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PolyOne Inc. Q3 2009 Earnings Call Transcript

November 04, 2009 | about: POL

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PolyOne Inc. (POL)

Q3 2009 Earnings Call

November 4, 2009; 9:00 am ET

Executives

Bob Patterson - Senior Vice President & Chief Financial Officer

Steve Newlin - Chairman, President & Chief Executive Officer

Analysts

Frank Mitsch - BB&T Capital Markets

Rosemarie Morbelli - Ingalls & Snyder

Dmitry Silversteyn - Longbow Research

Christopher Butler - Sidoti and Co.

Chuck Peterson - Morgan Stanley

Tarek Hamid - JP Morgan

Bill Hoffman - RBC Capital Markets

Presentation

Operator

Good morning and welcome to the PolyOne third quarter 2009 earnings conference call. Before we begin, the company would like to remind you that statements made during this conference call, which are not historical facts maybe 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 to future events and are not guarantees of future performance.

They’re based on management’s expectations and involve a number of business risks and uncertainties any of which could cause actual results to differ materially from those expressed and/or implied by the forward-looking statements. Some of these risks and uncertainties can be found in the company’s filings with the Securities and Exchange Commission as well as in today’s press release.

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

Now, I will turn the call over to Mr. Bob Patterson, Senior Vice President and Chief Financial Officer.

Bob Patterson

Thank you, Michael and thank you to everyone who has joining us on the call this morning. As always we welcome the opportunity to speak to our investors and the analysts about the recent performance of PolyOne. Joining me today is our Chairman, President and Chief Executive Officer, Stephen Newlin.

Before I begin, let me propose my comments by saying that unless other timeframes are specifically stated or referenced during today’s call, we will be comparing the operating results for the third quarter of 2009 to the third quarter of 2008. This morning we announced our results for the third quarter. Separately we filed a Universal Shelf Registration with the U.S. Securities and Exchange Commission and issued a separate release on that effect. I’ll provide comments shelf at the end of my planned remarks and we’ll leave time to answer any questions you may have about that as well as our results for the quarter.

For the third quarter, we reported sales of $548 million and net income of $49.6 million or $0.53 per diluted share. Year-over-year top line comparisons continue to reflect the effects on recession on end market demand, which has impacted all of our businesses around the world. Third quarter sales fell 25% compared to last year driven by a 20% decline in volume, despite as earnings improved.

Excluding special items and one time tax items as enumerated in our press release, we reported earnings of $0.14 per share versus $0.13 per share in the third quarter of 2008. Our headline story today, centers around the improvement in Specialty Platform earnings. Operating income from our specialty businesses increased to $19.5 million for the third quarter, a new record for PolyOne. All three of our specialty businesses reported a higher operating income and collectively specialty operating income as a percentage of sales reached 8.5%, also a new record.

During our last earnings call, we cautioned that in the second half of this year, we expected lower earning from our SunBelt joint venture and that LIFO benefits would diminish versus the first half of the year. Both of these trended as we expected during the third quarter, versus the second quarter SunBelt earnings declined $4.2 million and while LIFO provided a benefit of $1.2 million for the third quarter, this was $4.2 million less than in the second quarter.

Fortunately, revenues for the third quarter were better than we expected as they increased 10% from the second quarter and about 8% higher volume. Better top line plus continued margin expansion allowed us to offset the previously described headwinds and earnings before special items improved not only versus the prior year, but also against the second quarter.

Now let’s talk a closer look at each of our segments. Our Performance Products and Solutions segment reported sales of $181 million in the third quarter. The 34% sales decline from the third quarter of 2008 was driven by a 27% decline in volume principally due to lower housing and auto demand in the U.S.

Despite the decline in volume and sales, operating income increased $6.7 million, excluding LIFO, operating income increased by half a million as restructuring savings, lower raw material cost, and improved mix offset operating income loss due to the previously mentioned 27% decline in volume. Compared to the second quarter of 2009, operating income for PP&S decreased by $2.7 million and gross margins decreased by 180 basis points.

Excluding LIFO, operating income increased by $800,000 as gross margins expanded by an additional 20 basis points. The gross margin improvement was driven by volume gains partially offset by unfavorable mix as much as of the volume pickup was in contract manufacturing.

Our Specialty Platform reported sales of $230 million, which is an 18% decrease from the prior year’s volume felt 15% and unfavorable foreign exchange reduced sales by approximately 3%. Despite the lower volume and negative effects operating income increased by $5.2 million versus the third quarter of 2008 due to mix improvements, restructuring savings, lower raw material cost, and LIFO benefits.

LIFO added $1.7 million of operating income during the third quarter. For the third quarter, we reported Specialty Platform gross margins before special items of 24.8% and as I mentioned operating income of 8.5% of sales, both of which are records for PolyOne. Comparing our third quarter Specialty Platform sales to the second quarter of this year, sales increased by 7% as volumes increased by 5% and FX added about 2%.

Operating income increased $4.9 million sequentially, due to the higher volumes as well as the positive impact of improved sales mix and foreign exchange. Our distribution business delivered sales of $163 million in the third quarter versus $215 million in the third quarter of 2008. The 24% decline was driven by a 10% volume decrease with a remainder of the difference explained by lower selling prices as commodity cost fell year-over-year.

Compared to the prior year, distributions’ operating income declined $2.9 million to $6.5 million principally due to lower volume. However, comparisons to the second quarter of this year have improved considerably. Third quarter operating income was $2.6 million better than the second quarter principally due to sales increasing 21% sequentially.

The distribution sales improvement was driven by 11% higher volume and commodity inflation as market pricing reflected higher commodity costs, which are largely passed through to customers in this business. Much of distributions improved volume is due to an up tick in U.S. demand as well as new business gains and we are now starting to see transition business from the DuPont agreement.

Our Resin and Intermediates segment, which consists of our SunBelt joint venture, delivered operating income of $3.8 million, which was $5.8 million, below the prior year and $4.2 million below the second quarter. The decline in earnings was entirely due to falling ECU prices. It appears that these prices have stabilized and are beginning to move up although we do not expect to see the benefit of this improvement in pricing until the first quarter of next year.

Corporate and other costs before special items were $2.5 million higher than last year and include $1.4 million of incremental pension expense in 2009 due to the pension asset losses incurred in 2008. Compared to the second quarter, corporate and other costs declined $4.2 million, due to previously announced changes to our post retirement benefits, the pension expense adjustment in non-recurring cost associated with NPE occurred in the second quarter.

Third quarter results included pre-tax special items netting to $27.5 million of income and consisted of the following: $23.9 million gain related to cash received from our former parent company as partial reimbursement for previously incurred environmental cost, $21 million curtailment gain associated with post retirement benefit plan changes, $12.1 million of expenses associated with previously announced restructuring actions, and $5.4 million associated with environmental cost associated with plants no longer owned or operated.

Shifting now to cash flow and liquidity, in the third quarter we generated $79 million of free cash flow and ended the quarter with $241 million of cash on the balance sheet, which includes the $23.9 million from our former parent company. After paying down $20 million of our debt, our liquidity increased to $344 million partially due to the higher cash, but also because of increased availability under our accounts receivable facility.

Our liquidity has more than doubled from the beginning of the year. Despite a 10% increase in sales from the second quarter, working capital improvements added to cash flow and we are pleased with the efficiency gains were continued to made, most notably we increased inventory turnover to 10 times from below seven in the prior year and reduced past due accounts to 11% during the quarter from 23% at year end.

We believe we’ve adequate levels of cash and liquidity and as such we paid down $20 million of short term debt during the quarter. Our accounts receivable facility remains undrawn and we see no reason to borrow at this time. While we did file a universal shelf registration today with the SEC, we do not have plans to issue securities in the immediate future.

However we believe that having a shelf registration in place is prudent as it provides PolyOne with even greater financial flexibility in the event we identified strategic opportunities that may require additional capital. The shelf registration statement when declared effective by the SEC will provide PolyOne with the ability to offer and sell from time-to-time in the future and one or more public offerings up to $450 million of equity, debt or other types of securities described in the registration statement or any combination of such securities.

The proceeds of the securities maybe used for general corporate purposes including acquisitions, capital expenditures and repayment of debt. The specifics of any potential future offering along with the prices, terms and use of proceeds in any security offered by the company will be determined at that time of any applicable offering and will be described in a perspectives supplement at the time of such applicable offering.

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

Steve Newlin

Thanks Bob and good morning everyone. I am going to cover Q3 from my perspective and try to add some color of Bob’s comments. Consolidated sales increased 10% versus the second quarter of this year driven by an 8% pickup in volume. Demand improved across all end markets and it’s encouraging that each of our platform reported earnings and growth compared to the second quarter of this year.

Overall, demand is still well below where it was a year ago. The top line comparisons to 2008 have improved with each quarter of this year. I am particularly pleased to report the record selling results for our specialty platform this quarter. As Bob mentioned we achieved $19.5 million of specialty platform operating income. That’s the highest ever in PolyOne history, especially gross margins expanded to 24.8% and operating income reached 8.5% of sales also both records and further evidence that our transformational strategy is working.

As pointed out in our press release, specialty operating income for the third quarter contributed 47% of total business unit operating income. When you consider at the end of 2005 PolyOne derived only 2% of business unit operating income from specialty businesses, you can begin to appreciate just how far we’ve come and while we are highly encourage by this progress, we’re far from being finished.

Since 2007, we said publicly we aim to derive 50% of our business unit operating income from our specialty platform. I want you to know it’s not lost on us that the 47% current quarter contribution from specialty is held by currently depressed earnings from the housing and automotive markets as well as our SunBelt joint venture. As these markets recover, exceeding the 50% goal would be more challenge we view this as a good problem to manage.

Housing and auto remain key end markets for us and we believe they have reached bottom and the recovery should present significant upside for us particularly given our lower cost structure. 2009 has been a year of considerable change for PolyOne and it’s also been a year of significant progress. We have dramatically strengthened our balance sheet and the earnings power of our strategic platforms.

Looking back at our accomplishments our first quarter 2009 results were met with a side relief as we reported significant cash flow and east investor concerns about our financial position. During the second quarter, earnings per share improved as a result of restructuring actions, improved mix and lower raw material cost.

The second quarter illustrated the earnings capability of our strategic platforms and the type of leverage we would see as demand improved. The third quarter provided additional evidence of this as gross margins and operating income expanded. At 18.1% gross margins before special items for the third quarter expanded 630 points over the prior year. We outlined the drivers of this expansion in our earnings release today and if we exclude LIFO reserve charges and changes in that, gross margins improved 520 basis points despite a 20% decline in volume.

In connection with our four pillar strategy of specialization, globalization and operational commercial excellence we set aggressive gross margin and return on sale expansion goals for each of our strategic platforms and these goals are unchanged today. We focused on gross margins initially as a measure of our product profitability, but clearly gross margin is ultimately a means to an end, which of course is higher operating income and earnings per share.

For example, we said profitability goals for our Specialty Platform of 25% to 30% gross margins with return on sales on 10% to 12%. While two of our specialty businesses, Specialty Color, Additives and Inks and specialty engineered materials, met these goals for the third quarter, we still have to get the entire platform to attain this level of performance and achieve and grow this level on an annualized basis. The consistently reach these goals, our priorities are crystal clear.

First of all, we need to continue to win new profitable business at a faster pace. We also must reduce costs in working capital through the ongoing successful deployment of Lean Six Sigma and these are the two most important priorities in our company today. When I joined PolyOne, the company was focused on moving pounds regardless of profitability. Through our commercial excellence initiative and new incentive programs, a reward to sellers for profitable growth, we change the minds of our commercial organization.

We made some tough decisions to prune on profitable business and in some cases shrink our business. Our color business is a perfect sample of this. Color lost money every year of its existence until 2007 and for the third quarter, our Specialty Color, Additives and Inks business reported return on sales in excess of 10%.

While we’re proud of this success, we recognize that it’s now time to focus on profitably growing the top line as well. We’re cautiously optimistic that the worst of the recession is behind us and we can modestly invest in new sellers, accelerate innovation and expand our Lean Six Sigma initiative as well as grow our international presence. To this end, we’re piloting a cross selling initiative, whereby sellers will be rewarded for their ability to increase sales for other PolyOne businesses. A great avenue for this is our distribution business, which serves 5,000 customers.

We anticipate this pilot program will become a full launch in Q1 of 2010 at our sales meeting in February. Cross selling allow us to further capitalize on and leverage customer penetration by our specialty businesses. However, our success in this regard will largely be predicated upon our execution and our ability to innovate and differentiate PolyOne from our competitors.

New products are the key to differentiation and our vitality index is a measure of our success. If you all, we stated a goal of driving 25% of consolidated revenues from products introduced within the last five years and that’s a measure that included our distribution business, which has no research and develop. So while we will continue to hold all of our businesses accountable to innovate and drive new products to market, the primary area of incremental formulating R&D investment is our Specialty Platform.

So we believe our Specialty Platform vitality index is a more relevant metric and for the third quarter, that was 36%. We believe a range of 35% to 40% for our specialty business is appropriate. In addition to winning new accounts and expanding gross margin with new and innovative products, we continue to build out our Lean Six Sigma initiatives and our second class of Black Belts will begin their formal training in January of 2010.

I am particularly pleased by the impact or less deployment has had this year in reducing cost and working capital. We generated $118 million of cash flow from working capital reductions alone. Our second class of Black Belts will focus on improving sales force, effectiveness and efficiency, streamlining sales and operations planning and gaining further synergy from global sourcing to name a few. Our goal will continue to be 100 basis points of annual gross margin improvement from our manufacturing businesses to the successful execution of Lean Six Sigma.

Lastly, on growing internationally, we have a strong foot hold in China and we are making progress this year with recent investments in India, Japan and Poland. We will continue to capitalize on our positions in Asia and Eastern Europe, but we’ll also look to make initial investments in our specialty businesses in South America where we recognize we have a gap in our international service reach. Brazil is one of the fastest growing economies in the world. Our global customers are there and we need to be there too.

Before we end the call to take your questions I’d like to talk for just a moment about our expectations for 2010. Last quarter at this call we cautioned that during the second half of 2009 we would see lower earnings from our SunBelt joint venture and diminished LIFO benefits and both of these statements proved correct during the third quarter. We did see better than expected volume in revenues and that combined with continued gross margin expansion and SG&A reductions allowed us to improve earnings per share before special items from the second quarter of this year.

While we are pleased with our progress and confident in our ability to execute inter medium long term, we remain cautious about near term demand. Further, we historically experienced seasonal demand declines in the fourth quarter and our end markets and this maybe exacerbated this year by extended customer plant shut downs in December. We continue to hear customers making cautionary remarks about the fourth quarter and we can dismiss those comments.

With inventory levels being low, these statements may improve too pessimistic, but we have to plan for what we are hearing. Finally, publicly reported for orca live prices may have bottomed during the third quarter, but we expect SunBelt’s earnings to fall sequentially as selling prices lag the public to reported data. This combined with further diminished benefits from LIFO in the seasonally lower volume will LIFO result in the fourth quarter sales and earning declining sequentially from the third quarter.

That being said, as we look beyond the short term seasonal phenomena we are cautiously optimistic about the direction of the global economy going into 2010. In general, we believe demand will improve next year and combine with new business gains, we expect our 2010 revenues will exceed 2009.

Our two key priorities are winning new profitable business and reducing cost and working capital through the continued successful deployment of Lean Six Sigma. As we focus on these priorities and navigate near term demand concerns, I am confident we’ll continue to grow long term earnings and drive shareholder value.

I will now turn the call back to Michael to open the line for your questions. Michael?

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Frank Mitsch - BB&T Capital Markets.

Frank Mitsch - BB&T Capital Markets

I wanted to ask about the shelf. I think you said Bob that the three areas that you would look to use it would be M&A, CapEx and debt pay down and, your net debt is the lowest level it’s been in years. CapEx in the quarter was very light so, I was wondering if you could comment on what you would look to do or hope to accomplish if you were going to go the M&A route?

Bob Patterson

Well, at present and just to comment on the shelf generally, we made statements in our press release and really just want to reiterate those that we filed the shelf today. As a matter of prudence and to give us additional flexibility feature should the opportunities arise to do a deal and/or possibly exchange debt we don’t have any immediate plans for either of the following.

As we think about M&A, I would say we, important in flexibility point for the company and that as you said, we have the lowest net debt level in a long time and that gives us a lot more flexibility than we had a long time and so we are starting to look at our M&A opportunities.

At present I would say the only things that are out there in the near term might be smaller in nature and ultimately those could probably be funded with cash to the extent that we decided to move forward in any event. So that’s really the best observations I can make about the shelf again just to reiterate it was done out of prudence and to give us further financial flexibility.

Frank Mitsch - BB&T Capital Markets

I guess we shouldn’t read too much into that, then?

Bob Patterson

Shouldn’t read anything into it.

Frank Mitsch - BB&T Capital Markets

Steve, when you’re commenting about the fourth quarter, you seem to make the case that perhaps it’s not going to be as debt as part at the right work, but decline would probably not be as bad as you’re hearing from some of the customers given that inventory levels are low. Here we are, the first week of November. Can you comment on the pace of business quarter to-date?

Steve Newlin

Frank, I mean it’s really the last part of the quarter that concerns us, and it’s really the anecdotal stories that we hear from our customers and we know that we listen very carefully to them and right now they are nervous about their business environment at year end and winding down inventories and we heard some customers say basically from Thanksgiving forward. Things will be difficult or may even take extended shutdowns.

Now it’s not across the Board and there are some very good things going on. It looks like auto is doing better than we had anticipated. It’s just, here we are again and it’s been a year of this inability to visualize and understand where the business is headed and I don’t think our business is different than many others. It’s just harder and harder for us to forecast, because we’re coming out of a bad situation.

We didn’t know who’s going to get as deep as it did and we still don’t know the full breadth of the recovery. So it’s more about uncertainty and listening very carefully to our customers and making sure that we plan for the worst. So we don’t have to deal with surprises in sort of need reactions that aren’t very value additive, that’s really all about I can say about it, Frank.

Frank Mitsch - BB&T Capital Markets

I mean there are some folks who are commenting more positively about auto builds in the fourth quarter being at similar levels if not better than the third quarter. At this point you feel it’s more prudent to at least plan the potential exist that the third month of this quarter could be more endure than that expectation. Is that kind of what you’re saying?

Steve Newlin

I’d say that sums it up pretty well. I think on the housing front, we’re still not seeing recovery in housing and that as you well know, that’s more influential to our income than anything else, but I think your analysis of the auto market is, it is continues to improve modestly and that would help us, but it extends across many of the end markets, we’re just in arrow of caution by a lot of our customers. I know Bob would like to add a comment there.

Bob Patterson

I was just going to make one observation about auto and that is when you look at the third quarter sales increase just over 10% versus the second quarter. About 3.5% of that actually came from auto. Some of that may have been tied to cash for clunkers. It’s hard to make a direct correlation between the two, but we have continued to see auto improve through the course of October and as Steve mentioned, it’s more of a concern about what might happen at the very end of the year, specifically the month of December that probably has us concerned the most.

Operator

Your next question comes from Rosemarie Morbelli - Ingalls & Snyder.

Rosemarie Morbelli - Ingalls & Snyder

Why was distribution so strong? Do you think that it was mostly inventory build up at your customers or was the product actually going out the door?

Steve Newlin

There are two things, if you mean versus the second quarter of this year?

Rosemarie Morbelli - Ingalls & Snyder

Yes.

Steve Newlin

The first observation I would make is that we did see some level of inflation. So as you look at the sales increase you need to take that into consideration. Purely from a volume standpoint, the distribution business increased to 11% in the third quarter versus the second quarter.

Some of that was driven we believe by auto and some of that has been driven by new business gains, and we specifically mentioned the DuPont agreement, which we announced on our call in connection with the second quarter. I would say those two things more than anything else are driving distribution Q3 over Q2.

Rosemarie Morbelli - Ingalls & Snyder

So you don’t feel that your previous customers aren’t just rebuilding their inventories and they are going to be using them throughout the fourth quarter and therefore sequentially, I mean I know it will be down, but it would not falloff a cliff?

Steve Newlin

No. I don’t think that’s the case. I don’t think there’s anything that would falloff the cliff in the fourth quarter. As we said before, we’re concerned about what might happen in the month of December, but generally things are trending positively and that’s why we feel positively about 2010 once we get past Q4.

Bob Patterson

The good news on that same front, Rosemarie, we are really just getting wrapped up with this DuPont agreement transition and we only saw really a sliver of that in the third quarter. So we’re counting on and expecting some good progress on that front, but as far as if you look at this, I’d like to refer to this same store sale meaning existing customers and what they use in consumption rates are, we’re not seeing any kind of substantial pickup on that front.

Rosemarie Morbelli - Ingalls & Snyder

While we are expecting sales to be seasonally down in Q4 versus Q3, should we expect gross margin to be above the 18.1% in Q3 as you benefit some more from your restructuring step?

Bob Patterson

No, the restructuring savings, we hit a run rate in the third quarter. So we’re not expecting any further margin expansion as a result of those savings and then I would assume that gross margins would likely actually decline in the fourth quarter due to our expectations for lower volume as much as anything else.

Operator

Your next question comes from Dmitry Silversteyn - Longbow Research.

Dmitry Silversteyn - Longbow Research

A couple of questions, first of all, I was interested in your comment on the ECU pricing in your SunBelt joint venture. You talk first quarter of 2010 as being a period, where you going to see some benefit of higher prices in the ECU.

My recollection was that first quarter of this year still saw fairly high cost prices although on the way down. Now do you expect the cost of pricing to recover to first quarter of 2009 levels, by the first quarter of 2010 or is it chlorine pricing that’s going to be meaningfully higher?

Steve Newlin

I want to clarify that statement. I was referencing that we think we can see some sequential quarterly improvement in operating income. So comparing the first quarter of 2010 versus the fourth quarter of 2009 by no means do I think our operating income in Q1 of ‘10 will get to where it was in Q1 of ‘09.

Bob Patterson

Dmitry, you are correct and that our view is that the chlorine pricing will be higher, but we don’t in anyway expect cost to return to where it was in Q1 of ‘09.

Dmitry Silversteyn - Longbow Research

Then to follow-up just a little bit more detail on your housing and automotive exposure. When you talk about housing, do you really mean residential housing or it is general construction, light industrial, commercial, or is your focus in the market so tight that it is just the housing market that’s important to you?

Steve Newlin

It’s overwhelming housing. There’s a little bit of commercial, but it’s a tiny sliver of our entire revenue into building and construction space. For us, it’s new housing and of course even remodels can, if the activity around remodels and refurbishments picks up, that’s another opportunity for us.

Dmitry Silversteyn - Longbow Research

Then on the automotive exposure, I know it’s not as big as housing, but it is still fairly significant. Is that particular area of concentration in terms of geography or manufacture that you are exposed to or are you really broad across the automotive sector?

Steve Newlin

We’re highly exposed to big three and we’re working on penetrating further the Japanese and European OEMs and making some progress, but clearly our base business is primarily across the big three.

Bob Patterson

I would add one other observation on auto just to put it in perspective, Dmitry. Following on my comment to Frank, we think auto bottomed in the second quarter and from a combined revenue standpoint, that was about 8.3% of our total revenues and third quarter got to 10.8%. So auto has been obviously a significant influence in the third quarter in terms of increasing top line.

Dmitry Silversteyn - Longbow Research

Then final question, you talk about volumes, when you discussed individual business segments in the company overall and you given us some foreign exchange information. Can you let us know what’s happening with pricing? Is the pricing coming down faster or slower than the raw material prices decline?

Obviously, the distribution business though do or died, but more so in your specialty business, where does pricing currently stand on a year-over-year and sequential levels and what’s the market outlook like, I mean is there a lot of pricing pressure right now from customers or competitors or is everybody still focusing on maintaining pricing and improving the margins?

Bob Patterson

First of all a statement about raw material cost and they are not falling anymore they seeing to be coming up and we saw that sort of at the end of the second quarter and believe that’s been the case and third quarter so it could be more pressure on price now than probably ever.

In terms of our own performance with respect to price, I think we’ve done a better job this year of managing price in a deflationary environment than we did last year in an inflationary environment and so I continue to assume that we’ll manage that through the course of this year but thing it is will become more and more difficult to achieve that level of performance simply the result of inflation and competitive pressures.

Steve Newlin

I want to add that I think that the organizational readiness to deal with cost increase on raw material side, we have done a great job of taking a lot cost out of the manufacturing side, things that we can control and manage, but it’s our job and it’s our obligation and our sales forces obligation to sell pricing so that we are appropriately rewarded for our efforts and are getting much better at this and there are a lot of reasons it’s training in the sales forces, it’s education and working with our customers, it’s differentiation.

It’s having uniqueness that enables us to be viewed as a valuable partner to the customers. Although things coming to play and I think we’re certainly fairing much better than we ever had in the past and should we get some accelerated raw material increases, there could be a brief lag between catering those costs and recovering those with margin from customers, but I think we’ll be able to execute and I’m not particularly worried about this issue.

Operator

Your next question comes from Christopher Butler - Sidoti & Co.

Christopher Butler - Sidoti and Co.

I wanted to go back to the question of demand, understanding that your customers are relatively cautious of the some of them looking out to the fourth quarter and I think a fairly comment story is that nobody is looking too far into the future as far as forecasting their demand and their purchases. Could you give us an idea of what the indicators that you guys are looking at that give you a more cautiously optimistic viewpoint on 2010? Is there anything different than what we are seeing to sort of big picture issue?

Steve Newlin

Chris let me give you a couple of data points it might be helpful with this. As we look at the consensus forecast for automotive, let me begin with that. The latest estimate for 2009 is 10.2 million builds and that range has been between 9/6 and 10/6 and settled on 10.2. For 2010, the low is 10/4 better than ‘09 in the highest 13/1, with the mean at 11.5 million units. So that alone is 14% increase in automotive if nothing else happens not to mention we worked through some inventory.

So to me 2010 with automotive, it looks pretty good relative, not relative to the ‘04, ‘05 ‘06, ‘07 years were we build 16 to 17 million units, but certainly relative to ‘09. Let me sort of shift gears now and move it over to housing which has it’s more impact on us. A number of builds estimated for 2009 is a low of 560,000 to a high of 610,000 pretty tight range a mean of 580,000 units and we’re kind right in their with that mean number.

For 2010, the mean is 810,000 units. That is a very substantial increase in housing builds and when you overlay that with potential mix of houses in that lower cost housing, smaller homes, lower cost per square foot homes tend to favor PolyOne because there’s more vinyl and more plastic this used in those applications. That’s what gives us where in the execution that we’ve seen give us a lot of encouragement for future. So, I don’t know if that’s what you are looking but those are specific data points in facts that might be helpful.

Christopher Butler - Sidoti and Co.

Looking at the third quarter, the strength in the specialty, I know that most people when they’re looking at say, the GDP number for the third quarter are trying to ex out stimulus and rebates and all this other stuffs that’s going on. If we’re looking at your results, is there anything in there that would be more third quarter one time in nature or are we looking at just straight up improvement of your specialty segments?

Bob Patterson

The only thing that I would consider as a potential one timer is the LIFO benefit of $1.7 million. Obviously, LIFO is not a one time event it’s how we account for our costs. So you’ll see that in the fourth quarter as well as we’ve cautioned we think that benefit could diminish.

Christopher Butler - Sidoti and Co.

Could you remind me what the benefit would have been through the first nine months of the year?

Bob Patterson

For specialty?

Christopher Butler - Sidoti and Co.

Yes.

Bob Patterson

For specialty, all in LIFO benefit I think was about $3.5 million and I can confirm that.

Steve Newlin

So all in for specialty was $3.7 million.

Operator

Your next question comes from Chuck Peterson - Morgan Stanley.

Chuck Peterson - Morgan Stanley

You talked a little bit about acquisition earlier. What size of acquisitions would you consider at this point?

Bob Patterson

I guess, we’re clearly in recent months, we’ve imposed some constraints on ourselves just because we were nervous and trying to work on some internal matters and we kind of abandoned at least temporarily our M&A strategy. What our strategy was before that I’ll start it was kind of two-fold. Certainly looking at leverageable strategic platforms, primarily if not absolutely specialty in nature that we could find opportunities to leverage just as we’ve done with GLS.

I think GLS is a great example and it’s probably on the larger side, there are not a lot of GLSs out there to obtain, but there are a lot of $10 million, $20 million opportunities for us, and we’re going after those opportunities with renewed vigor. On a couple of fronts, one we can do it now and we also have confidence that we can accomplish this, but also the evaluations have dropped on these and there are some terrific opportunities, if we can rope them in and get them under the right circumstances and they all make sense to us.

That said, I think this management team has the capacity and the capability to take on a major transformational acquisition if the right opportunity were to arise and that would be all I’ll comment on that. We don’t have any other comments on our sights on anything, but we’re always out there looking each and everyday to find ways to create shareholder. If that comes in a small package, we’ll go after it and it becomes in a large package, but it makes sense for us, we’d also be willing to give that the utmost consideration.

Chuck Peterson - Morgan Stanley

As of the end of the third quarter, I’m coming up with if we include your share of the SunBelt I’m coming up with a shade under two times net that’s EBITDA. With that as a base, for the right acquisition, how high would you be willing to take that number?

Bob Patterson

Actually, before we got into the economic crisis last fall, we used to get the same question and at that time we were about 3X. So we would take it up one turn higher than that if the right opportunity presented itself. I’d say that we’d probably still feel the same way about our capital structure going forward.

Operator

Your next question comes from Tarek Hamid - JP Morgan.

Tarek Hamid - JP Morgan

Can you talk a little bit about strength in the automotive segment sequentially from 2Q to 3Q? Any other end markets that helped drive the improvements in the Specialty Platform?

Bob Patterson

Well, first of all, the comments that we made about auto are principally driving the PP&S, the segment revenue, so as you looked at, there are sequential increase of volume of about 7.8%. A decent chunk of that was from auto. The other areas if you just are referencing Q2 do Q3, is that right? Is it Q2 to Q3 is be to confirm that?

Tarek Hamid - JP Morgan

Yes.

Steve Newlin

We did see a pickup of about a percentage point in consumer, and that probably was the most significant move in the specialty platform that we saw from Q2 to Q3.

Bob Patterson

Healthcare was up 10% sequentially.

Tarek Hamid - JP Morgan

Generally pretty broad based?

Bob Patterson

Yes.

Tarek Hamid - JP Morgan

Then following off on the last question, you are sitting on liquidity of $344 million. Any thought as to what sort of the right level liquidity to hold in the businesses longer term with markets generally a little bit more stable?

Bob Patterson

I guess the best observation that I can make about our comfort level with the capital structure is in reference to debt to EBITDA and would make the same observation that I did for the last caller. The way our debt is trading right now, our senior notes are the most substantial level of maturity, we have coming due in 2012. They’re trading at 101.

There’s a make-whole premium to take those out early, and they have a relatively attractive rate at this point and we think if we were to refinance, we’d pay a little higher today. So I really wouldn’t say there’s any anticipation of paying down debt in advance of its scheduled maturities.

So to the extent that we continue to generate free cash flow that’s going to without cash in the immediate term. To the extent that something becomes a good opportunity for us on the M&A front. As Steve mentioned, that’s an area where we can see future cash expenditures, but beyond that we don’t have any further plans.

Tarek Hamid - JP Morgan

One final question from me, on the working capital side, you’ve done a great job year-to-date, but any additional targets you had, sort of any number that you want to get down to during 2010 on working cap?

Bob Patterson

We’re going to continue to drive working capital, specifically as we think about that internally. We focused on all three areas of trading capital, but collectively we’re looking and trying to reduce working capital as a percentage of sales and we’re going to be trying to do that on an annualized basis going forward, but we don’t have a specific target that we would share with the public today.

Steve Newlin

I mentioned that we had a Lean Six Sigma initiative for around sales and operations planning and this is also aimed at reducing working capital. While making sure that we continue to be world class in our on-time delivery performance. So I’m going to push this saying so far that the wheels come off here and we end up losing this advantage we have with regard to customer on-time delivery performance. So that’s the balance we strive, but we think we have improvement to go.

Operator

Your next question comes from Bill Hoffman - RBC Capital Markets.

Bill Hoffman - RBC Capital Markets

Steve, I wonder just one last sort of focus on the experiment side of the business. What I’m curious is the geographic mix of your specialty business, whether it’s more Europe versus U.S., and trying to get to a sense of what you see as sort of the ultimate revenue opportunities in that business.

Steve Newlin

So if you look at it collectively, in ‘08, and this is all down this year because volumes and revenues are down, but in ‘08 we had about $1 billion of specialty income. As you know, our European and Asian business is overwhelming specialty, color additives innings as well as our specially engineered materials.

So it’s a big opportunity for us. We define our total market as a $30 billion plus market. I would say that you can count on specialty being at least a third of that, and we keep redefining the market opportunity. We haven’t changed our public stand, but we keep finding new niches and opportunities to grow in the specialty market. So yet it’s not undefined, but it’s certainly expandable.

So I think if we look at this and understand that we got our strong investment in Asia. We like our position there. We want to do better in Japan. We have a lot of opportunity to grow in India and continue to grow at double digits in China. We are well positioned there and that’s almost all specialties. I would say 90% of that business is specialty business.

For Europe, I would say it’s a similar number. The overwhelming majority of our business in Europe is specialty. In place we have a whole, I mentioned this in my remarks, is in Latin America. We had a little bit of business down there, really driven by customers asking us to serve, and we either have to import into that market or tool manufacture with people that they help us take care of some customers there and we see a quite a growing opportunity. Brazil alone, to give you an example has a $1 billion worth of specialty potential that we know of today.

So it’s a opportunity rich environment and it’s up to us to just get after it, execute and win the business. That’s why we’re spending so much time, energy and effort on training the sales force on developing new products that differentiate and that’s was really all about.

Bill Hoffman - RBC Capital Markets

What I’m trying to get to is as of the sales dollars today, how much of that is in the international market just if you took specialty segments since we…

Steve Newlin

It’s 50/50. The way we actually have organized our three reportable segments in specialty, we actually have separately reported our international businesses, and that’s the easiest way to think about the breakdown of the platform. It’s the international what this really will represents about 50% of the platform sales. A little bit higher in Q3, but from year-to-date it’s above 50%.

Bill Hoffman - RBC Capital Markets

The second question is, the SunBelt JV, we always got to ask, the strategy with it currently now we’re cycle trove for nine months ago we were cycle peak. We talked about potentially monetizing that. Any change in view right now?

Steve Newlin

We continue to view our SunBelt JV as non-core. We said the same thing now for a number of quarters. We think with that obviously with pricing dropping in the third quarter, that we’re going to continue to see some improved earnings there. So obviously, from a valuation standpoint things should improve. I would also point out recent proposed legislation related to Mercury and all in references on their call, the House Committee on Energy and Commerce passed a bill that would require producers using Mercury technology to decide by June 30 of 2012 whether they will convert or shut down facilities.

There are three grades of caustic mercury, membrane and diaphragm. The SunBelt JV is membrane all in operates two facilities that utilize mercury cell technology or about 18% of its capacity and this is all from their call. So I think going forward, that’s probably beneficial to us since we have membrane technology, and that venture has additional capacity that could be expanded to meet us needs going forward.

Operator

Your next question comes from Rosemarie Morbelli - Ingalls Snyder.