial performance, my remarks will focus on our full-year accomplishments as we established a number of records. For the full year, 2011 sales totaled $2.9 billion, a 9% increase from 2010 and a new record for PolyOne.

We also delivered record adjusted EPS of $1.02, a 29% increase over prior record, which was set in 2010.

These full-year results are particularly encouraging as they were generated by record-breaking performances in each of our three strategic platforms. Both the Specialty and Distribution platforms delivered record earnings, and Performance Products and Solutions generated record return on sales.

Despite slower economic conditions in the second half of the year, we achieved these record performances as we focused intensely on our four-pillar strategy. While we curtailed spending in the second half of 2011, we did not cut back on innovation. In fact, we continue to invest heavily in innovation at PolyOne to support our strategy.

Last fall, we conducted our first-ever Innovation Week in which we brought key marketing and technical resources together to share best practices, foster ingenuity, and improve our customer-centric innovation skills. We also tapped one of the world's premier thought leaders on innovation, Dr. Clayton Christensen, who helped train and inspire our innovators.

We're developing solutions to solve our customers' toughest challenges. I remind you that 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. During 2011, we achieved a Vitality Index in our Specialty Platform of 38.4%, which reflects top-tier innovation performance for a specialty company.

Recent examples of innovation include our announced collaboration with Siemens Healthcare to develop non-lead radiation shielding components for Siemens' newest line of CT scanners. Using one of PolyOne's Global Specialty Engineered Material solutions, Trilliant Healthcare Radiation Shielding Compound, Siemens was able to design and produce components with radiation-shielding performance equal to lead, while being environmentally friendly compared to traditional metal and lead parts. Through this innovation, we are helping healthcare providers incorporate more sustainable materials into their devices, while reducing their machining, assembly, and regulatory costs.

We also recognize that a collaboration with additive suppliers is an important part of our innovation strategy. Recently, we announced an alliance with SANITIZED AG, a leading producer of antimicrobials, to provide innovative customizable solutions for specialized healthcare and medical device applications, such as minimally-invasive surgical device housings, catheters, hospital furnishings, and medical packaging.

We're using the antimicrobials in our WithStand Antimicrobial Solutions, which consists of active ingredients that inhibit the growth of bacteria and viruses on plastic surfaces. So the next time you're in a doctor's office or hospital, take a quick look around at all of the surfaces and equipment that would benefit from antimicrobial plastics technology. From tubing to bed rails, there are numerous applications where we can help promote better healthcare to our customers and patients around the globe.

And in fact, speaking of healthcare, compared to the prior year PolyOne's sales to the healthcare market increased 19% to $269 million in 2011 as a result of our focused efforts to drive growth in this market segment.

In July, we announced an expansion of PolyOne Distribution in Shanghai, making our first entry point for POD in Asia. The Shanghai distribution facility is focused on providing value to healthcare-device manufacturers in Asia.

Speaking of distribution, in 2011 POD reached nearly $1 billion in revenues and delivered record operating income of $56 million. That's a 33% increase in operating income over the prior year, and return on sales reached a new high of 5.6%, while ROIC reached nearly 50%.

Performance Products and Solutions recorded sales of $865 million, up 11% from 2010, yet still 26% below 2006 revenue levels when U.S. housing starts were at 1.8 million units per year. Keep in mind that was three times the still-anemic 600,000 starts we experienced last year.

Impressively, and despite these comparatively lower sales than in 2006, our PP&S return on sales reached record levels of 7.2% in 2011, and that is an improvement of 170 basis points over 2006. You may want to talk further with Cynthia Tomasch about this as she has been leading two of our business units within PP&S under Rob Rosenau's leadership.

As PP&S continues to drive improvement through innovation and commercial and operational excellence, this business will be even better positioned for profitability as its core end markets, like housing, eventually recover, and this provides further upside to these record-setting results.

And while I'm eager to discuss how we'll take advantage of the upside potential across all of our businesses in 2012, I want to focus on Specialty as I look back on 2011 as a pivotal year in our transformation. First, we invested heavily in sales, marketing, and technical service resources to support and execute our innovation efforts. While Specialty operating income was a record this year, our results show that we modestly pared short-term results for long-term gains as we invested approximately $15 million in additional sales, marketing, and technical resources.

Second, we sold the last of our commodity-oriented investments, SunBelt. We realized $175 million from that sale before earnouts and we removed significant volatility from our earnings. And while we were satisfied with the price and multiple at the time as being mutually fair, we are delighted the total proceeds have been elevated as the business performed well in 2011.

At the time of the sale, we said we intended to use the proceeds to accelerate Specialty Platform growth. We followed through on that commitment and made several exciting investments in 2011 to grow our Specialty Platform.

In January, we acquired Uniplen, a specialty engineered materials producer in Brazil. In October, we announced the formation of a color joint venture in Saudi Arabia to expand our footprint into the Middle East.

And of course, we acquired ColorMatrix, a true game-changer for PolyOne and the largest acquisition in our Company's history. Although the transaction just closed in late December, we're off to a fantastic start together and the integration is going extremely well.

A few weeks ago, I visited the ColorMatrix Global Technology Centre in Knowsley, UK, meeting with employees as part of some integration activities. I don't think their level of innovation can be overstated. It's something you have to experience and feel as you talk with employees. Some cultures just have it, but most don't.

ColorMatrix in their approach to innovation will have positive ripple effects throughout our organization that no one could have predicted.

ColorMatrix has a track record of exceptional performance, having organically grown its EBITDA by an annualized growth rate of 16% since 2002.

This acquisition further positions PolyOne globally, strengthening our position in Brazil and Asia and creates an entry point into Russia.

As a result of incremental investments we expect to make in ColorMatrix, the acquisition will be modestly accretive in 2012 in the range of $0.04 to $0.06 per share, and increase to $0.12 to $0.15 in 2013.

ColorMatrix also accelerates the achievement of our Specialty Platform goals, most notably pro forma for the acquisition and the sale of SunBelt, 50% of our earnings now are from Specialty versus just 2% in 2005. This is just one of the 2012 goals we set for ourselves back in 2007. And it's hard to believe it's been five years since we first announced those aspirational targets. I am proud to say that we'll either exceed or come very close to meeting each of these extremely aggressive goals.

Let me share some proof of that performance. In return on sales from 2007 to present, consider the progress that we've made toward those lofty goals. Specialty improved from 3.2% to 8%. That is tremendous progress. POD improved from 3% to 5.6%, already surpassing our 2012 expectations. And PP&S improved from 6.1% to 7.2%, tremendous performance considering housing-start levels were less than half of what they were in 2007.

We targeted to improve our Vitality Index from 21% in 2007 to the range of 35% to 40% in 2012, and we're already at that target. In 2007, our pretax return on invested capital was 10.8%, and we expect to be very close to the 15% target we set for ourselves by 2012.

And as a measure of globalization, we said we wanted at least 40% of our sales to be generated outside the U.S. by 2012, and we will be at or very near this goal.

Of course, now we have to raise the bar higher, and on May 16 we will host an Investor Day in New York during which we will communicate our new 2015 goals. In setting these goals, we will hold steadfast to our four-pillar strategy which remains unchanged. We will continue to emphasize margin expansion, increased Specialty contribution, innovation, and international growth. And I hope that is what you have come to expect from PolyOne, higher expectations, continuous improvement, consistent with our strategy and our values.

You know, it wasn't an easy year and we are not in an easy business, and that is what makes me so proud of our performance this past year. And that's what makes my confidence grow in terms of all that we can do and are doing to take this Company to greater heights.

Before concluding my remarks, I want to share a few of my experiences in early 2012. I've spent much of my time so far this year directly with our employee base, and in my travels I've learned a lot.

I started the year with a trip to Asia, meeting and listening to associates there, talking about expectations, areas poised for growth and how we'll capture it. The next week I was in the UK, officially welcoming our ColorMatrix team and supporting their tactical integration sessions.

And just last week, we did something never before done at PolyOne. We brought together our entire team of sellers from around the globe. And joining our sales team were our general managers, who are the leaders that really drive the business performance that Bob and I get the pleasure of reporting to you each quarter.

This global meeting was amazing. They were a tremendous few days together where we sharpened our sales tools, recognized and planned cross-selling successes, trained our teams on our latest and greatest products, and energized our sellers for the coming year. During this meeting, I had the opportunity to talk with sellers who serve customers throughout 101 countries, and it was one of those rare moments where I actually gave pause to remark on just how far we've come as a Company, not just from a globalization standpoint, but in our transformation to become a world-class, highly-profitable specialty company.

And as CEO of this Company, I look well beyond the numbers that get rolled up each month and each quarter. There is tremendous value in talking with our team, especially in our non-headquarter locations. That's where you hear the stories behind the numbers. That's where I learned about one extraordinary seller who last year pruned $2 million worth of commodity business at 2% margins, but she didn't make any excuses, and instead went out and replaced those lost sales with new accounts averaging 30% margins to far more than offset the profitability of what was pruned.

Now, on a volume basis, her territory volume is considerably lower, but the profitability is substantially higher. This is what we mean by mix improvement, which remains a vital tactic as we execute on our strategy.

Those are the types of stories that are happening every day in our Company. They don't always get told on this call, and unfortunately I don't get to hear them all, either. But when I do, it provides me the confidence and reassurance that is hopefully conveyed when I speak with you.

PolyOne has enjoyed very good success in recent years, but I submit we have so much more that we can do and so much more that we will do, thanks to this terrific and engaged team of associates that I have the privilege to lead.

And before closing, I'd like to thank our PolyOne associates around the world for their exceptional performance in 2011 and for their continued relentless execution of our four-pillar strategy.

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

(Operator Instructions). Frank Mitsch, Wells Fargo Securities.

Good morning. Hey, Steve, how can I get access to your frequent-flyer miles? It seems like you've racked up quite a bit so far this year.

That's a great question. I could trade places, I guess.

You told the story about mix improvement, and I know that that was one of the keys behind the Global Colors segment. I was wondering if you could maybe spend a moment or two and just kind of flesh that out a little bit more in terms of what can we expect in the future from that area and if there are any specific examples to bring it to something tangible that we can touch and feel.

I'll take a first pass at that, Frank, and I think it's hard to put that into terms that, what I'd say, serve as a forecast for the future because we don't really know to what extent we would prune accounts in the future.

And as we have said in prior quarters, I always look back on 2011 and the amount of pruning that we did and say, look, a lot of that was predicated on pretty significant inflation that we experienced at the beginning of this year, which forced us to have some difficult conversations with transaction-oriented type customers where we couldn't get the desired level of profitability. To the extent that we see inflation in the future and it's as extreme as it was this last year, you may see more of the same.

But with our expectations of mid-single digit type inflation numbers, I think it will diminish significantly. Do you want to add?

Yes, I mean, I think, Frank, it's an iterative process, and I think it's part of getting better continuously and being smarter and more thoughtful about where your resources are allocated and taking care of those customers who appreciate the value that you bring to the table.

Many do, but some occasionally don't. They're very transactional in nature, and we will continue to have moderate pruning going forward just as part of our overall strategy, because we're not going to allocate our resources away from customers who appreciate what we bring and direct -- tie those resources up at customers who are really just being transactional in nature.

I think that the ColorMatrix opportunity gives us a unique chance to do some of this as well because they have a tremendous portfolio of very value-added products, a wonderful additives portfolio that we think can also be applied to many of our current-palette masterbatch customers as well. So I think you'll continue to see a modest level of this mixing up. It is an integral part of our strategy and I think it makes very good sense for us.

And Steve, speaking about ColorMatrix, you obviously raised your accretion expectation for that business, and I'm wondering what was it specifically that you've been able to see there that gives you the confidence that you can get more out of it?

Yes, I want to answer, Frank, but Bob's just -- he's jumping in here. He's going to get this one.

Yes, thank you. Principally, it's just a result of the better rates that we got on the underlying debt that we used to secure the deal. I believe we had said previously around 6% to 7%, and the all-in effective rate on the term loan B is 5.6% now, so that's giving us a good guide in 2012 from where we were before.

So that's the financial answer, but I have to tell you, having spent more time with these people and getting to know them and seeing what we really have in here. Normally when you make an acquisition, we tend to not always get it everything in diligence, and there are usually a few adverse surprises, and you expect them and hope that they're not significant.

The surprises that we have seen have all been, all been, on the upside, and so we are -- I'm really excited about this group of people. They're very talented. The more I learn about their technology and the portfolio that they have, the more enthusiastic we are about this deal. I'm really glad we have it and I think you can expect really good things from ColorMatrix.

All right, terrific. And then, lastly, obviously with the transaction, your net debt to EBITDA ticked up above 2. What sort of targets do you have there, and any sense on timing when you will achieve those leverage targets?

We've typically answered that question saying that we would be comfortable taking that up to a higher level of leverage, even as high as, say, 3, but with a long-term goal of trying to stay below 2. With the improvement in earnings in 2012, we'll be below that level in short order.

By year-end?

Yes.

Saul Ludwig, Northcoast Research.

Bob, what will be the interest expense for the year?

It will be close to $50 million.

Okay. The policy that you've done now with pension and that you're going to mark it to market each year in the fourth quarter, whatever that number is, are you going to call that special and cull it out from your reported results, or does this pension effect become an ongoing either plus or minus impact on your reported results?

The fourth-quarter mark-to-market adjustment will be called out as a special, and going forward that will obviously be a good guy or a bad guy, pending on market return of assets during the year and discount rate changes at the end of the year.

It is important to note that the ongoing expense assumptions for pension are not carved out as a special item. They are included in operations, so we've made no change there. But where that mark to market used to go to the balance sheet, now it goes to the P&L in the fourth quarter. We're calling that a special.

And what will be your pension expense in 2012 versus 2011?

The pension expense should actually be a little bit higher in 2012 by about $2 million versus where it was in 2011.

And then, finally, could you just -- I know the issue about volume is less important than the mix and your pruning actions, but could you just run through what your fourth-quarter volume changes were by the four different segments?

Yes, I can do that for you, Saul. Well, first of all, I would tell you that as we went through, and we did have the mix changes that Steve referenced, it is a critical element of our transformation story to replace high-volume, low-margin commodity business with higher-margin specialty business that is often lower margin.

We talked about this really having a positive impact on color and additives where fourth-quarter organic volume was down 17%, yet operating income increased 21%.

Was it down 17% for color or for the whole Company or what?

No, that was for -- I'm just speaking to the color segment now. I think you were asking me to go through and do that, and that is my intention.

So 17% for color. For PP&S and distribution, volumes were down about 6%, operating income increased by 60% and 23%, respectively. And as you know, where we were challenged in the fourth quarter was in our engineering materials business where the economic downturn disproportionately impacted our highest-margin businesses in consumer products, and organic volume for EM in the fourth quarter was down 17% and operating income declined associated with that due to softening demand for premium-priced product categories in the second half of the year.

So, the balance of that, of course FX had very little impact on the quarter, so the balance of that makes up really price and mix.

Yes, Saul, I appreciate the way you frame the question because as you -- you know us very, very well, and as you know this is -- looking at us from a volume standpoint is not the best way to really understand our progress and what is going on. And I know you know that, but I think for the benefit of other listeners it is important that we reiterate this because we've been consistent with this message now for three or four years. So, I hope that answers the volume (multiple speakers)

No, excellent. But it was 17%, 17%, 6%, and 6%?

Right.

Gotcha. Okay, terrific. Thank you very much. Good quarter.

Mike Sison, KeyBanc.

Hey, guys. Nice end of the year.

In terms of your 2012 outlook, Steve, you noted that you expect another record year. You gave us a little bit of color on ColorMatrix in terms of accretion. Can you sort of map out some of the [other] areas that should help you have another good year?

Yes, I will do the best I can on that. I think we're feeling better and better about 2012. I think third quarter and fourth quarter, it looked a little scary.

We're still very concerned about Europe and we think it's fragile, at best, and I believe it is going to limit some of the expansion and probably result in a reduction in demand. Don't know much for sure, any more than you do, of course, about the dollar, but most likely our belief is it will strengthen against the euro.

We have some expenses in the first half of 2012 that are above and beyond the normal expense in prior years. That includes this first-ever Global Sales Meeting that we held in February, and then in April we have the NPE 2012, the National Plastics Exposition, which we will participate heavily in, and that's an every-three-year event so that is not in our base. So those are sort of, I would call, anomalous expenses, plus the investments that we've made that we think are appropriate for long term.

So, maybe there's some near-term hurdles, but we are looking -- we're very optimistic, medium to long term, about the growth opportunities, and we think we're going to have a very strong second half of this year, and we're not looking past the first half, either. But growth rates decelerated a bit, and that's as a result of this current economic environment.

Okay. Then, in terms of the profitability by segment, I think you noted in the opening comments that you expect to hit the 2012 margin goals for each of the segments in 2012.

We didn't say that specifically. I think what we said was that, and this is -- we really didn't actually comment on that. We're well on our way, though, and I think if we're not there, we will be very close.

Okay. And what type of growth do you think you will see in ColorMatrix, Steve, in 2012 versus 2011, implied in the accretion guidance?

I think -- first of all, I would say that, recall that 70% of ColorMatrix business is outside the U.S., with a relatively heavy concentration in western Europe.

And so, it is possible that we may see some muted growth this year, just based on the consumer confidence in that region and dynamics around PET bottle consumption. But it's -- they're still going to see growth this year. Historically, they've had double-digit growth in sales and even higher, near 16%, double-digit growth in EBITDA, and we expect that to be the case by 2013.

Okay, great. And last one, there's been some optimism that housing is getting better, maybe stabilizing. Are you seeing any optimism from your clients in those areas as we head into 2012?

Yes, Mike, it's still -- it's pretty early to tell. There are some encouraging signs. We have -- as you know, we've been very bearish on this process, and we've been [riting] and preparing and dealing with this, our organization, for the worst aspects of this. We've been on the bottom end of all the consensus estimates and have been closer to reality.

So I don't want to get us all revved up about the housing until we have really concrete evidence that it's improving.

I will say that January looked good. I think we will know a lot more by the end of April, if we see improvements. Second quarter is always -- is a big one for housing starts, and if we get some uptick there, that will help us. I look forward to the time that it happens. It's going to depend, I think -- we've got the interest-rate environment. I think there is certainly opportunities for improvement if we get continued strengthening in the unemployment -- or the employment rates. So those are the things, I think, that are going to drive it more than anything else.

Great. Thank you.

Eugene Fedotoff, Longbow Research.

Congratulations on the good quarter.

Thank you.

Thank you.

A couple questions around raw materials, I guess. What do you see as far as your raw-material costs in the fourth quarter, and are you seeing raw-material costs increasing in 2012? And also, if you can comment on your pricing actions, if you're trying to stay ahead of the curve there?

First of all, we don't quote specific numbers on raw material cost impact within our own business, but we do take and try to quote market pricing for the basket of items that we do purchase, and those were up roughly 17% in the fourth quarter of 2011 versus fourth quarter of 2010.

We think it's reasonable to expect mid single-digit type inflation in 2012. There has been some recent activity around butadiene that is suggesting that is going up at an even faster pace than that, off of its lows in the fourth quarter of last year, and I think there's going to continue to be tightness around TiO2.

So, when we think about the future, we're typically most focused on those areas of specialty supply versus the larger base resins.

And can you comment on pricing? What are you doing?

Well, I mean from a pricing standpoint, if you're referencing our customer pricing, ultimately our intention here is is that we need to get pricing to more than offset the inflationary effects, and so that would be our plan for 2012.

Eugene, we really proactively monitor these raw-material prices and the potential supply/demand conditions that could impact our sales margins. I think that you have seen us deal with this pretty well through a rather heavy inflationary period. Our sourcing and commercial organizations work together, and they institute the necessary increases, wherever appropriate, to ensure we're not allowing raw-material price increases to adversely impact our sales margins.

Great, thanks a lot. And what are your expectations, Bob, for tax rate for this year?

I still use 34% as a good rate for modeling purposes.

And just last question, can you tell us what ColorMatrix sales and operating income was in the quarter?

I'll tell you that for the year. ColorMatrix had about $200 million of revenue and $43 million of EBITDA, which was actually really very close to what we said in the third quarter when we went out and secured the financing around that. And so, those are the numbers that we have right now.

I will tell you that there is an 8-K that will be filed shortly with some pro forma numbers in those and those are forthcoming.

Thanks a lot.

Mike Ritzenthaler, Piper Jaffray.

Good morning. My question is around (technical difficulty) expansion. You mentioned the POD facility in Shanghai. Can you give us a little more detail around expanding further the footprint in China, and perhaps Brazil, Latin America, and maybe even outside of POD in some of the more specialty products?

Well, I mean, we're just putting our foot in the water, our toe in the water, really, in China, in Asia, for that matter, right now with POD.

We were very focused. We're very selective. We have a lot to learn about how to run a distribution business there, but so far, so good. We're focused really on healthcare solutions at this time, and we anticipate that we will expand that, and we're just focused around the Shanghai area.

That said, we have six facilities in China, so we have a very nice position in China and improving throughout Asia. So we'll continue to invest where we see the higher-growth opportunities. We always measure the sort of political risk, the economic risk when we make decisions about where we expand, but I think Asia offers further opportunities for us.

India is a place where we haven't -- I don't think we've done a good enough job yet in terms of beginning to get serious about penetrating that arena. We have a fresh leadership team down there who I think is going to do a really good job for us, but we will need to most likely and want to make some additional investment in India.

As for South America, you mentioned, we're really, again, starting with Brazil. We have more work to do in Brazil first before we consider expanding out into such places as Argentina and others. The attractiveness in that region is really primarily focused around Brazil, and that's just due to size and progress and GDP expansion, as well as sort of pending events that we think are going to have sort of permanent impacts on the overall economy, like the World Cup and the Olympics that are planned for the near and intermediate future.

Okay, great. That was my only question.

Steve Schwartz, First Analysis.

Good morning, everyone. In PP&S, you guys had a very nice gross margin. I think we were expecting lower PVC cost. Bob, you mentioned higher prices. Is it that your pricing was that much stronger that gave you that result?

I mean, it really is a combination of pricing to a certain extent, as well as, I think, ongoing going benefit from Lean Six Sigma and sourcing savings. It's a combination of all those things.

Okay. So we can expect that to continue going forward in the next -- at least the next few quarters it will carry through?

Look, it's our expectation, Steve, to be able to manage pricing.

What we can't always manage is the external environment, and that includes the competitive intensity. We're going to be thoughtful and smart, I think, about how we handle these business applications, and I don't want to put us in a box on this.

I think the other thing I'd mention is we do tend to have a lag in those contracts with PP&S, and so when we had some inflation, we've always said that about -- around half those contracts have a 90-day lag on, which hurts us on the upside and helps us on the downside.

So we feel really good about our position. We think our quality, our delivery service, and our specialty applications command a premium in that space, but I don't want to make -- I don't think we want to make any statements, forward-looking statements, about what we're going to be able to do with regard to pricing in that space.

We have had a great track record, and I'd rather have you look backward at what we've done rather than anticipate what we might be able to do when we've got factors beyond our control.

Sure, okay, understood, Steve. Bob, in your commentary when you talked about the Specialty Platform, I got the impression that you noted mix was negative. We talked -- the color segment mix was positive. Am I hearing that right?

Yes, I mean, for color, mix was positive, and was really the largest, I'd say, beneficiary of the pruning actions that we talked about. Within engineered materials, that's where we did see a decline in demand associated with a couple of our higher-margin product lines where we sell into consumer products, as well as into solar and nuclear end markets, and that was a negative from a mix standpoint.

Okay. Yes, I was going to ask you to give us some examples of that mix shift, but it's consumer, nuclear, and solar.

That's right.

And look, and generally speaking, I think what we're seeing is, it's not a loss of share as much as it is really a decline in demand in those specific end markets.

Sure, sure. Could certainly understand that. And then, just my last question, since we have this earnout, Bob, can you just remind us what the drivers behind that earnout are? Is it simply revenue or profit, and what's causing that, because it's certainly not housing related, right?

Unfortunately, we can't disclose the terms and conditions of the earnout structure, and neither is Olin, so I can't say much about that. I can only say that when we sold the business in February, there were a set of expectations about performance over the course of the next three years, and to the extent that performance exceeds those expectations, both Olin and we benefit in this structure.

Okay. But potential for two more years of an earnout payment, right?

That's correct.

Right.

Okay. Thanks, guys.

Christopher Butler, Sidoti & Company.

Sticking with a similar subject, just to be clear, on a Company basis, was product mix beneficial to you in the fourth quarter?

On a total basis, I would articulate that mix was a benefit to us.

And if we're looking at the gross margin improvement year over year, how much of that would you attribute to product mix versus pricing versus raws?

I really couldn't bifurcate that for you as well as I'm sure you'd like me to. I can tell you that as you look at gross margins expansion, it is driven by all three of those things, and when you break down the specific segments, you can see where that resides. And it's not just inside the Specialty Platform. We did have improvement in PP&S, as well as in POD.

And as we look at the volumes in the fourth quarter, the reports of others were that things had gotten soft and definitely in specific areas, but rebounded in January. As we look at your business and as it pertains to some of the higher product mix products, have you seen a rebound in January and this far in February?

We can't say specifically what's happened in January, but just to reiterate some remarks that Steve made about 2012 outlook. I'd say that there are signs of the economy picking up a little steam. It's encouraging, and we are as well, and that is across a broader array of end markets.

And just finally, sorry if I missed it, but expectations for depreciation and CapEx this year?

Yes, CapEx should be between $50 million and $60 million. I would say that's higher than what you have historically said is our normal $40 million number, and that is because now it includes ColorMatrix. We have some incremental expenses on SAP implementations this year, and then finally, our investment in our Saudi joint venture will take place in 2012, so that gives you some of the delta there. And that is about two-thirds of what we expect depreciation to be in 2012.

I appreciate your time.

Rosemarie Morbelli, Gabelli & Company.

Good morning, all, and congratulations on a great year.

Thank you, Rosemarie.

Steve, you were very cautious regarding the first half of 2012. Do you anticipate that the first half, or at least the first quarter, could actually be lower than the first quarter of 2011, or did I misread this?

I didn't say that, Rosemarie, and I (multiple speakers)

No, I know you didn't, but I was trying to figure out what you actually did say.

Look, we're trying to build a culture -- first of all, you know we don't give guidance. But we're building a culture of winning in any context, and whatever the business environment is, it's our job to grow the business. And I don't see that changing.

I will tell you we had a great start to 2011 and we've got a big base and we've got a few expenses in Q1 that I outlined for you that weren't there last year, which makes it a little more difficult. But we are very confident in the year, and I'm not suggesting that we're going to have a down quarter. I didn't infer or imply that. So, if I did, I clarify it.

No, no, no. Thank you. I was just trying to figure out how much of an impact you were anticipating, and considering the difficult comparison as well.

Could you give us a little more details, on a totally different subject, on the ColorMatrix? You talked about leveraging each other's strengths. Could you give us a little more details on that?

Yes, I'll start, and as we have said, this is not a cost play for us, but really an opportunity for us to leverage each other's commercial and technical strengths.

Most notably, as Steve mentioned, ColorMatrix has a premier suite of additive technologies that we believe can be combined with our masterbatch technologies as well. So we see an opportunity for growth and expansion there.

We also see an opportunity for ColorMatrix to benefit from our size and scale, and to take advantage of those types of synergies. We just had, as Steve mentioned, our first global sales conference last week, which included the ColorMatrix sales associates, and I can tell you that the energy coming out of that meeting was as positive as we could hope for in terms of what the sales growth opportunities are.

So, I'd say those are two key areas of synergy opportunity for us on the -- from a commercial standpoint.

I think you also have to look at what's inside this portfolio. So yes, liquid color is a key element of it. Additives are a key element, but we also have fluoropolymers and silicone concentrates, which are businesses that are new to us and very related and something many of our customers buy.

And as you get into these fluoropolymers, these are typically used in specialty applications that are exposing materials to high temperatures or chemicals that require a lot of wear resistance. So they would be used in automotive and healthcare and specialty wire and cable applications to improve performance.

And segments like wire and cable, like fiber-optic cables, for example, provide a great opportunity for synergy with PolyOne's global customer base. Wire and cable's a big account base for us and we have not had these applications in our arsenal.

Then you move into healthcare, and it includes applications like dental tools or tubing and catheters for healthcare. Fuel hoses, films, tapes, and wire and cable systems in automotive. And so -- as well as tapes and molded parts and connectors and electronics. These are markets where we have a very strong presence, but this offering has not been a part of our offering in the past. So we think there can be a tremendous amount of cross-selling in these products that really supplement our portfolio.

That is very helpful, thank you. And if I may ask a couple of questions. On the raw materials/pricing ratio, have you recovered all of your raw-material costs, not necessarily the margin, but the dollar amount? And do you think that with a 5% expectation of raw-material inflation for 2012 you can go beyond just recovering the dollars, if that were the case?

Well, let me take the first stab at that, and then I will let Bob, who has more facts and data to work with.

It's never been our intention simply to recover the increases. We believe that when you produce something, there's a certain margin that goes along with that, and there's a certain profitability expectation. And if you continue just to try and capture your rate of inflation, by definition you are declining your gross margins, and we have not been doing that. We have been doing better than that.

And that remains our intention because we want to take some of that money and we want to give it to shareholders. We want to take some of that money and invest it in innovation for our customers and continue to provide the kind of services that are extraordinary that we're giving our customers today.

So I think we've done that and I think that the numbers play that out, if you look at the last couple of years of inflation. And it would be -- it is our stated strategy and intent to capture pricing and to be able to hold or expand margins through whatever types of inflation or deflationary periods we would encounter. Bob?

Yes, I would add that when you look at year-over-year gross margins at 16.6% in both years, I would say that it is flat, driven primarily by some of the mix issues that we've experienced with engineered materials, as I described that before, having the most significant negative effect. But beyond that, I think we've done a very good job of recovering those costs.

Yes, I was asking the question because you are also working on efficiencies and on changing the mix and so on, so they were more than just price versus raw materials in that gross margin.

And lastly, if I may, on the healthcare side, what kind of growth rate do you expect in 2012 and what do you see on the solar outlook, if you don't mind?

That's sort of two questions, and they will be our last because we're out of time.

Solar is very difficult to predict right now. I think it's going to be very challenging for us to have -- I don't see us growing solar in 2012. It's a marketplace we don't want to abandon. It's an important one. I think I look at it a little broadly, a little bigger, and that would be alternative energy, and I think there will be multiple different application points for us in the alternative energy space because I think alternative energy is here to stay.

Solar is one of those that works really well economically if there are subsidies, and when those subsidies dry up, there are sort of limits to the sustainability of it. So we're going to lump those all together, and I would say that the specific aspect of solar will be challenging, but alternative energy will continue to grow.

And the other question was related to the healthcare market expectations. I would simply say we continue to believe in this market and we are investing heavily in this marketplace. I think our record speaks for itself. I would expect it to grow at rates much faster than the core for PolyOne in 2012 and beyond.

We continue to beef up resources. Our brand is getting polished each and every day. We're participating in trade shows. We had one last week and we're seeing tremendous amount of interest in the uniqueness of our portfolio and our offering to that segment. Bob?

Nothing else.

Okay. Hope I answered your question, Rosemarie. So, I'd like to thank all of you for your continued interest in PolyOne and I want to wish you all the best in this new year. We're looking forward to updating you on our 2012 progress during our first-quarter conference call scheduled for early May and hopefully at the Investor Day as well later that same month. Thank you all very much. Have a great day.

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