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Executives

Susannah Livingston - Director of Investor Relations

Jeffry N. Quinn - Chairman, President and Chief Executive Officer

James M. Sullivan - Senior Vice President and Chief Financial Officer

Analysts

David Begleiter - Deutsche Bank

Laurence Alexander - Jefferies & Company

Laurence Jollon - Barclays Capital

Randy Laufman - Imperial Capital

Dennis Delafield - Delafield Asset Management

Solutia, Inc. (SOA) Q4 2008 Earnings Call February 18, 2009 10:00 AM ET

Operator

Good day, ladies and gentlemen and welcome to the Solutia Fourth Quarter 2008 Earnings Conference Call. My name is Monica and I'll be your operator for today. At this time all participants are in listen-only mode. We will have a question-and-answer session towards the end of this conference. (Operator Instructions). As a reminder this conference call is being recorded for replay purposes.

At this time I'd now like to turn the call over to Susannah Livingston, Director of Investor Relations. Please proceed.

Susannah Livingston

Thank you, Monica. And good morning to everyone. We are pleased you have taken the time to join Solutia's fourth quarter conference call. Jeff Quinn, Solutia's Chairman, President and Chief Executive Officer and Jim Sullivan, Executive Vice President and Chief Financial Officer are with me this morning.

Jeff will open today's call with brief comments on the year and the quarter and organizational priorities. Jim will then discuss the quarter's results in detail, identifying factors that drove the segment performance. Jeff will finish with some comments on our end markets and outlook for 2009. We'll then open the lines for question-and-answers.

First, I'd like to remind you that we are webcasting this call which you can access through our website solutia.com. We'll also be using presentation materials today which are posted on the website or momentarily will be posted on our website along with the press release issued last night announcing fourth quarter and full earnings. In addition, Solutia's 10-K will be filed tomorrow February 19th.

So please turn to slide two, 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 filings.

Our prepared remarks today include reference to non-GAAP financials in our discussions of earnings, the 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 defined 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 of 2008. 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 N. Quinn

Thanks, Susannah and thank all of you for joining us this morning for our fourth quarter 2008 earnings conference call. We appreciate your continuing interest in Solutia, especially in these strange and sort of unprecedented times. We do apologize about the delay in giving the presentation posted up in the website and hopefully that will happen here in just a few moments as we experienced some technical difficulties this morning.

This morning as Susannah has noted, I will make some brief comments on our full year performance in the fourth quarter. Then I will speak to my priorities for the organization for 2009. Jim will then provide his detailed review of the numbers of the quarter after which I will talk briefly about our markets in 2009 expectations.

Let's start on slide four, where you will see our net sales, adjusted EBITDA, and adjusted EPS for the year and broken down by quarter. As our press release stated last night, revenue was down in the fourth quarter, however adjusted EBITDA was up relatively to the comparable period in 2007.

Net sales were $429 million down 13% over last year's results, and EBITDA was $72 million up 4%. We reported adjusted diluted earnings per share of $0.12 per share for the quarter.

Looking back our results for the full year 2008.

2008 was a good year for Solutia. Sales were up 14% over 2007. And we recorded improvement in adjusted EBITDA of 29% over the previous year. These results were significant considering the historically high raw material environment early in the year. The economic conditions for our end markets throughout the year, and a very challenging fourth quarter.

As it was typical with many of our peers during the first half of the year, we experienced strong growth both top-line and bottom. Even our third quarter experienced growth, which came forward into a solid October.

However, in November and even more so in December, we began to feel the impacts of the global economic downturn. Despite these challenges, we delivered strong fourth quarter results that allowed us to meet our guidance we set out back in the summer.

As we near here at the end of the month, the first anniversary of our emergence from bankruptcy; I have never been more proud of the men and women of Solutia, and we have never believed more fully in the strategic direction of our organization and the prospects for our future. The date on which we emerged from bankruptcy it seems a lifetime goal now. But has been a year well spend.

As depicted on slide five, we have build a portfolio of market leading specially chemical businesses. Slide five is when I know that many of you have seen before in our presentations. However, I would like to highlight the improvement in full year adjusted EBITDA for two of our three segments.

Saflex was up 25% and Technical Specialties was up 37%. In addition, these segments contribute to EBITDA margin expansion, increasing the margins from 16% in 2007 to 19% in 2008. CPFilms was a bit down for the year, it was hammered late in the year but I feel good about these results. In a year that brought exceptional volatility to the global markets in which we participate.

The highlights from the quarter are set forth on slide six, as we have stated many times we will continue to price our products commensurate with the value added by these products and the fourth quarter was no exception.

However, declines in volumes across all business segments particularly late in the quarter and continued higher raw material costs offset these gains. The largest impacted volumes were experienced in Asia. In the Asian region as costumers around the world took steps to reduce their inventory through destocking.

This had a profound impact on the Technical Specialties segment due to the reduction in tire demand particularly within the automotive sector. We also expedited our plans to balance the supply and demand of our Saflex production as announced we will no longer be producing Saflex sheet at our Trenton, Michigan plant. We made this decision based on the continued shift of Saflex demand to Europe and Asia, and in light of the expansion of our lowest cost Saflex plant in Ghent, Belgium.

This was not a decision that we made lightly, but one that has proven to be prudent especially in light of the current economic conditions.

Despite the downturn in demand, our EBITDA in the quarter improved over 2007 due to aggressive cost containment efforts along with favorable currency impacts. Given the dramatic change in demand over the last three months, we have implemented a near-term plan to protect our liquidity, enhance cash flow generation and reduce volatility as stated on slide seven.

That said, I believe it is important to note that while we have and we'll continue to take proactive steps to right size our business to this ever changing environment our long-term strategy remains intact.

Let me begin by discussing some of the actions we have recently implemented as well as the other levers of our businesses we will be able to pull in 2009.

Starting early in the fourth quarter, we took steps to substantially reduce capital spending through aggressive cost cutting measures for 2009. We cut capital down to maintenance levels. At this point discretionary spending was eliminated and staffing levels were reviewed in position to eliminate it through shift to an even more lean corporate organization.

As we closed out the year however, we recognized that even more drastic action was necessary. We have made significant changes to our incentive compensation structure. We have suspended our company's 401(k) maths for employees under the tariff plan. And we've froze all salary and wages to the extent allowable.

We have already reduced our head count by 5% across our go forward businesses. And as we continue on our path to divest our nylon business additional reductions will occur.

I will speak to the nylon sales process in a moment. But given the severe downturn in the nylon business during the fourth quarter, we made the decision to permanently shutdown the part of our Greenwood, South Carolina plant related to a corporate fiber and to significantly reduce operating rates across each of our five nylon plants. These actions are intended to preserve our financial health, strengthening our profitability to position our company for long-term success.

As stated on slide eight, throughout this year and while we were in bankruptcy, we have continued to move forward in our strategy to build a premier performance material and specialty chemical company. Our commitment to our customers remains unchanged and we continue to position Solutia to create value for our shareholders as the economy recovers.

With our focused portfolio performance materials and specialty chemical businesses, we believe Solutia will have strong relative performance during these uncertain times, the sale of the Nylon business is the next step in that transformation.

Despite the turbulent markets our strategic alternative process with respect to our nylon business is progressing as depicted on slide nine. As we have previously stated we have a competitive active bidding process. Clearly, the current environment has had an impact on the process and has required us to be more creative and flexible in structuring an appropriate transaction.

Our goal remains to close the sale of the business by the end of the first quarter. Not withstanding this we are still focused on our financial and operating priorities for the business, maximizing cash flow, efficiently managing working capital, optimizing run rates and otherwise repositioning it in the business to match the current demand environment.

As Jim will speak to you later, discontinued operations of the nylon business did not perform well in the fourth quarter with a loss of a $130 million excluding non-cash charges primarily related to the impairment of assets. These results led us to take swift restructuring actions discussed earlier. However, due to the pooling in working capital out of the business it did in fact generate positive cash of $7 million during the quarter.

As we continue to position Solutia for longer term growth it is important to reiterate our view regarding positioning within the chemical space. As you can see from the graph on slide 10, the products within our portfolio come together many steps away from the well head and therefore are not tied to commodities directly, whether our business is involved the formulation of ingredients or fabrication of products.

In this position we do not determine price based up on raw materials. But expect a fair price for the quality and uniqueness of the products we deliver and for the technical services we provide to our customers. These characteristics define not only the Solutia up-to-date but they also mark the course of where we plan to take the company going forward.

Solutia's portfolio is positioned well for long-term growth, all of our business segments carry solid leading market positions which will continue to... we will continue to leverage for future growth. Our manufacturing facilities are large in scale and have low cost positions. In each of our businesses we displace strong technological leadership with our Saflex Belgium expansion up and running at full scale, we are not only the lowest cost producers but also have aligned our PVB sheet manufacturing footprint with global demand levels.

CPFilms remains focused on developing key global target markets and it continues to extract greater value by further integrating downstream.

Technical Specialties continues to hold advantage positions especially in our large Crystex franchise where we deliver quality and reliability of supply. Lastly, all of our product lines continue to innovate whether it's a new product applications by photovoltaic and silver, new products like Crystex HD are improving manufacturing processes. We remain focused, we have a committed capital structure with no near-term maturities.

We have recently made some changes to our management structure. During this quarter James R. Voss, has been named Executive Vice President, Global Operations. In that role he is responsible for the day-to-day management of the manufacturing and commercial operations across all of our businesses. Jim previously ran Technical Specialties and did a great job for us in that regard especially the integration of the Flexsys acquisition into Solutia and enhancing the performance of the businesses since we've owned it.

Luc De Temmerman, who previously did a stellar job of running Saflex for the last seven years has become our Executive Vice President of Growth and Development. In that role Luc will work closely with me to define the future course of our company with a specific focus on technology, innovation and growth.

In short I have taken two of my old stars and have redeployed them into positions where they will continue to add either more value for Solutia going forward.

In addition, we consolidated three administrative jobs into one and gave that job to Paul Berra, our new Senior Vice President and General Counsel and Chief Administrative Officer.

These men have created a lower cost, more streamlined senior management team that will continue to display the aggressive act of this approach that serves us so well through the dramatic restructuring of our company over the last five years. I look forward to continuing to working with this team to create value for our shareholders.

Now, I would like to turn the call over to Jim Sullivan, our Executive Vice President and Chief Financial Officer. Jim?

James M. Sullivan

Thanks Jeff. And good morning to everyone. I will begin my discussion with Solutia's consolidated sales and earnings from continued operations and then breakdown results by reporting segments. I will conclude with comments on cash flow, debt and liquidity.

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

Slide 13 details the charges and other adjustments we have excluded in our calculation of adjusted EBITDA for the fourth quarter of '08 and the fourth quarter of '07. I would like to hit on just a few of the larger items in '08.

First, during the quarter we completed the shutdown of the rubber chemicals production operation at the Ruabon Wales facility and took additional net charges of $13 million for severance and certain another termination and decommissioning related activities.

Additionally, during the fourth quarter, we recorded a $10 million restructuring charge associated with the announcement of our Saflex manufacturing line going down at our Trenton, Michigan facility. This unit is scheduled to complete its production activity by the end of the first quarter.

Also during the quarter we took $6 million of non-cash impairment charges on certain assets in the CPFilms and Technical Specialties business segments.

As mentioned in the third quarter certain functional expenses previously allocated to the nylon business that are not currently expected to follow the sale transaction have been pulled out of disc ops and moved into continuing ops. This cost totaled $2 million in the quarter and has been excluded from adjusted EBITDA. Our expectation is that we will eliminate this cost overhang and other unallocated corporate cost following the sale of the nylon business.

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

Turning to slide 14. Here we bridge our fourth quarter 2007 sales from continuing operations to the fourth quarter of 2008. In total sales were down $63 million or 13% year-over-year. While average selling prices were up 11%, volumes were down 22 and currency translation primarily from a weaker euro and pound sterling relative to the U.S. dollar accounted for the remaining 2% decline.

Slide 15, bridges the $3 million or 4% increase in our year-over-year consolidated adjusted EBITDA from continuing operations. You will note here, that higher selling prices, cost reduction and a modest benefit from currency translation at the EBITDA line more than offset the earnings drag resulting from lower sales volumes and higher raw materials.

Now, let's turn to the business segments starting on slide 16 with our Saflex business.

Fourth quarter sales for this business totaled a $188 million, down $8 million or 4% year-over-year. Average selling prices rose 7%, not quite enough to offset lower volumes of 8% and unfavorable currency movements.

Volumes were down in most major world areas including Asia where we had previously been experiencing solid growth trends. As Jeff said from and end market perspective sales volumes were down most significantly in the automotive sector, as our customers took quick action to reduce inventory levels as they saw weakening downstream demand surface the latter half of the quarter.

Laminated glass for architectural applications helped steady in the quarter mainly due to the longer order lead times experienced in this market. And photovoltaic volumes while still relatively low compared to our traditional automotive and architectural segments were up nicely in the quarter and are trending consistent with targeted growth rates.

Despite the overall slowdown in volume Saflex delivered adjusted EBITDA of $33 million in the quarter which was ahead of the prior year by $4 million or 14%. This earnings improvement was primarily driven by higher selling prices that more than offset the impact of lower volumes both from a sales and production standpoint, continued escalation of raw materials and currency losses.

Also noteworthy is the continued positive progression of Saflex's adjusted EBITDA margin toward our stated mid-term goal of 20% plus. The significant capital investments made in this business over the past few years most recently with the sheet expansion at the Ghent, Belgium facility have strategically repositioned the asset base with low cost, improved product and service capabilities that are squarely focused on the growing regions of the world.

The benefits of improved product mix, manufacturing productivity and reduced logistics cost that were expected from these investments are beginning to show through the numbers.

CPFilms' results are summarized on slide 17, this business was significantly impacted in the quarter by the global economic slowdown on both a sales and earnings basis. Net sales totaled $40 million in the quarter which was down $10 million or 20% versus 2007. Selling prices were up 4% with volumes down 22% and currency down 2%.

U.S. demand conditions remain relatively weak consistent with what we saw in the first three quarters of the year but for the first time in 2008 international volumes fell sharply with the Asian and European regions of the world being the hardest hit. The broader economic slowdown was exacerbated in this business by the global credit crisis as a few of CPFilms' larger distributors outside the U.S. had difficultly securing Letters of Credit in the quarter

CPFilms' fourth quarter adjusted EBITDA totaled $2 million, down $6 million or 75% year-over-year. This earnings decline was primarily due to the lower sales volumes and unfavorable manufacturing performance with the latter mainly attributed to significantly lower production rates and lower fixed cost absorption.

The business has taken further action early 2009 to resized it's fixed cost base and SG&A spending levels around the world to better align with what is shaping up to be a weaker demand environment in2009.

Turning to slide 18, you will note Technical Specialties' results were also impacted in the quarter by the global economic downturn but mostly in terms of sales volumes. Net sales of $194 million, were down $43 million or 18% year-over-year, overall volumes were down 33%, however selling prices rose 16%.

The volume declines were consistent with the overall movement in the market and were most severe in the rubber chemicals product line as tire manufacturers idled a significant amount of capacity in the quarter.

Fluid's volumes were also down put to a lesser extent. Average selling prices helped the firm during the quarter which is reflective of the premium value added product and technical service nature of the portfolio.

Adjusted EBITDA totaled $43 million, down $4 million or 9% versus 2007.

The volume decline and higher year-over-year raw material cost more than offset the positive impacts from improved pricing and currency.

Slide 19, summarizes disc ops, the nylon business had a very challenging fourth quarter reporting adjusted EBITDA loss of $127 million which was down $129 million... excuse me $139 million versus the fourth quarter of 2007.

Year-over-year volumes were down over 50%. The business responded to this reduced demand profile by aggressively reducing cash fixed cost, curtailing production rates, temporarily idling certain facilities and permanently closing a portion of the Greenwood, South Carolina corporate fiber operation.

Despite these restructuring efforts manufacturing cost in the quarter were significantly higher than 2007 due to lower manufacturing utilization rates and an unabsorbed fixed cost.

In addition, while selling prices improved year-over-year, raw materials were up dramatically as the business worked off high cost inventory from purchases that were made in the third quarter.

In addition during the quarter, the business was required to perform an impairment test on its assets in accordance with SFAS No. 144. For purposes of testing for impairment, the fair value of the asset group was determined by weighting estimated sales proceeds and discounting cash flows that are expected to be generated through the disposition date.

This test concluded and impairment existed as of December 31st, and accordingly a $461 million charge was taken in the quarter. As Jeff mentioned earlier, cash generation and debt reduction continue to be a key focus and priority for the company.

Slide 20, details cash flows for the company across 2008. For the year, cash provided by operations totaled $140 million, which was driven by strong earnings and effective working capital management. With regard to the latter in the fourth quarter the company reacted quickly to the weaker demand profile by reducing cash fixed cost and slowing productions rates.

Cash interest in the quarter of $27 million was down modestly compared to the third quarter reflecting the payoff of the $400 million, 15.5% bridge loan mid-August. Also during the quarter, the company contributed $7 million to the domestic pension plan bringing a total contribution to the forecasted rate of $57 million for the year.

We are actively managing funding of these pros and domestic pension plan to meet the requirements of the IRS and the PBGC. Based on their funding rules we estimate that we will be required to make approximately $35 million in pension contributions to the plan in 2009.

Capital spending for continuing operations in the quarter totaled $32 million as we completed certain strategic projects in particular the resin expansion at our Saflex plant in Massachusetts, and a new coating and lamination line in CPFilms.

However, as Jeff stated earlier as demand fell off during the quarter, we took immediate action across the company to reign in all non-critical capital spending. As we move forward in this weaker global economic environment, we will carefully and prudently manage our capital spending. For 2009, we are reducing capital spend rate to maintenance levels.

Turning to disc ops. Despite the significant earnings loss in the quarter free cash flow was a positive $7 million and this was driven by the sharp reduction in working capital levels in the quarter.

Moving on to slide 21, we ended the quarter with net debt of $1.364 billion versus $1.366 billion at the end of the third quarter so basically flat. The fourth quarter debt position was comprised of a $183 million draw in our revolver, $1.188 billion on the term loan, $25 million of other short-term debt netted against $32 million of cash.

The $450 million revolver facility is backed by a borrowing base comprised of certain U.S. and Belgium inventory and trade receivables. Due to the significant decline in working capital in the fourth quarter, most notably in the nylon business, the borrowing base decreased to $370 million effective mid-January. Therefore, our year-end adjusted liquidity taking into account this reduction in availability was $145 million.

Now, I will turn it back to Jeff and he will talk about the 2009 outlook. Jeff?

Jeffry N. Quinn

Thanks Jim. As Jim said, I'd like to conclude with some comments on our markets and talk a bit about guidance for 2009. There is no doubt that our end markets remain challenged by the weakness in the major industries, automotive, the constructions in which we sell products.

Slide 23, provides that break down. At year-end 2008, about 60% of our revenue was linked to the automotive segment with a greater orientation to replacement and aftermarket business as opposed to OEM business. We sell products into residential and commercial construction markets. These sales account for about 19% of our revenue with over 75% of that being commercial. Clearly, these segments will continue to be impacted by the economic slowdown to varying degrees.

On slide 24, some details set forth concerning our sales into the construction market, construction will continue to be a challenge in 2009. Europe is our most important construction market representing about 60% of our construction sales primarily in our Saflex business. Euro construct forecast, construction activity in Europe to be about 4% below 2008 levels which was already 2.5% below 2007 levels. Saflex however, will continue to benefit from design trends toward more glass and more importantly legislation to promote some laminated glass over tempered glass.

Now, let's look for a moment at the automotive OEM markets on slide 25. We expect sales into the OEM markets which represent about 23% of our revenue to be down in 2009, there is no doubt that the trends experienced in the fourth quarter we'll carry over it into the first and probably second quarters. Until then, the continued weakness in auto OEM will accelerate a shift in our sales mix to the replacement market. More than half of our auto exposure is to the replacement market and another 5% is to the aftermarket.

On this slide we show the breakout of the automotive replacement sales in each business segment. For tires and windscreens we saw a significant destocking during the fourth quarter, as OEM sales plummeted and tire and glass manufacturer shifted inventory to the replacement markets. Due to good inventory management in the U.S. and Europe since this summer, the destocking in these areas was largely completed in the fourth quarter.

And however in Asia, which was slower to react to the global downturn, destocking has just begun and will continue to be a drag on volumes into 2009. Specifically for each segment, Technical Specialties enjoys about 70% replacement market relating to the tire market.

We expect this market to stabilize by mid-year for the U.S. and European regions. And as gas prices remain low, we will begin to see miles driven stabilize also benefiting replacement tires.

Saflex has about 40% of it's revenue in order replacement. This segment also benefits from greater miles driven. Now, that the emerging markets have been purchasing new cars at exceptional rates in recent years, their replacement markets are starting to grow.

CPFilms, automotive products are 100% aftermarket. Though it is positive that these sales are not tied to the OEMs in this segment, they are tied directly to consumer spending habits, which as we all know are weak. We are expecting some level of consumer confidence and spending improvement by mid 2009. The timing is good for CPFilms, as the warmer months are historically the best in this segment.

Finally on slide 26, the last end market, the general industrial market. These markets account for approximately 22% of our sales. It shows many markets including medical and electronics, aerospace and our growing business of alternative energies. As we have stated previously, we expected increasing volumes associated with this end market for 2009 for Saflex as well as Therminol and CPFilms.

As we move into 2009, we do not foresee a short-term recovery in the global economic environment. In fact, we expect to face a weaker year in our 2008 results, especially in the first quarter, which is historically slower anyway.

As set forth on slide 27, we are forecasting our EBITDA guidance for 2009 to be in the range of $325 million to $350 million from continuing operations. Just to be clear, this does exclude nylon which is now in discontinued operations. We expect capital expenditures to run about $50 million for the year, we expect depreciation and amortization to be fall within the $100 million to $105 million range. We expect cash taxes to be approximately $30 million and cash interest will be in the range of $90 million to $100 million for the year.

A few last comments to make before we open up the lines for Q&A. We understand that we are in the midst of a global downturn in the economy and must take the necessary steps to protect the long-term strategy of our businesses while effectively running our businesses in the present.

Slide 28, outlines our current focus areas. We will complete our transformation into a pure play specialty materials company. Our focus on protecting our liquidity is of at most important and as I mentioned earlier we are taking aggressive actions in response to the weak demand environment.

During this time we will not lose sight of our strategy to focus on growth and emerging market given the value and innovation our products bring to our customers. I take great pride in our results for 2008 and the tremendous performance of our management team and organization during these trying times.

They have focused on those factors that can be impacted while preserving our customer relationships and our market positions. We believe that our strategy is strong and that with our diversified portfolio and our commitment to action we will place Solutia in the best position when the markets rebound.

Thank you for your time today. And now, I would like to turn the call back over to Susannah Livingston to open it up for question-and-answers. Susannah?

Susannah Livingston

Thanks Jeff. Monica if you could give some instructions we are ready to take Q&A.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). Your first question comes from the line of David Begleiter with Deutsche Bank. Please proceed.

David Begleiter - Deutsche Bank

Thank you. Jeff, can you comment on Q1, would you expect Q1 EBITDA to be similar to Q4 or below Q4?

Jeffry Quinn

We expect that many of the current demand environment trends that we saw in the fourth quarter to continue into the first quarter. We have obviously the impact of selling out some of the positive in terms of the pricing actions that we take. But, I think all in all we see first quarter to be a bit lower than the fourth quarter.

David Begleiter - Deutsche Bank

Very good. And just on Saflex, I know you put through a late '08 price increase on Saflex. Can you comment on the success of that price increase and expectations for full year, Saflex pricing?

Jeffry Quinn

David, as you know, you're correct in the premise of your question. We did take aggressive pricing actions in 2008, specially late in the year in Saflex. Certainly as demand weakens there are always pressures on pricing but we continue to focus on, and focus our customers on the value that our products deliver, the reliability of our deliveries and the service that we provide, the technical sales and service that we provide. So we will continue to emphasize those attributes to our customers and work diligently to preserve the progress that we've made in pricing over the last several years.

David Begleiter - Deutsche Bank

And question for Jim. Jim what is nylon's working capital at year-end or what was nylon's working capital at year-end?

James Sullivan

Dave, we'll look that number up for you here and get back. We'll answer that question just a second. We're looking up right now.

David Begleiter - Deutsche Bank

Thank you.

James Sullivan

We're going to go ahead and take the next question while, we're getting that number for you.

Operator

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

Laurence Alexander - Jefferies & Company

Good morning.

Jeffry Quinn

Hi, Laurence.

Laurence Alexander - Jefferies & Company

I guess, first question is on your construction exposure. Could you just clarify how much of your European exposure is in Eastern Europe and your expectations for '09?

Jeffry Quinn

Yes, I think a relatively low portion of that total is Eastern European Laurence. I think primarily as told the Western European markets that we serve. We can dig out an exact number for you, but it is a relatively low portion of the total sales in the Europe.

Laurence Alexander - Jefferies & Company

And what assumptions are you making for raw material relief in 2009?

Jeffry Quinn

Yes, we do premise there will be a decline in raw material costs year-over-year. And certainly as we move forward we will begin to realize that if we had not in terms of our guidance set forth a specific number but it is... there is a number that is a positive obviously offset by negative numbers related to volumes.

Laurence Alexander - Jefferies & Company

And I guess probably on CPFilms, do you expect it to be profitable on an EBITDA basis in Q1?

James Sullivan

Yes, Laurence, this is Jim Sullivan. We do expect that business to be profitable in Q1.

Laurence Alexander - Jefferies & Company

Okay, thank you.

Operator

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

Laurence Jollon - Barclays Capital

Good morning. Can you hear me okay.

Jeffry Quinn

Yes, Laurence we can.

Laurence Jollon - Barclays Capital

Jim, I just wanted to follow-up, I think you said $35 million of pension contributions in '09 I just wanted to confirm that those were cash contributions in excess of expense?

James Sullivan

That is the contribution that needs to go into the plan the expense that's running through EBITDA is low single-digit millions.

Laurence Jollon - Barclays Capital

Okay. So the actual hit to cash flow would be something like $35 million, well I mean you have losing all digits running through EBITDA and then you will have an additional call it $30 million in picked up used cash and working capital, is that correct?

James Sullivan

That's correct.

Laurence Jollon - Barclays Capital

Okay. And then following up sort of related to that on free cash flow if I take the midpoint of your EBITDA guidance for '09 and I back out $50 million of maintenance CapEx, $30 million of cash taxes the midpoint of your cash interest expense guidance, I guess it's roughly $150 million to $160 million of free cash flow. So I am just trying to put that with your free cash flow guidance. I know pension cash contributions are one driver but is the receipt simply use of cash from working capital and nylon or because I assume that your free cash flow guidance is excluding nylon?

James Sullivan

No, that will include the impact of on cash until we dispose the asset and so there is a modest cash use that's included in that number.

Laurence Jollon - Barclays Capital

Is it fair to say that after the pension contributions and that you are modeling in cost $50 million of working capital uses for nylon?

James Sullivan

Yes, I don't think we have that number here handy. The thing that you need to may be remember is that with respect to our post retirement OPEB program, we do have cash that tends to run at about 50% higher rate than the expense that's running through EBITDA.

So there is a little bit of a below the line cash drain from that order magnitude about $10 million. In terms of environmental spending, we are covered pretty much across the year with the amount that we have remaining in the restricted account that was set up at emergence. So really shouldn't have a lot of cash net cash going out to environmental. And then we are expecting a rebound in growth towards the end of the year so there would be a usage in working capital in our continuing ops business.

Laurence Jollon - Barclays Capital

Jim on the OPEB issues, I thought that that was all satisfied with the VEBA trust upon emergence?

James Sullivan

Well, and that's true with respect to the pre-spend OPEB obligations. So these where the people that had retired from Monsanto, but were just handed to set to us at the spin-off in 1997. Those liabilities were completely funded by the VEBA that was set up at emergence.

Laurence Jollon - Barclays Capital

Okay.

James Sullivan

But there is a small net OPEB liability that's remaining and that is for post-spend retirees. Those plans have been frozen, so they are just working their way through the pay-off period here over the next five to seven years. And the cash flows will trend down but currently run at about $20 million a year. And as I said, about half of that runs through the income statement in terms of expense, the interest cost and their liability.

Laurence Jollon - Barclays Capital

Okay, I appreciate all the color. Just last question on nylon, obviously I write-down, the book value in the quarter is it possible for you to disclose what the book value was after the write-down?

James Sullivan

No, it's order of magnitude in the kind of 270 range.

And to answer David's question earlier the working capital of the business at year-end was roughly $300 million and that would be accounts receivable, inventory less accounts payable.

Laurence Jollon - Barclays Capital

Thank you, Jim.

James Sullivan

You are welcome.

Operator

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

Randy Laufman - Imperial Capital

Hi, good morning guys. Thanks for taking my question.

Jeffry Quinn

Hi, Randy.

Randy Laufman - Imperial Capital

Just wanted to touch on some of the pricing versus volume questions and you guys have done a great job of withholding your pricing which looks like kind of sacrificing some volume there. Wondering what your, what the thoughts are going forward as we see volumes continue to dip. Is it the strategy that continue to hold the pricing or it is there at some point of it start to make sense to lower pricing to start capture some of that loss volume?

Jeffry Quinn

Randy, I think that our first priority and focus does remain on the proposition of value pricing and pricing our products appropriately in the marketplace to fairly share the value and the functionally that our products provide. I think when you look at volumes, when you look at the current environment. You have to look at whether there is elasticity of demand based upon price. And we certainly are very focused on that and I think that in this sort of unprecedented economic time, there may not be so much elasticity of demand based upon price as there has been in past period.

So we have no interest in giving away price that, if that result in increased volumes and we would rather reduce our fixed cost profile tend to or sort of blocking, tackling to run the business and remain committed to our commercial approach and velocity.

Randy Laufman - Imperial Capital

Okay. And then thinking about 2009 in the same manner, I guess on a year-over-year basis, when should we think about those kind of year-over-year price increases, it's kind of flat now, based off of where those the majority of the price increases were implemented in 2008. Obviously, we saw continued double-digit price increases in fourth quarter. I think probably first quarter we'll see similar type percentages but is it second or third quarter that we start to see a more kind of flat comparison on a year-over-year basis?

Jeffry Quinn

Yes, Randy. I think that your premise is exactly right is that, as the year goes by, we will see year-over-year comparisons, we'll see pricing start to flatten out. And we'll be as you said and it varies across businesses. But obviously, in the first quarter, some in the second quarter. And as you get to the third and fourth quarters, it will be relatively flattish as we get out in the year. But it does vary a bit business-by-business.

James Sullivan

Yes, to Jeff's point, we would expect the largest year-over-year improvement in pricing to come in the first quarter with the trend declining because we were implementing price increases across the year. And as Jeff points out starting in the third quarter we wouldn't expect to see a lot of price. And in fact in at least a couple product lines in the Technical Specialties segment, I'm thinking in particular rather rubber chemicals and our Saflex line, we would expect some price pressure across the year.

Jeffry Quinn

Yes, and if you go back and look at the major pricing announcements in 2008, whether it be Crystex or Saflex in the timing of those you can kind of see where those fell in the year and you'll draw your conclusions about what the year-over-year trends will be?

Randy Laufman - Imperial Capital

Great, thanks for the color on that. Just one follow-up question if I could just touch on cash flow and potential asset sales I know your guidance for cash interest assumes the sale of nylon in the first quarter or you announced that on the first quarter which I guess implies that the proceeds which you used to pay down debt, Jeff if you could just touch on that and also if there are other potential asset sales in the works, specifically the other rubber chemicals businesses that you had mentioned in the past and what the strategy is for asset sales in 2009?

Jeffry Quinn

Yes, Randy I think that the premises of your question are spot on we will look at the proceeds from nylon to be used to reduce debt, pay down the revolver and reduce debt. In terms of other asset sales we are constantly evaluating our portfolio and looking at things. And certainly in this environment those dynamics are a bit different. But we do continue to evaluate a number of different ways of continuing to transform the portfolio both on the asset sell side and on the potential acquisition side.

So that's an ongoing process and we are actively involved in many thoughts and many discussions in that regard. But don't really have anything specific to talk about this time with respect to any of the other businesses including the other rubber chemicals businesses.

James Sullivan

And I think it's fair to say as well that our assumption here for cash interest projection is conservative in terms of the impact the nylon would have on that.

Randy Laufman - Imperial Capital

Okay. Fair enough, thank you very much guys.

Jeffry Quinn

Thanks Randy.

Operator

Your next question comes from the line of Dennis Delafield with Delafield Asset Management. Please proceed.

Dennis Delafield - Delafield Asset Management

Thank you. And I may have missed this, but since you pointed out the effect of raw materials on nylon in the fourth quarter. What is the state of the cost of raw materials in the nylon inventory today?

James Sullivan

Yes, we worked off significant amount of the high cost raw materials that were purchased in the third quarter. We worked a significant amount of that off in the fourth quarter. Because we had idled the facilities mid-quarter, we weren't buying a lot of materials at the real low cost that you see in the spot market right now. So I would say as we said at year-end we have a little bit of a blend of some of the lower cost purchases early in the quarter. I would expect the first quarter to work off some more of that. And then I think get through pretty much that and be more in line with what you see and observe in the marketplace in terms of propylene prices below $0.20 for example.

But it will take us... it won't be a severe, the impact in the first quarter as it was in the fourth quarter, but it's... we're not quite there in terms of working it through.

Dennis Delafield - Delafield Asset Management

Thank you.

Operator

Your next question comes from the line of Gentry Klein with Cedrus Capital (ph). Please proceed.

Unidentified Analyst

Hi, guys.

Jeffry Quinn

Hi, Gentry (ph).

Unidentified Analyst

On the liquidity, I believe adjusted liquidity is a $145 million. How do you feel about that going forward, I know that obviously with the divesture disposition of nylon, it showed that your working capital requirement should ease substantially. But just wanted to get a sense of do you feel comfortable with recurring liquidity position as it relates to you the pro forma businesses?

Jeffry Quinn

Absolutely, Gentry. It's a level a little lower than what we've been running at. But we take an aggressive action in terms of cash conservation that Jeff talked about. We're going to take off nearly $50 million of CapEx. And we're doing a number of other things to, if you will improve the seasonality of our cash flow across the year historically. If you look back at the first quarter, it tends to be a significant cash use quarter.

We don't see that trend in 2009. In fact, we would we expect kind of cash to be about breakeven in the first quarter versus the use. So we're doing a lot of different things in the company to manage liquidity, maximize the availability obviously under our U.S. and Belgium revolver.

But as well we've got a number of pockets within our credit agreement outside of the U.S., that we can tap into other liquidity sources and we're in the process of doing that. Not that we needed to run the business, because we do as we said. In our guidance we do expect to generate positive cash flow in 2009. So we would expect to build on the liquidity position at year-end. But we're doing a lot of things proactively to continue to bolster that.

Unidentified Analyst

Okay thanks.

Operator

Your next question comes from the line of Helen Montagna with Rhapsody Capital (ph). Please proceed.

Unidentified Analyst

Hi, good morning, can you please just clarify for us. Did you say that the sales of nylon will be announced by the end of the first quarter or would be completed by--?

Jeffry Quinn

We're sorry. We cannot hear you.

Unidentified Analyst

Okay, all right. Can you hear me now?

Jeffry Quinn

Yes, that's much better.

Unidentified Analyst

Okay, my apologies. Can you just clarify for us if the nylon sales is supposed to be completed by the end of the first quarter or closed by or announced by the end of the first quarter?

Jeffry Quinn

Our goal is to consummate sale by the end of the first quarter. Certainly there is always some basis that could slip, but certainly our intention would be to close the sale by the end of the first quarter.

Unidentified Analyst

Okay, wonderful. And lastly, can you just clarify for us, if the cash interest expense of $90 million to $100 million for '09 includes some amount for debt reduction and what is implicit in the forecast?

James Sullivan

Yes, as we said earlier. It's a conservative amount of debt reduction that we've taken to get to that $90 million to $100 million. We talked earlier about the net asset value after the write-down of $270 million, certainly if you took $270 million of cash, you would get to a much lower interest number.

So we have taken a conservative approach there. Obviously, we're working very much, very hard in moving this transaction out by the end of the first quarter as Jeff said. Having said that, we still are in discussions in terms of restructuring of that transaction, which could impact the level of cash proceeds that we get at closing.

Taking into a lot of details, but just to give you a little bit of color as to why we've taken the conservative view in terms of our post nylon cash interest projection.

Unidentified Analyst

Thank you so much.

Jeffry Quinn

Thanks Helen (ph).

Operator

At this time we will now turn the call back over to Susannah Livingston for closing remarks.

Susannah Livingston

Thank you everyone for their time today and their continued interest in Solutia. And if you have additional questions please call me. My number is located on the earnings release from earlier today.

Jeffry Quinn

Thanks everyone. I appreciate your time and interest.

Operator

Ladies and gentlemen, this concludes the presentation. You may now disconnect. Thank you and have a good day.

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Source: Solutia Q4 2008 Earnings Call Transcript
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