Solutia Inc. Q3 2008 Earnings Call Transcript

Executives

Susannah Livingston – Director, IR

Jeffry Quinn – Chairman, President and CEO

James Sullivan – SVP, CFO and Treasurer

Analysts

Jason Miner – Deutsche Bank

Laurence Alexander – Jefferies & Company

Constantinos Karathanos – Goldman Sachs

Randy Laufman – Imperial Capital

Laurence Jollon – Barclays Capital

Solutia Inc. (SOA) Q3 2008 Earnings Call Transcript October 30, 2008 10:00 AM ET

Operator

Good day, ladies and gentlemen, and welcome to the third quarter 2008 Solutia Inc. earnings conference call. My name is Amity, and I will be your coordinator for today. At this time all participants are in a listen-only mode. We will facilitate a question-and-answer session towards the end of this conference. (Operator instructions)

I would now like to turn the presentation over to your host for today's call, Ms. Susannah Livingston, Director of Investor Relations. Please proceed, ma'am.

Susannah Livingston

Thank you, Amity. This is Susannah Livingston from Director of Investor Relations. On the call with us today are Jeff Quinn, Solutia's Chairman, President and Chief Executive Officer, and Jim Sullivan, Senior Vice President and Chief Financial Officer and other members of our management team.

Jeff will open today's call with brief comments on the quarter and global market conditions. Jim will then discuss the quarter's results in detail, identifying factors that drove segment performance and non-reoccurring items. Jeff will then finish with some comments on the outlook for the remainder of 2008. We will then open the lines for questions and answers.

The Solutia press release announcing the third quarter earnings was distributed via PR Newswire last night and is posted on our Web site solutia.com along with slides for this webcast.

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 the statements in our quarterly and annual SEC filing.

Our prepared remarks today include reference to non-GAAP financials in our discussions of earnings. For reconciliation 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 before interest, taxes, depreciation, amortization, and reorganization item. Adjusted EBITDA is EBITDA excluding certain gains and charges, including certain fresh start accounting impacts, stock-based compensation expense, and nylon cost overhang that is retained by the ongoing business.

In addition, I would like to remind everyone that Solutia has classified the integrated nylon segment as discontinued operations effective in the third quarter. As such, results will be reported on this call and in our slides with the nylon segment as discontinued operations.

Now let me turn the call over to Jeff.

Jeffry Quinn

Good morning. Thanks, Susannah. I appreciate all of you joining us this morning for our third quarter earnings call. As Susannah mentioned, I will start with some brief comments on the third quarter and then I will speak to the current macro economic environment and what we see ahead of us. After Jim Sullivan does a deeper dive into the numbers for the quarter, I will come back on and talk briefly about full-year guidance and organizational priorities that we have established for these uncertain economic times.

I would like to start on Slide 4, and I guess really the bottom line is in spite of a macro economic environment that rapidly declined late in the quarter, we delivered exceptionally strong results for the third quarter in both revenue and adjusted EBITDA from continuing operations. These results reflect the strength of our performance, materials, especially chemical businesses, Saflex, CPFilms and Technical Specialties.

On Slide 5, there are just a few highlights listed for the quarter that I would like to hit upon. First, obviously is the increase in net sales. Net sales were $587 million, up 29% from the third quarter of 2007. Our strong top line growth was driven by price and volume increases, and to a lesser extent, favorable currency movements.

Jim will walk through a bridge in a bit. But suffice it to say that volumes were up in all of our segments with double-digit growth in Saflex. Prices increased in all of our segments, most notably in Tech Specialties and Saflex as well.

A couple of interesting points, our year-over-year improvement of 29% from the third quarter of 2007 is the highest quarter-over-quarter increase we have experienced, bringing the year-to-date, year-over-year revenue from continuing operations improvement to a bit greater than 23%.

Secondly, as we have stated in the past, Asia is a high growth market where we are actively participating. For the quarter, sales from Asia were up 43% compared to last year. Collectively for the quarter, 73% of our revenue from continuing operations originated outside of the United States, reflecting the true global nature of our businesses.

Adjusted EBITDA increased to $111 million, that was up 48% from the same period last year. This result are mainly attributable to higher sales as noted, improved plant performance at various sites, partially offset by higher raw materials. We had strong performance across all businesses with the Technical Specialties segment recording record sales in adjusted EBITDA numbers.

The adjusted EBITDA margin for the year improved 2% over last year to 19%. And finally, we reported adjusted diluted earnings per share of $0.32 for the third quarter in 2008. Jim will walk through these numbers in greater detail shortly.

Over on Slide 6, in addition to the very strong financial performance for the quarter, there were important developments as we continued our strategic path forward. First, through successful equity offerings, we were able to fully repay the $405 million, 15.5% bridge facility during the quarter.

Obviously, given the current state of the equity markets, this was something that the timing was just very good on. This taking out the bridge will allow us to save approximately $60 million annualized on a go-forward basis and interest. It also means that we have no short-term maturities, which is also a very important factor in the current environment.

As many of you know, our Saflex plant expansion in Belgium, the world's largest and lowest cost PVB sheet plant was successfully started up during the quarter as well.

Over on Page 12 of the slide deck, there is actually a picture of the expansion there. Again – as we have always stated, it is our goal in Saflex to grow with the market and improve margins. This plant is an important part of that strategy and our overall strategy to reconfigure our assets to balance geographic supply and demand. As this plant has come on, we will employ a very disciplined commercial approach as we feather this supply into the marketplace.

In addition, we have talked about how this expansion gives us a lot of optionality as we look to supply the growing photovoltaic market. I'm pleased that we have secured over 6 million square meters of actual photovoltaic sales for 2009 already. This is a significant increase over our 2008 volumes, and puts us well on our way to that 20 million square meter annualized run rate opportunity that we have talked about by the end of 2010.

In addition, during the quarter, we completed the idling of all the Ruabon, Wales products in rubber chemicals. As we stated in the second quarter, we will be closing the Ruabon site by year-end, and that's still our target and very much on track. This site represents about 25% of revenue from that other rubber chemical businesses that's reflected in Technical Specialties and about 5% of Technical Specialties revenue overall. You will recall that previously we have said that our goal is to be out of those other rubber chemical businesses within 12 months to 18 months and we are still on track for doing that.

During the quarter, CPFilms made some significant progress and continued to execute on one of its key strategic initiatives that is to move further downstream in the U.S. markets. In the third quarter, we completed another purchase of one of our U.S. distributors. In addition, we increased the number of U.S. branded stores during the quarter. We feel both of these events will benefit the market-driven sales concept of CPFilms.

And finally, during the quarter, the nylon sales process continued to advance as you will see in more detail on Slide 7. Despite the turbulent credit markets, our strategic alternative process for nylon moved forward during the quarter and is continuing to move forward here in the fourth quarter. We have a competitive, active process. Our goal still is to complete the process by the end of the first quarter of 2009.

Importantly, as our press release stated last week, we have moved the integrated nylon segment into discontinued operations, reflecting our belief that sale of this business is probable within the time frame prescribed by the accounting rules.

Finally, given the realities in today's environment, nothing is for certain. We have moved forward with an analysis of alternatives if, in fact, we do not sell the business as a whole on ongoing concern basis.

In addition, we have begun to change our financial and operating priorities for the business as we focus on cash flow, managing working capital, optimizing run rates, and otherwise repositioning the business in the current soft demand environment. These moves are the right moves regardless of whether or not the business is sold.

Next, I would kind of move forward and talk a little bit about the current situation. Unfortunately, in today's world, we can't take much time to celebrate the past even if it was a very successful quarter. So I would like to just turn my attention now to the present environment, and a bit later, I will talk about sort of what we are doing about the present environment.

One of the things that marked our successful transformation of this company in bankruptcy was that we dealt with the realities of our situation, conducted thorough analysis, and took an activist approach to moving forward with a sense of urgency. Our approach now is no different. So first, I want to deal a bit with what are those realities that we are facing.

Slide 8 and 9 take a look at our revenue base from continuing operations through a couple of different filters, geography and end-use markets. As illustrated on Slide 8, the overwhelming majority of our revenue is international in nature, roughly 73% of the total.

Importantly, we continue to demonstrate our ability to capitalize on this global presence, particularly, within emerging growth markets such as Asia, Africa, and the Middle East. For the third quarter, our revenue from the Asian region increased substantially over 2007 by 43%.

We also had strong growth in the rest of the world which is really Canada, and Central and South America and the European and Middle Eastern Africa, as we group things, most notably in the Middle East and Africa.

As is evident by our segment geographic breakdown, we were active in all areas across the entire portfolio which we view as a positive, especially during these uncertain times. Of note is that in only one business, CPFilms to U.S. sales account for a majority of our revenue, and many of you will remember that much of our focus in CPFilms is international growth due to better market penetration.

Slide 9 looks at the same revenue base through a different lens, end-use markets. It will be no surprise to any of you that about half of our revenue is exposed to the automotive segment, with a slightly greater orientation to replacements, including tires and windshields, and CPFilms products as opposed to OEM business.

Geographically, our automotive exposure is balanced with the replacement portion being weighted slightly more to the developed economies as opposed to the developing economies. All in all, only about 5% of our revenue from continuing operations is U.S. OEM auto related.

We are also exposed to residential and commercial construction, for about 21% of our revenue with over 75% of that being commercial construction. As we have discussed with many of you in the past, since the architectural use of laminated glass is much more prevalent in Europe, the geographic origin of our construction exposure is much more Euro-centric.

We are acutely aware that we are currently operating in one of the worst financial crisis in history. The depth and magnitude of its impact on the global economy is still largely unknown, so is its duration. Clearly, the two segments I mentioned will be impacted through varying degrees in each of the geographic markets. 71% of our revenue comes from those two end-use markets.

While we are realistic about the challenging environment facing these two segments, we believe that geographic diversification, the split between OEM and replacements on the auto side and between commercial and residential on the construction side will help mitigate this risk.

Over on Slide 10, not to spoiling our beautiful fall day here in St. Louis, but I wanted to spend just a couple of minutes discussing what we are seeing in our markets, starting with the automotive sector as set forth on Slide 10.

JD Power is forecasting that global production levels for cars and light trucks will show virtually no growth in 2007 through 2009. As this slide indicates, these forecasts have radically changed over the course of the summer into the fall. However, we are positioned well in the few markets that are showing continued growth, most notably Asia.

In addition, over half of our automotive sales are replacements in nature as I said previously. This will continue to buffer us during economic downturn though the decline in U.S. and miles driven in the U.S. is a bit of a concern.

On Slide 11, you will see information about the global market dynamics for the construction segment. We have already started to see the impact of the credit crunch in our businesses that are tied to the commercial and residential construction markets. Our commercial construction forecasts are shown – are showing 2008 as the low point for the U.S. with some continuing decline in eastern and western Europe into 2009.

We expect Asia construction to grow with GDP with greater growth in the emerging parts of the region. As a result of these market factors, volumes began to shift to a downward trend during the last days of September. Based on what we are seeing today, we are operating under the assumption it will be a challenging operating environment throughout the remainder of the year.

While we don't have a crystal ball, and for the most part cannot control the macro economic environment, we are proactively monitoring the situation and evaluating its impact on these markets. Just as we did in our reorganization, we will not let things that we cannot control define us, but rather we will be defined by how we respond to these events.

As set forth on the next couple of slides, we are confident that Solutia is well-positioned to navigate effectively through this difficult environment without losing sight of our long-term growth strategy. As we have demonstrated over the past few quarters, we hold solid Number One market positions in each of our businesses.

In addition to leading in market share, we believe we are the leader in technology and cost position in each of our businesses. We have large scale manufacturing facilities such as the largest insoluble sulfur plant in the world and the largest PVB plant in Europe and in the U.S. Our manufacturing footprint in every business segment is global in nature, and is for the most part well-balanced to geographic supply and demand.

In Saflex, we continue to monitor the global demand shift to the east and we will adjust capacity to best fit our customer and market needs as appropriate. The same holds true for our Crystex site, as we continue to monitor the needs of the rapidly growing Asian markets, and look to expand our manufacturing capacity there at the appropriate time.

As we pointed out in the last quarter's conference call, part of our strategy is to take advantage of the significant growth opportunities in the emerging markets, particularly, China and India. Though the global economic outlook for these regions may moderate, we believe these markets should continue to provide solid growth for our businesses going forward. Again, all three of our business segments participate in these regions.

Moving on to Slide 13, our commitment to innovation and new product application for our current portfolio will continue. We see solar opportunities for all of our semi [ph] into 2009. It's important to note demand will in part be driven by policy. The U.S. Congress extending the 30% solar investment tax credit, in addition to the EU and many U.S. state mandates for higher renewable energy, will help drive the growth in this market.

Specifically for Saflex, we are confident in the growth of the photovoltaic market as is evident from our volume production commencing at various solar cell manufacturers who utilize PVB as the encapsulant in their thin film photovoltaic modules.

In Technical Specialties, our Therminol BP 1 heat transfer fluid is used in concentrating solar power systems. The fluid efficiently transfers heat from sunlight into a power generation facility. In the third quarter of this year, we already experienced sales into the solar thermal power plant in Egypt.

CPFilms sells a full array of products that are used for conductivity, UV and other barrier films from mobile and flexible electronic devices and rooftop applications. While the solar market contributes currently a small part of Solutia's total revenue, it is growing rapidly and we expect this to be a resilient market in 2009, despite a broader economic slowdown.

Of course, given the recent developments in the financial markets, I would be remiss not to mention our debt structure. Our $1.2 billion term loan and our $450 million revolver are not due until 2014 and 2013 respectively.

It's important to note that our $1.2 billion in term loan, $900 million is protected with a LIBOR cap of 425 basis points. Our liquidity continues to remain strong at $227 million at the end of the quarter. We will reduce our indebtedness from its current level to approximately $1.3 billion at year-end.

We believe that the potential sale of the nylon business would complete the transformation of Solutia into a pure play high margin, high growth specialty chemical company. All of our businesses also demonstrate the attributes of specialty businesses that are important in an economic downturn.

Lower cyclicality, lower volatility, compared to more commodity oriented businesses, and importantly, the ability to value base price for products that are generally not optional, but essential in terms of the functionality they bring to our customers.

Finally, I would be remiss if I did not mention the experience of our management team. The ability to operate and deliver results in uncertain times is common for us. We have been operating under such circumstances for the past four plus years. Albeit the economic times will be different heading into 2009, I believe this team will continue to focus on our customers and maintaining our low cost positions while not losing sight of our long-term strategies to grow these businesses and deliver value to our shareholders. Our team has a bias for action, and we will take the steps necessary to excel in this volatile economic environment.

Lastly, before I turn it over to Jim, moving over to Slide 14, I would make a few points in regard to past recessionary times. While I obviously wasn't here at Solutia during those times, I have asked the team to look at our performance during the past economic downturns to see what lessons learned to pick up. Several observations can be made.

First and foremost, we are a different company with a different management and strategy than during the past. Generally, our specialty businesses performed well during the last recessionary cycle. However, at the time of the 2001 recession, we were heavy in the fiber business and U.S. centric.

As of this quarter, nylon has now moved into discontinued operations and that business is much less exposed to fibers to-date than it was in the past. Our continuing operations revenue is three quarters ex-U.S., and our management realizes that the value add of our products have in the market and have a dedicated, disciplined commercial approach regarding capturing our fair share of that value.

In addition, we use the tools of bankruptcy to significantly reallocate the legacy liabilities that have plagued Solutia during past recessionary times. So in effect, we have a lighter burden to carry this time through the downturn.

In Technical Specialties during past recessions, we did experience volume decline in most business lines. However, in our Crystex and specialty fluids businesses, the margin impact was somewhat muted due to our ability to hold on to price, which holds true to-date.

In addition, the Crystex business is advantage even more today with new products that drive improved manufacturing for our customers. In addition, we have begun to exit underperforming assets in the rubber chemical space as discussed earlier.

Saflex during past recessions maintained volume, but did experience pressure on price. However, it's important to note that back in 2001, pricing was under pressure as competitors were trying to gain market share, and in the downturn in the early '90s, there was also excess supply in the market.

In both recessions, we were operating in a downward trend of raw material costs which is not necessarily true to-date. In addition, both the PVB and resin markets are well-balanced today. Importantly, Saflex participation in the emerging solar space will help mitigate the slowing demand in automotive and architectural applications.

CPFilms maintained earnings during past recessionary times. Historically, that business relied almost completely on U.S. markets. But today, 40% of the window film revenue is from outside the U.S. and Western Europe. It's also important to note that category mix in the window film market is shifting towards architectural applications where energy savings is an important driver of consumption. And this should continue despite slow economic times.

So in conclusion, I believe we are entering into uncertain times, but in better shape than we have ever been in the past. I am going to turn it over to Jim, and let Jim talk about the quarter results in a bit more detail. Then I will make some concluding remarks about how we have adjusted our organizational priorities given the current economic situation that we have been discussing. Jim?

James Sullivan

Thank you, Jeff and good morning to everyone. I will begin my discussion with Solutia's consolidated sales and earnings from continuing operations and then break down our results by reporting segments. I will conclude with comments on cash flow and debt.

To enhance transparency with investors and highlight underlying trends with the business, we have adjusted reported EBITDA in all periods to exclude certain items, both charges and gains, stock-based compensation, and cost overhang related to nylons classification as discontinued operations.

Page 16 of the slide presentation details the charges and gains we have excluded in our calculation of adjusted EBITDA for the third quarter 2008, and for the third quarter 2007. During the second quarter, we announced our decision to exit rubber chemicals manufactured at Ruabon.

During the quarter, we recorded net charges of $1 million for severance and certain other termination and decommissioning-related activities. As Jeff said, we are on track to complete this restructuring by year-end.

In addition, we incurred a $1 million charge associated with relocation of our small European plastic products manufacturing operation from Gent, Belgium to Romania. More than offsetting these two charges in the quarter was a $3 million gain that we realized from the sale of surplus land.

Importantly, underlying each of these actions is our ongoing commitment to proactively improve the strategic positioning of our businesses and to generate cash from non-core assets.

Also as mentioned, consistent with the accounting requirements for Disc Ops., costs currently allocated to the nylon business that are not likely to follow the sale transaction will remain in continuing operations. This cost overhang is primarily related to the retiree medical obligation we internally allocate to nylon.

You will note this cost allocation is down $2 million year-over-year, which is due to the scale back benefit programs and planned funding that was implemented upon our emergence from bankruptcy in February. Of course, post-completion of the nylon sale, the company will appropriately resize all of its corporate overhead functions to be in line with the $2 billion dollar plus global performance material and specialty chemicals business.

For reference, we have included tables in the Appendix section of the slide presentation today that bridge reported EBITDA and EPS to adjusted EBITDA and adjusted EPS.

Turning to Slide 17, Solutia's consolidated and combined net sales from continuing operations for the quarter totaled $587 million, up 29% year-over-year and 23% on a year-to-date basis. Adjusted EBITDA was $111 million, up 48% over the third quarter of 2007 and 36% on a year-to-date basis.

Adjusted EPS was $0.32. The $133 million or 29% increase in year-over-year sales in the quarter is further broken down on Slide 18, with higher volumes accounting for 8% of the gain, selling prices 16%, and currency movements 5%.

Slide 19 bridges the $36 million or 48% increase in our year-over-year consolidated adjusted EBITDA from continuing ops. Higher sales volumes, improved product mix, selling prices, and solid manufacturing performance more than offset the negative impacts from higher raw material costs and currency translation.

Now, let's turn to the business segment, starting on Slide 20. Saflex's third quarter sales totaled $221 million, up $48 million or 28% year-over-year. Volumes increased 14%. Average selling prices rose 7% and favorable currency movements accounted for the remainder of the improvement over the last year. International volumes were up solidly, while domestic volumes were held steady.

Although we did experience some volume slowdown toward the end of the third quarter, the European architectural market and the Asian architectural and automotive markets were up 20% and 30% respectively year-over-year in the quarter.

While volumes were indeed strong in the third quarter, with the rapid slowdown in global demand we are now seeing, we do expect some inventory correction to occur with our customers in the fourth quarter.

Adjusted EBITDA for Saflex totaled $35 million, up $8 million or 30% compared to the prior year period. This improvement was primarily driven by the higher sales volume and improved product mix. Partially offsetting strong, top line growth was continued escalation of raw materials.

In addition, manufacturing and other costs were up modestly due to the start-up of the Gent PVB expansion and increased marketing and technology-related spending in support of the emerging photovoltaic platform.

On Slide 21, CPFilms net sales for the quarter totaled $63 million, up $4 million or 7% over the prior year. Volumes in this business were up 3%, selling prices were up 3%, and currency added 1%.

While U.S. demand conditions remained weak, the business experienced good international volume growth in the third quarter, most notably in Russia, and Central and South America.

CPFilms adjusted EBITDA totaled $15 million, up $1 million or 7% year-over-year. This improvement was primarily due to higher volumes with selling price increases offsetting higher raw materials and modestly increased SG&A spending.

On Slide 22, you see Technical Specialties. This business continued to deliver outstanding results in the third quarter, with net sales of $294 million, up $80 million or 37% year-over-year.

Overall, volumes were up 4%, selling prices rose 28%, with the remaining year-over-year revenue growth coming from favorable currency movement. Product volumes within this segment were mixed in the quarter.

Notwithstanding year-over-year mid-single digit percentage overall demand decline in the rubber chemicals industry segment, Sandoflex, our antidegradant product line, experienced high teen percentage volume gains due to significantly tighter supply conditions, in particular, related to Chemtura's exit in the fourth quarter of 2007, and production start-up difficulties encountered by an Asian competitor.

Third quarter volumes in Crystex and other rubber chemicals were in line with the overall decline in the market. Year-over-year volumes from the specialty fluids businesses were on par with global GDP growth rates in the quarter.

In terms of selling prices, the business has successfully implemented numerous increases this year across the portfolio, which is reflective of a number of factors, including the significant value and use of the segment's branded product and service offerings, supply/demand conditions, inclusive of the temporary shortage caused by competitor startup issues and the dramatic increase in raw material costs.

Technical Specialties adjusted EBITDA totaled $75 million, up $28 million or 60% over the prior year. Strong top line growth, higher manufacturing and utilization rates, and lower spending levels more than offset the significant increase in raw materials and unfavorable currency exchange movements on EBITDA in the quarter.

Aggressive pricing action taken on other rubber chemical product lines that are being phased out with the closure of the Ruabon facility, added over $5 million of year-over-year improved margin in the quarter.

As previously mentioned, we have classified integrated nylon as discontinued operations effective in the third quarter. As such, the assets and liabilities and operating results of the business are now reported as discontinued on the consolidated financial statements. The convention for discontinued operations is to report results from the face of the income statement on one line net of tax.

In the Appendix to our slide presentation today, we have included a reconciliation of adjusted EBITDA numbers for both the current quarter and the prior year third quarter, to the net income number reported on the income statement.

You will note in addition to the normal reconciling items from adjusted EBITDA to net income, we are required to allocate certain amounts of interest expense to disc ops as well as appropriate tax provisions.

We will not go through this in detail on the call today rather we will focus our comments on the underlying changes we saw with sales and adjusted EBITDA in the quarter versus the prior year.

The nylon segment generated revenue of $506 million in the quarter, basically flat with the prior year. However, the 2007 revenue number did include a one-time benefit of $22 million from the early termination of a customer contract.

Selling prices were up year-over-year, partially offset by volume declines in chemical intermediates and carpet. We continue to see solid growth in our plastics business, which did offset a portion of the carpet and intermediate chemicals volume softness. Nylon adjusted EBITDA was a loss of $5 million in the quarter. This compares to adjusted EBITDA of $24 million in the prior year.

In addition to the volume weakness, which impacted both revenue as well as asset utilization rates other drivers of the change include the continued escalating raw material profile which was an increase of $84 million over the prior year. We recovered approximately 82% of this increase through our selling price action, which has improved coverage from what we saw in the first two quarters of the year.

The other significant factor that negatively affected performance was Hurricane Ike, which impacted adjusted EBITDA by $8 million. This was due to sales volume loss and lower fixed cost absorption from the evacuation and complete shutdown of our Alvin, Texas operation for a couple weeks. Offsetting these items was continued cost reduction as well as currency gains from our global plastic business.

Slide 24 details 2008 cash flow from continuing operations by quarter and year-to-date. This is a dramatically different cash profile than what we had previously reported and highlights the cash generating strength and significantly reduced working capital volatility of the specialty businesses.

Year-to-date cash provided by operations excluding reorg activities was $116 million. This was driven by strong earnings and effective working capital management. For the quarter, we saw a 4% improvement in working capital as a percentage of sales compared to the prior year period.

Also during the quarter, we contributed $23 million to the domestic pension plan, which brings us to a total contribution through September of $50 million. We made another $7 million payment to the plan in October, which completes our mandatory obligation for 2008. Despite weak year-to-date asset returns in the pension plan, our mandatory contributions in 2009 are pretty much locked in at around $40 million.

Cash interest in the quarter was down modestly sequentially reflecting the payoff at 15.5% bridge loan in mid-August. As Jeff said earlier, the elimination of this step will save the company over $60 million of interest on an annual basis.

Cash used in disc ops and investing activities year-to-date totaled $218 million, approximately two thirds of this cash use was from higher working capital levels, and about 50% of the increase is the inflationary impact we saw on inventories and receivables from higher raw material costs and higher selling prices. The remaining 50% is volume related. In addition, our quarter-end payables balance was lower than normal, due to the timing of Hurricane Ike in the back half of September.

We expect a significant reduction of working capital in the fourth quarter from lower raw material costs and lower formula-driven selling prices. In addition, as Jeff mentioned, we are aggressively moving our inventory levels to a position that is in line with the reduced demand profile we are now seeing in the business. At the same time, as production rates are scaled back, we will be in action prudently reducing fixed costs wherever possible.

Capital spending for continuing ops in the quarter totaled $27 million. A large portion of this spending was against Saflex expansion, which Jeff said was completed in the quarter. In the fourth quarter, we will complete the Saflex resin expansion at our Indian Orchard, Massachusetts plant.

As a reminder, maintenance capital spending level in total for the company is about $65 million with continuing operations running at about $40 million and nylon at about $25 million. As we move forward in this uncertain global economic environment, we will prudently manage our capital spending rates and are well-positioned to pull back to maintenance levels if conditions dictate.

Moving on to Slide 25 with regard to debt, we ended the quarter with net debt of $1.366 billion versus $1.756 billion at the end of the second quarter, down $390 million quarter-over-quarter. The third quarter's debt position was comprised of $186 million draw on the revolver, $1.191billion on the term loan, and $27 million of other short-term debt netted against $38 million of cash.

Most notable in the quarter was the $422 million of net proceeds from the two public equity offerings which allowed us to retire the bridge loan. As of the end of the third quarter, net debt to trailing 12-month adjusted EBITDA was 3.51% down from 4.97% at the end of the second quarter.

As Jeff mentioned earlier, it's important to note our capital structure in light of the current credit crisis. Our $1.2 billion term loan is not due until 2014. This facility carries the LIBOR plus 500 basis point rate with LIBOR floor at 350 for four years. $900 million of the $1.2 billion is protected with the LIBOR cap of $425 million through April of 2010. The $450 million revolver matures in 2013 and it is backed by inventory and receivables that currently have a much higher value. We have the ability to borrow under the revolver at either LIBOR or prime plus a margin.

In addition for the quarter ended September 30th, our total liquidity was a solid $227 million, which is expected to increase from the strong cash generation in the fourth quarter.

Now, I would like to turn it back to Jeff to talk about the 2008 outlook. Jeff?

Jeffry Quinn

Thanks, Jim. I would like to just conclude with some commentary on our guidance for the remainder of the year and our current focus. Even in the face of these uncertain times and market headwinds, we are confident that we can deliver on our EBITDA guidance for 2008 of that $385 million to $395 million range from continuing operations. Obviously, just to be clear, this does exclude the integrated nylon business which has now been moved to discontinued ops.

For those not familiar with Solutia's historic quarterly seasonality, our fourth quarter is typically slower for Solutia, and on average, delivers approximately about 20% of our EBITDA for any given year. We do expect as we move forward in the fourth quarter to see some abatement in raw material pricing.

We expect capital expenditures to run in the $90 million to $95 million range for the full year with depreciation and amortization falling in at $100 million to $105 million range as set forth on the slide. Cash taxes will still be in that $20 million to $25 million range that we have talked about previously, and very importantly, we see our net debt being reduced by year-end to about $1.3 billion from sort of the $1.366 billion level that it was at the end of the quarter.

And move over to Slide 28, just a few last comments before we open it up for questions. Now, as we head into the fourth quarter and 2009, we have to be realistic about what lies ahead of us. On this slide, I've tried to outline our current focus areas. We will complete our transformation into our pure play specialty materials company through the strategic alternative process in nylon.

As this process continues, we will refocus the business. We have implemented a more disciplined operational and commercial approach, and as Jim mentioned, we will monetize inventory levels in this business from their recent high levels. During this time, we cannot lose sight of our overall strategy to focus on growth in emerging markets and we will also look for opportunities to strengthen our global leading position.

And I do believe that there will be opportunities that will arise out of the global slowdown. We will focus on delivering value and innovation to our customers. And we will continue to try to focus our customers on the value and innovation that our products deliver.

Importantly, our main focus area will be on reviewing discretionary spending, monitoring our capital programs, monetizing working capital, and protecting our liquidity, which will be very, very important to us as we navigate through 2009.

We take great pride in the performance we have delivered in the quarter, despite the turbulent markets. I have great confidence in our management team. We realize that we have work to do. We are realistic, but I take comfort from the role that this organization and this team have traveled together through difficult times over the past four years.

We believe our leading market positions and our cost position, coupled with our diversified portfolio across geographies and end-use markets will allow us to navigate the current economic environment and do a better job of that than many of our competitors. So we are realistic about the challenges, but we are optimistic about the path forward.

So thanks for your time today, and now I would like to turn it back to Susannah to open it up for Q&A.

Susannah Livingston

Thanks, Jeff. Amity, if you could give some instructions, we will be ready to open it up for Q&A.

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from the line of Jason Miner with Deutsche Bank. Please proceed.

Jason Miner – Deutsche Bank

Thank you. Good morning. Can you hear me?

Jeffry Quinn

Yes. Good morning, Jason.

Jason Miner – Deutsche Bank

Hi, it's okay. Thanks for the helpful detail. One of the players in carbon black was out this morning with some volume declines in Asia. So – and I think you mentioned in Tech Specialties some, in line with the market declines in Crystex. Also, with potential for raw materials to maybe ease going forward, I wonder if you could just talk about how you see pricing in Technical Specialties evolving given the margin improvement we saw this quarter?

James Sullivan

Jason, this is Jim Sullivan. I think we clearly expect to see some pricing pressure in the antidegradant product line. As we talked about, we did benefit from having some competitor disruption in the third quarter. We will see pricing in that business, we think, come down. Crystex is different. As we have talked about many times, it's really one of a kind, and we would expect for the most part to be holding prices where they are at and enjoying some of the raw material benefits as sulfur comes down. In the other rubber chemicals businesses, we are basically going to be out of those businesses by the end of the year and as I indicated in my commentary we have been very aggressive in pricing our way out of that market.

Jason Miner – Deutsche Bank

Okay. Just focusing on Crystex, have you seen volume pressures in Asia in Crystex?

James Sullivan

Yes, indeed, we have. I think what we are seeing there is very much in line with what the overall market is. And it was about down 5% in the third quarter.

Jason Miner – Deutsche Bank

Okay. Just shifting, but still focusing on Asia for a moment, looking at the construction charts you guys have. Could you just talk about the selling cycle for Saflex in Asia, in general, but particularly, how sort of long your lead times are if we expect a downturn to bottom in '08 for construction, when will you see that? I gather there is a relatively long lead time there.

Jeffry Quinn

Yes, I think, Jason, in general, in the Saflex business, the lead time on the architectural side is a bit longer than it is on the automotive side. I think the architectural side, the lead time generally is probably, three months to six months depending on the project, obviously. Maybe a bit longer lead time on the larger projects, obviously. So I think as we move forward, we are looking now at sort of the projects that are beginning in 2009. So I think that any volume impact that moves forward, we should be seeing some of it now. And that probably will continue as we move into '09. So I think there is not a big bullet to come. I think we are starting to see that and the business is managing through that well to this point.

Jason Miner – Deutsche Bank

Okay. It's very helpful. Thank you.

Operator

Your next question comes from the line of Laurence Alexander with Jefferies. Please proceed.

Laurence Alexander – Jefferies & Company

Good morning. I guess first a question with respect to the asset sale and the current market. Can you flesh out a little bit more detail, your degree of confidence or levels of interest that you are seeing in the nylon assets? And also how the current credit markets have affected your perspective and priorities for uses of cash?

Jeffry Quinn

Laurence, I guess on the nylon process, first of all, I truthfully don't really know what to say beyond the fact that we have a competitive and active process ongoing. Certainly, it would be foolish to say that the macro economic environment that we are functioning in doesn't impact that process in some way. Obviously, each of the parties that are – might be interested in the asset have to factor that in, and I am sure that they are doing that, but we still have a very vibrant ongoing process. And as we said in the commentary, we are still online, for the same time frame that we have stated now for a couple of quarters of believing that, that process will conclude, and we will execute on an alternative by the end of the first quarter. And clearly, the movement of the business into discontinued operation reflects our belief that the accounting standards for such treatment are obviously met. So, really can't comment beyond that. We have talked about that in the past, about potential participants in such a process, and that is all continuing forward. Because of the environment, though, we are realistic. I mean, nothing is for certain. As I said earlier, so we are continuing to develop scenarios and plans, if for whatever reason a sale didn't happen.

Overall, because of the changing economic environment, I think that we fully believe the liquidity and cash flow are the words of the day and are really – we have always been focused on that, obviously. But really making that priority one in terms of managing costs, managing discretionary spending, looking hard at our CapEx, and really looking at monetizing working capital out of the businesses. Some of that naturally happens for us because of the seasonality. Some of it will naturally happen because of the determining of the trend in raw materials, but also we are really going to focus on that and squeeze that as much as we can because we believe that liquidity and cash are very important to managing through this environment.

Laurence Alexander – Jefferies & Company

And secondly, with respect to Saflex in Europe, can you give some color on order patterns? I guess, since the end of the quarter and confidence on the operating leverage or the impact on systems if volumes in Europe were to decline?

James Sullivan

Laurence, this is Jim Sullivan. We did see some volume slowdown in Europe architectural toward the end of the third quarter. And what we believe is going to happen here in the fourth quarter is, it is going to be a transition period for our customers as they look at their inventory levels and readjust to the new world that we live in today. So we do expect volumes to be under some pressure, but having said that, I think we still believe year-over-year in the fourth quarter, that they are going to be around even and maybe even modestly higher. But you will not see in the fourth quarter the volume strength that we reported in the second and in the third quarter.

Laurence Alexander – Jefferies & Company

Okay, that's very helpful. Thank you.

Operator

Your next question comes from the line of Constantinos Karathanos with Goldman Sachs. Please proceed.

Constantinos Karathanos – Goldman Sachs

Good morning. A quick comment first. It is refreshing in this market that several other companies have cut their year-end guidance for you guys to stick to your guns. So congratulations on that.

Jeffry Quinn

Thank you.

Constantinos Karathanos – Goldman Sachs

Two quick questions, if I may. First one, how lower sulfur prices will impact your insoluble sulfur business? Should we look for market sustainability over there or with the lower prices we are going to see lower margins?

James Sullivan

No, I think, Constantinos, as we said earlier, insoluble sulfur is really sold on a value add basis. We're just bringing out new, advanced product lines that process better in our customers factories, save costs for them. So really this sale is more on the basis of the value that we are adding and not due to any kind of changes in materials patterns. Clearly, the significant rise that we saw early in the year on sulfur has abated and we would expect that moving forward, there will be some – probably some modest decline in overall selling prices in the business, but for the most part, this is truly a specialty chemical, and it's sold on that basis.

Constantinos Karathanos – Goldman Sachs

Okay. Then if I can switch to Saflex, back in April, I think or May, you announced a 40% increase in Saflex prices. And can you talk about the success of those price increases? And is there room for more price increases in 2009 per quantum allowance?

Jeffry Quinn

The price increases announced in Saflex was successful, and that's not to say there was not some difficulty. By really focusing on the reliability of Saflex as a PVB supplier, product innovation, that the technical service and support that we offer our customers, we had a good success on that price increase, and my hats off to the Saflex organization for managing through that.

With regard to the market environment, it's changing a bit. It – we do have – we believe a strong value proposition to offer our customers and we will continue to look for opportunities to – to share fairly with the customer – our customers the value those products create. So I think you will see that same disciplined, commercial approach being applied as we move forward in 2009 as we have over the last number of years in the Saflex business.

James Sullivan

Constantinos, Jim Sullivan. Let me turn back to your question, and make sure I round it out and fully answer it with respect to Crystex. As Jeff said, we are very focused on making sure that we are running our facilities in line with the new demand environment, and in Crystex, with demand down, we will see an impact there, and we will be pulling back our factories. So there will be some impact in terms of the utilization. Obviously, in situations like that we do everything we can to reduce our fixed costs, but there will be some impact from that as well.

Constantinos Karathanos – Goldman Sachs

Okay. Helpful. And then finally, if I may, where do you see Sandoflex in 2009, and how do you view the possible entrance for Synokem back into the market?

Jeffry Quinn

The Sandoflex market and the PPD market is pretty dynamic. Obviously, situation has changed there a bit with supply coming on, and the ability of that supply to move into other markets. So compared obviously to Crystex, that market is going to have challenges as we move into 2009. But we are confident that our position as the largest participant in that PPD market, and the lowest cost western producer will serve us well as we continue to sort of maintain a very strong share there and address the challenge of competition. We believe our cost structure is very competitive there, and that we will have nothing to fear with competition in that marketplace.

Constantinos Karathanos – Goldman Sachs

Thank you.

Operator

Your next question comes from the line of Randy Laufman with Imperial Capital. Please proceed.

Randy Laufman – Imperial Capital

Hi, good morning, guys.

James Sullivan

Hi, Randy. How are you?

Randy Laufman – Imperial Capital

Good. Thanks. Just wanted to go back to the nylon sale process a bit. And Jeff, you mentioned some alternative scenarios if the sale does not get accomplished –

Jeffry Quinn

Right.

Randy Laufman – Imperial Capital

I was wondering if you could maybe go into a little bit more detail about what those alternative scenarios might be.

Jeffry Quinn

Okay. And I think this is not anything that probably most of the folks on the phone have not heard previously. I think those scenarios would include things ranging from looking at selling less than the whole, perhaps, but really focused around a narrowing and focusing of the business on a core part of the business that we believe can be the basis for a profitable, sustainable business with good growth characteristics. So that could possibly mean getting out of certain parts of the chain and focusing sort of high growth parts of the business. We have a fully integrated business going all the way from acrylonitryl all the way through resin and fibers and certainly there are parts of that business that are more sustainable and more profitable than others. You don't necessarily have to be in parts of that business to be in other parts.

So we will look at really making decisions on a go-forward path that creates something that would better fit with our portfolio of sort of global leading positions if we need to. And we – the more we look at that, the more we believe there are opportunities or alternatives there that would be acceptable if for whatever reason the sales process, the strategic alternatives process would not result in the sale of the full, integrated business on a going concern basis.

Randy Laufman – Imperial Capital

Okay. Great. And whatever the case – whatever the final out is here, is it your expectation that it should be the first quarter of '09 whether it's an alternative scenario or the sale or would an alternative scenario potentially take longer?

Jeffry Quinn

Yes, I think Randy, it's still our best judgment that we will conclude this process and execute on it by the first quarter – end of the first quarter. I think that we will start to do things, and you will see actions soon that relate to a restructuring and refocusing of the business. And as I said in my commentary, we believe that those that refocusing is appropriate in value add regardless of whether a sale happens or not. And so I think you will see action and movement in that regard very soon, much sooner than the first quarter.

Randy Laufman – Imperial Capital

Okay. Great. Thank you. And then also, Jim mentioned that when we do see some conclusion to this process that you will take a look at the corporate structure and the overhead and see where you can kind of cut back or realign where necessary. It appears even after breaking out nylon from discontinued; it appears your SG&A and overhead is roughly the same level as it's been in the past couple of quarters with nylon. Just wondering if you could maybe give us a little bit more detail on the magnitude of a cut that we could see or what kind of realignment we could see from the corporate overhead perspective?

Jeffry Quinn

Yes, Randy, good question. I'll say that I look at it not per se, a cut, although obviously we believe that the resulting structure will be a lower cost structure. It really is more of a correct alignment of the organization for our strategic path forward. We will be going from a $4 billion plus a year chemical company with some significant commodity exposure in the nylon business to what we believe is a real tight group of high performing specialty businesses, which are global, but – and have significant growth opportunities and all those things. And so we need to be staffed, appropriately structured to pursue those, but I think net-net it will be a smaller structure, a more streamlined structure.

In addition, we have the very real fact that Solutia is coming out of a period of a four-year restructuring, where there was a lot of sort ancillary work that was not necessarily related to our businesses going forward and that's always been true for Solutia in terms of the burden of the legacy liabilities and how much time and focus that took. Now that's gone away. So, I think net-net as we come out of that, the reduction and the lower cost will not be quite in line with the split of revenues, but certainly, it will be moving in that direction. And I would say that net-net, we think that somewhere between 30% and 40% would be a target that we would be shooting for in terms of coming out of that number.

Randy Laufman – Imperial Capital

Great. Thanks for the detail. And then lastly, I just wanted to touch on the cash flow. You mentioned that you expect to generate some significant cash in the fourth quarter, end the year with $1.3 billion of net debt. And I was wondering what the plans are for those – for the cash now that we are seeing some changes in the markets. And in the past you talked about bolt-on acquisitions, but has that strategy changed? Would you look to maybe pay down more debt or are you continuing to look for some of those bolt-on acquisition?

Jeffry Quinn

Randy, as we move into the fourth quarter and do have the ability to sort of monetize some working capital – no, we will pay down debt. I mean, that is a very – that is our focus obviously here in the next quarter. As we move forward into 2009, we believe that producing strong cash flow for these businesses is our focus and our goal and we will do that. We have not in any way abandoned the idea of highly synergistic, strategic moves, and we believe that there are things out there that are available to us that we would do that will strengthen our portfolio and strengthen our ability to generate cash from our portfolio as we go forward. So, no, we have not in any way deviated from our strategy in that regard.

Randy Laufman – Imperial Capital

Okay. Sounds good. Thanks a lot, guys.

Operator

Your final question comes from the line of Laurence Jollon with Barclays Capital. Please proceed.