Solutia CEO Discusses Q3 2010 Results - Earnings Call Transcript

Solutia CEO Discusses Q3 2010 Results - Earnings Call Transcript
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Solutia Inc. (



Q3 2010 Earnings Call

October 28, 2010 10:00 am ET


Susannah Livingston - VP, IR and Communications

Jeff Quinn - Chairman President and CEO

Jim Voss - EVP and COO

Jim Sullivan - EVP and CFO


Douglas Chudy - KeyBanc Capital Markets

Sabina Chatterjee - BB&T Capital Markets

Christopher Butler - Sidoti & Company

Laurence Alexander - Jefferies

Bill Hoffmann - RBS Capital Markets

Gregg Goodnight - UBS



Good morning, ladies and gentlemen, and welcome to the Q3 2010 Solutia Inc. earnings conference call. (Operator Instructions)

I would now like to introduce Ms Susannah Livingston, Vice President of Investor Relations and Communications.

Susannah Livingston

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We are pleased you have taken the time to join Solutia's third quarter conference call. Jeff Quinn, Solutia's Chairman President and Chief Executive Officer, Jim Voss Executive Vice President and Chief Operating Officer and Jim Sullivan Executive Vice President and Chief Financial Officer are with me this morning.

First I'd like to remind you that we are webcasting this call which you can access through our website, Also, we'll be using presentation material that are posted on the website along with the earnings release announcing third quarter results and a video highlighting key drivers in our performance. Finally, Solutia's Form 10-K will be filed later today.

If you would please turn to Slide 2, during this call management may make certain forward-looking statements. These statements are based on management's current expectations and are subject to change. Our actual results may differ materially. Please read our commentary on forward-looking statements at the end of our press release or statements in our quarterly and annual SEC filings.

Our prepared remarks today include reference to non-GAAP financials in our discussions of earnings. For reconciliations of our non-GAAP measures to GAAP figures, please see the schedules in our earnings release and contained in the slides today.

Also, just to be clear we define EBITDA as earnings from continuing operations before interest, loss and debt extinguishment, taxes, depreciation, amortization and non-controlling interest. Adjusted EBITDA is EBITDA excluding certain gains and charges, costs overhang associated with businesses classified as discontinued operations and stock-based compensation expense.

One last item to point out for this call, the Primary Accelerators business ceased operations this quarter. As such and per accounting guidance, the financials for this year and historical years will be restated by moving Primary's results into discontinued operations. In today's presentation, historical numbers have been restated in this fashion. For you reference, a restatement of quarterly historical numbers for this change is posted on our website.

Now, let me turn the call over to Jeff.

Jeff Quinn

Thanks, Susannah, and thanks to all of you for joining us this morning for the third quarter call. I am going to begin by discussing some highlights in the quarter. And then Jim Sullivan, our Chief Financial Officer, would do a deeper dive into the numbers. Then Jim Voss is going to talk about a couple of issues that are important to working capital and the sustainability of our margin profile. And then finally, Sullivan will come back on and talk about our expectations for the remainder of 2010. And then I'll close with some comments before we open it up for your questions.

Moving over to Slide 4 to discuss third quarter results, I am pleased that we can report another strong quarter for Solutia. We continue to be optimistic about our significant end markets. The year has played out much like we expected it to back in the second quarter when we significantly increased our guidance for the year.

We experienced year-over-year revenue improvement during the quarter as volumes were up 12%, which is not insignificant considering we had a very strong third quarter in 2009. We have seen a continuing trend of stabilizing and improving demand in our end markets and expect that to continue into 2011.

The global nature of our business segments allow us to benefit from increased demand no matter where demand is strong. For the third quarter, the Asia Pacific region drove the largest percentage of growth with a 28% increase over 2009 from strong performance in solar, aftermarket window films and electronics.

Manufacturing utilization rates for the company declined sequentially as a whole down to the low-80s with the dip in the second quarter due mainly to performance films as we head into the seasonally slower mass for that business.

As I have stated many times and I will continue to remind you, our cost structure has been transforming on permanent basis we believe. This quarter, we posted quarterly adjusted EBITDA of $130 million with an industry leading margins of over 25%. This is our sixth consecutive quarter of margins in the mid-20s, again demonstrating the significant value add and staying power of our businesses.

Several other important developments occurred during this past quarter. As Susannah mentioned, we ceased operations of our Primary Accelerators business. You will recall that that business was part of what we've always referred to as Other Rubber Chemicals. This completes the disposition of all the loss-making products in that segment following the closure of Ruabon in 2008 and Cologne in 2009. The Primary Accelerators business is now treated as discontinued operations for all reporting periods, as Susannah mentioned.

I am a firm believer in maintaining a strong balance sheet, a fact which I think we've made clear over and over again. In the third quarter, similar to last quarter, we produced outstanding results around cash generation in part due to the continuation of strong operating results and also due to the improvements in working capital that Jim Voss will highlight shortly.

Due to the strong performance, we made a voluntary pay-down along with a minor scheduled amortization for our total reduction in debt of about $30 million on our term loan during the quarter. This repayment brought our net debt ratio to below 2.5 as of the end of the quarter. We will continue to opportunistically look for chances to continue reducing debt and strengthening the balance sheet.

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