Solutia Inc. Q1 2009 Earnings Call Transcript

Solutia Inc. (SOA)

Q1 2009 Earnings Call

May 07, 2009; 10:00 am ET

Executives

Jeff Quinn - Chairman, President & Chief Executive Officer

Jim Sullivan - Executive Vice President & Chief Financial Officer

Susannah Livingston - Director of Investor Relations

Analysts

James Sheehan - Deutsche Bank

Laurence Alexander - Jefferies & Co.

Ed Scott - Contrarian Capital

Jeff Gates - Gates Capital Management

Presentation

Operator

Good day ladies and gentlemen and welcome to the first quarter Solutia Inc. earnings conference call. My name is Vitrie [Ph] and I will be your coordinator for today’s conference. (Operator Instructions)

At this time I would like to turn the call over to your host for today’s conference Ms. Susannah Livingston, Director of Investor Relations. Please proceed ma’am.

Susannah Livingston

Thank you, Vitrie and good morning. We are pleased you have taken the time to join Solutia’s first 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 quarter, organizational priorities and some comments on our end markets. Jim will then discuss the quarter’s results in detail, identifying factors that drove segment performance. He will also discuss our outlook for 2009. Jeff will then close with some comments and we will open the line for questions and answers.

First I would like to remind you we are webcasting this call, which you can access through our website www.solutia.com. We will also be using presentation materials today which are posted on the website, along with the press release issued last night, announcing first quarter results. In addition Solutia’s 10-Q will be filed in the next few days.

If you would 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 in the statements in our quarterly and annual SEC filings.

Our prepared remarks today include reference to non-GAAP financials in our discussions of earnings. For a reconciliation of 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, noncontrolling interest in reorganization items. Adjusted EBITDA is EBITDA excluding certain gains and charges, stock based compensation expense, and nylon cost overhang that is retained by the ongoing business.

In addition I’d 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.

Jeff Quinn

Thanks Susannah and thank you all for joining us this morning for our first quarter 2009 earnings conference call. This morning I will make some brief comments on the first quarter performance, the status of our organizational priorities, and talk about our end markets. Jim will then provide a detailed review of the numbers for the quarter and talk about our 2009 expectations.

Moving first to slide four; as we had expected, our first quarter results were adversely impacted by the continued weak demand environment and destocking activities, which resulted in both decreased revenue and decreased adjusted EBITDA comparable to the same period in 2008.

As was stated back in February, we did expect the first quarter to fare worse than the fourth quarter, but our quick reaction to the economic environment and disciplined cost cutting mitigated further deterioration of our results. For the first quarter, we reported net sales of $339 million, down 34%; and EBITDA of $56 million, down 41%, compared to the prior year period, and we reported adjusted diluted loss per share for the first quarter of 2009 of $0.05 a share, excluding special items that Jim will cover shortly.

This quarter was a difficult period. However, we are comforted by month-over-month improvement in volumes during the quarter, and our expectation is that that will continue as the year progresses.

To hit on a few highlights listed on slide five, as expected, volumes declined across all business segments and regions. The largest impact of volumes came from the Asian and European regions as customers continued to destock their inventory. However, based on current views into the second quarter, we feel that destocking is largely behind us.

Primarily, as a result of reduced volumes, EBITDA declined over 2008 first quarter. However, favorable pricing helped to offset this loss and again demonstrated the strength of our specialty chemical businesses. In addition, our cost containment efforts, which I will discuss further in a minute, positively contributed to the bottom line.

Turning to slide six, to hit on a few highlights from each of the business segments, Saflex experienced the greatest decline on its volumes in the Asian and European region, driven by the struggling automotive sector. However that business is starting to see demand strengthens in the latter part of the quarter in China with the aid of governmental incentives.

As previously announced, we are no longer producing Saflex sheet at our Trenton, Michigan plant. This step will help improve Saflex’s cost position for the remainder of 2009 and beyond, in light of the expansion of our lowest cost Saflex plant in Belgium in late 2008; and as Jim will discuss in a moment, despite these challenges, the challenged market Saflex delivered improved EBITDA margins over 2008’s first quarter.

CPFilms weak results were significantly impacted by the global down turn in automotive, commercial construction, housing sectors and deteriorating consumer confidence. These conditions are causing many of our global distributors and customers to rebalance inventories, and some, especially in emerging markets have struggled to maintain their credit standing. Suffice it to say we are not alone in fighting this challenge, but as a major supplier of window film components, we can say our demand profile was better than that of many of our competitors.

In the last few days we’ve made a significant change in this business. We have changed leadership in CPFilms. Kent Davies, who was running the business, has left the company, and we have promoted Ray Kollar to the President of CPFilms. Ray’s been with us a couple of years in our technical specialties group and before Solutia, spent over 20 years with Intel. We believe this change puts the right team on the field at the right time, with a more aggressive market facing approach.

We continue to see great opportunity in CPFilms which had generally been a strong performer for 20 plus years. With only 1% market penetration today, the long term growth prospects are very promising; especially in the development of the architectural and energy savings markets and the continued success of our downstream channel efficiencies.

CPFilms has consistently delivered margins in the mid to low 20% range, even as we have made investments to globalize this business over the past few years. Though first quarter results were modest, the team has implemented costs and expense savings initiatives, which will positively position this business for a successful future when the market conditions improve.

Technical specialties also experienced a large volume decline, as a result of the depressed global automotive sector. However, this business too has seen improvements in the latter part of the quarter related to the Chinese incentives. In addition the business continues to benefit from price discipline and implemented cost savings initiatives which assisted in delivering improved EBITDA margins.

Speaking of cost savings, as we announced on our last call, given the dramatic change in demand, we implemented a near term plan to protect our liquidity, enhance cash flow generation and reduce volatility as stated on slide seven. The results we made in the first quarter alone were imperative, as these actions more than covered our spending and restructuring costs. Let me review again the actions we implemented and where we stand on these initiatives.

The first group, assets and spending, will yield a total savings in 2009 of $110 million in cash, and $60 million in EBITDA compared to 2008. Notwithstanding a few projects trailing off in the first quarter, we have substantially reduced capital spending, down to maintenance levels. This will be a savings of about $50 million over 2008 spend. We started up the year eliminating discretionary SG&A spending and fixed costs across all sites, as the steep decline in volumes left many of our plants running at utilization rates of lower than the mid 60s.

The second group, structure and employees, will have an annual benefit of $50 million. With the emphasis of shifting to a more lean corporate organization, we not only reduced head counts at plants, but also our corporate office. In total, these actions will reduce our work force by 10%. Most of these actions were implemented later in this quarter, and therefore will have more of an impact starting in the second quarter.

As mentioned before, we have made significant changes to our incentive compensation structure, both in terms of the bonus pool approved for 2008, and the structure of our programs for 2009. Most of you have probably seen the 8-K filed on our bonus pool payout for 2008. The Board and the management felt it was prudent during this time to conserve cash and reduce the payouts for the goals achieved last year.

This event alone accounts for approximately half of the $50 million of cash savings in the first quarter. In addition, we have suspended our company 401-K match for employees and frozen all salaries and wages to the extent allowable. All of these events are ones we can control in the environment and will position Solutia well for the coming months.

One of the most important events of Solutia’s history took place at the end of the quarter, with the announced nylon divestiture. Once this sale is completed, Solutia will have transformed into a pure play specialty materials and chemicals company. To hit on the highlights again of the nylon divestiture, we are selling substantially all the nylon assets to SK Capital Partners.

We will receive $50 million of cash and a 2% equity stake in a new company formed to hold substantially all the assets of the business. We will also receive $4 million in deferred cash payments. The affiliate will substantially assume all of the liabilities of the nylon business, including known and unknown environmental liabilities, $80 million of pension liabilities relating to active nylon employees and other liabilities associated with the business.

Solutia also would gain availability under its credit facilities of $25 million as a result of the release of letters of credit associated with the nylon business. The sale would include all five plants, Pensacola, Florida, Alvin, Texas, Decatur, Alabama, Greenwood, South Carolina and Foley, Alabama. We continue to anticipate the closing of this deal in the second quarter of this year.

As is stated on slide nine, over the past few years we have executed on our strategy to build a premiere performance materials and specialty chemicals company. With the completion of the sale of the nylon business, the transformation is largely complete. As a result, our portfolio would consist of attractive market leading global businesses with preferred margins.

Just as important, our commitment to our customers remains unchanged, if not strengthened, as we can now focus more on these core businesses going forward, and position Solutia to create value for our shareholders when market conditions improve.

In looking at some of our end markets, automotive and construction, there is no doubt that they have been challenged in the first quarter, and will remain depressed for the next few quarters, compared to 2008, but at improved levels compared to the first quarter.

Slide 10 reviews our assumptions around key trends and drivers in these end markets. From a macro perspective, various stimulus packages will have positive implications for our businesses if not in 2009, then in future years. CPFilms specifically should benefit from the targeted $30 billion of US funding for energy solutions. For automotive, OEM production will remain depressed for the year, but each month has shown a steady increase in each of our businesses, which is positive.

Demand has strengthened in China and Germany, in part due to their government incentives. Importantly after eight months of decline in global auto builds, they are projected to stabilize in the month of April. In construction our outlook is a bit more cautious, as it will continue to be a challenge. Europe is Solutia’s most important construction market, representing 60% of our construction sales, primarily in our Saflex business.

We expect the European architectural market to remain relatively flat this year. Saflex however will continue to benefit from seasonal demand growth, design trends toward more glass and more importantly legislation that promotes laminated glass over tempered glass. Consumer spending habits have continued to plague CPFilms results, but as we enter into the warmer months, this segment typically experiences seasonal improvements.

Overall we expect 2009 to be a challenge. Although volatility remains in our markets, heading into our seasonally stronger months and seeing more stable order patterns, gives me confidence in the long term outlook of the company.

Now I would like to turn the call over to Jim Sullivan, our Chief Financial Officer.

Jim Sullivan

Thanks Jeff and good morning to everyone. I will begin my discussion with Solutia’s consolidated sales and earnings from continuing operations, and then breakdown results by reporting segment. I will conclude with comments on cash flow, debt, liquidity and our 2009 full year outlook.

To enhance transparency and highlight the key underlying earnings trends of the 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 nylon’s clarification of discontinued operations.

Slide 12 details all of the items excluded in our calculation of adjusted EBITDA for the first quarter versus the first quarter of 2008. I would like to hit on just a few of the more significant items in 2009. First, during the quarter, we completed the shut down of the Saflex manufacturing line at our Trenton, Michigan facility and took additional charges of $4 million for severance and certain other termination and decommission related activities.

We also recorded a $1 million restructuring charge associated with the closure of our Ruabon, Wales facility. Additionally during the first quarter we took $17 million for severance and retraining costs associated with our companywide cost reduction program.

The last item I will highlight is the partial reversal of the company’s 2008 incentive accrual. As Jeff mentioned, this action was taken in light of current economic conditions, and to maintain the company’s strong liquidity profile. The $23 million gain recorded in the first quarter, but has been excluded from our adjusted EBITDA and adjusted EPS numbers.

Turning to slide 13, here we bridge our first quarter 2008 sales from continuing operations to the first quarter of 2009. In total, sales were down $178 million or 34% year-over-year. While average selling prices were up 6%, volumes were down 38%, and currency translation, primarily from a weaker euro and pound sterling relative to the US dollar accounted for the remaining 2% sales decline.

Slide 14 bridges the $39 million or 41% decrease in year-over-year consolidated adjusted EBITDA from continuing operations. The earnings impact from lower sales volumes and lower manufacturing utilization rates in the quarter was partially mitigated by improved selling prices, lower raw material costs, and aggressive cost reduction.

In addition, you will note there was a $3 million reduction in other income, which is primarily currency transaction losses. In 2009, we had currency and transaction losses of $3 million and at 2008 we had currency transaction gains of $1 million.

Now let’s turn to the business segment, starting on slide 15 with Saflex. First quarter sales for this business totaled $133 million, down $60 million or 31% year-over-year. Average selling prices rose 2%, while volumes decreased 29%, and unfavorable currency movements accounted for the remaining 4% decline.

Sales volumes were down in all major world areas. From an end market perspective, as anticipated, the automotive sector was the most impacted. However, the positive volume progression and reduced order volatility experienced in this sector across the first quarter, and into the early part of the second quarter are encouraging and we believe an indication that inventory destocking across the supply chain is bottoming out.

Also, it appears government stimulus initiatives around the world are starting to kick in, as we do see demand strengthening, in particular in China and Germany. Laminated glass for architectural application was also down, albeit less severely than what we saw in automotive. However the valid pattern in this market across the quarter was flat.

Looking ahead, we do expect to see sequential volume improvement from seasonal growth, as well as from certain customer contracts that kick in later in the year. Solar energy volumes, while still at relatively low levels versus our traditional automotive and architectural business, were up significantly, sequentially and year-over-year and continue to trend consistent with our targeted growth rate.

Saflex delivered adjusted EBITDA of $24 million in the quarter, down $7 million or 23% year-over-year. Improved selling prices, lower raw material costs and manufacturing and SG&A cost reduction, partially offset the earnings drags from lower sales volume and production rates. In addition Saflex achieved an improved EBITDA margin of 18%. This is a 200 basis point improvement over the first quarter of 2008.

CPFilms results are summarized on slide 16. This business was impacted the most in the quarter by the global economic slow down. Net sales totaled $34 million in the quarter, down $28 million or 45% versus ‘08. Selling prices were up 2% with volumes down 45% and currency down 2%.

Demand conditions remained relatively weak across all world areas. Automotive and architectural markets were both down relative to the first quarter of 2008; although the do it yourself market for automotive did experience modest volume improvement. Importantly, March and April results were decidedly better than the first part of the quarter and offered encouragement for the peak selling season ahead in the second and third quarters.

CPFilms first quarter adjust EBITDA totaled $2 million, down $14 million or 88% year-over-year. This earnings decline was primarily due to lower sales volumes and unfavorable manufacturing fixed cost absorption from significantly reduced production rates, partially offset by lower material costs and SG&A spending. Again, it is worth mentioning that the sequential improvement in March in both sales and operating rates resulted in near normal margins for the month.

March sales rebounded nicely in both North America and Asia, reflecting the benefits of our channel efficiency initiatives in the US and the resilience of the Chinese market. All of the US territories where we have implemented downstream distributor integration experienced year-over-y ear revenue growth.

In addition as Jeff mentioned earlier, we expect this segment to also benefit from the government stimulus initiatives being rolled out around the world. In fact in North America request for energy audits are at an all time high, demonstrating the increasing awareness of window film as an effective tool in fighting energy costs in commercial buildings.

Turning to slide 17, you will note technical specialty results were also impacted in the quarter by the global economic downturn, but mostly in terms of sales volumes. Net sales of $167 million were down $85 million or 34% year-over-year. Overall volumes were down 43%, while selling prices improved 11%.

The volume declines were experienced in all world areas during the quarter, more significantly in the rubber chemicals product lines and to a lesser extent in fluids. The Asian region showed the largest overall drop, but by March, volumes began to improve, due to the Chinese government auto incentive programs. In addition, rubber chemicals volumes were lower, due to the shut down of our Ruabon, Wales facility at the end of 2008.

Adjusted EBITDA totaled $46 million, down $13 million or 22% versus 2008. Improved selling prices and cost reduction, partially offset the earnings impact from lower sales and production volumes. Technical specialties also achieved an improved EBITDA margin of 28%, compared to 23% in the first quarter of 2008.

Slide 18 summarizes the first quarter results for discontinued operations. The nylon business had another challenging quarter, though not as severe as the fourth quarter of 2008. Year-over-year sales were down 56%, with volumes down over 50% and selling prices down about 4%.

The business reported an adjusted EBITDA loss of $58 million, down $51 million versus the first quarter of 2008. Significant progress was made in the quarter, reducing the operating cost footprint of the business; however, this was not enough to offset the combination of lower selling prices, significantly reduced production rates, and the continued bleed off of high cost raw material purchases from 2008.

Based on the sales contract with SK Capital, the business performed an impairment test on its assets in accordance with SFAS number 144. This test concluded an impairment existent on March 31, and accordingly $101 million after tax charge was taken in the quarter. Please note this charge has been excluded from the $58 million adjusted EBITDA loss as noted in our Reg G table in the appendix of the presentation.

As Jeff mentioned earlier, cash generation, debt reduction and liquidity preservation continue to be key focus areas for the company. Slide 19 details the company’s first quarter 2009 cash flow, versus the first quarter of 2008.

For the quarter, cash provided by continuing operations totaled $30 million. This compares to a use of cash in the first quarter of 2008 of $36 million. Despite lower year-over-year after tax earnings of $36 million, cash from continuing operations in the quarter improved $66 million, due to effective working capital management, reduced incentive payments, and lower funding of pension and other post retirement benefit plans.

In addition, cash interest in the quarter was down compared to the first quarter of 2008, reflecting changes in the debt capital structure of the company post emergence and the pay off of the $400 million bridge loan in the summer of 2008.

Also during the quarter, we switched from a one month to a three month LIBOR contract for our term loan interest payments, thereby pushing out the March interest payment until May. Since we have a 3.5% LIBOR floor on this loan, this action preserved liquidity without impacting the company’s cash interest rate.

Capital spending for continuing operations in the quarter totaled $15 million. This includes approximately $8 million of payments on growth related capital projects that were wound down late 2008. Going forward as we have stated, we have reduced the capital spend rate to maintenance levels.

Turning to discontinued operations; despite the earnings loss in the quarter, free cash flee flow was a positive $35 million and this was driven by a sharp reduction in working capital levels in particular inventory.

Moving on to slide 20, we ended the quarter with net debt of $1.314 billion, which was down $50 million from year end. The first quarter debt position was comprised of $1.185 billion on the term loan, $27 million of other short term debt, $137 million draw on our revolver and this was netted against $35 million of cash.

Due to the significant decline in working capital in the first quarter, most notably in the nylon business, our revolver borrowing base stepped down to $340 million. Despite this reduction in availability, our quarter end liquidity improved to $163 million, due to the strong cash generation in the quarter.

In addition, it is important to note that we have the ability to utilize LIBOR rates or the prime rate on our term loan. Effective in May, we switched to prime borrowings, which based on current rates, will save the company approximately $1 million of cash and interest per month.

Briefly, in reference to our bank covenants, as of March 31 the maximum leverage covenant was 4.75 versus the actual of 3.57. The minimum fixed charge coverage covenant was 1.15 versus actual of 1.64. The leverage covenant reduces to 4.25 by the end of the third quarter 2009. This, in combination with our earnings projection, will result in our reduced cushion for the remaining quarters of 2009.

Slide 21 lays out the pro forma liquidity impact of the nylon sale and the German debt raise as of the end of the first quarter. With regard to the nylon sale, you will note that the loss of the borrowing base exceeds the amount of net sales proceeds and the liquidity benefit we are receiving from the release of nylon related letters of credit. The German unsecured term loan closed yesterday, and the $66 million of net proceeds were used to reduce borrowings at our revolving credit facility. This two year loan was issued at 95 and carries a cash coupon of 12%.

The estimated pro forma liquidity, taking into consideration these transactions as if they occurred at the end of the first quarter is $127 million. While the absolute level of liquidity is modestly lower, when looking at it as a percent of sales, liquidity improves 200 basis points. Additionally, with significantly reduced sales and earnings volatility, the level of liquidity required to successfully operate the go forward business is much reduced.

Now let’s move on to our annual guidance on slide 22. First, I want to reiterate that first quarter earnings were consistent with management’s internal forecast developed early in the year, and the trends highlighted on the fourth quarter earnings call in February. So while demand visibility in the current economic environment is not great, we do take pride in proactively managing the operating levers of the business that are within our control and the first quarter is a good reflection of that.

As we sit here in May, after analyzing market trends and talking with customers, we believe significant inventory destocking impacts on our business are largely behind us. Going forward, we expect quarterly year-over-year volumes declines to lessen, with the fourth quarter being the inflection point for positive year-on-year growth. Based on this and the benefits of the significant cost reduction outlined by Jeff, we are maintaining our previous EBITDA guidance for 2009 of $325 million to $350 million from continuing operations.

In terms of the key drivers of cash flow, we expect cash income taxes, which I’ll remind you are only paid in our foreign jurisdictions because of the large operating loss carry forward we have in the US, will be in the range of 25 million to $30 million. Cash interests will be in the range of $95 million to $105 million, which is a slight increase due to the new German term loan.

Our US qualified pension payments will be about $30 million, which is less than previously discussed, due to the transfer of the nylon active employee liability and the associated 2009 cash requirement to the nylon transaction.

Cash restructuring payments are projected in the range of $35 million to $40 million. This is the investment we are making to achieve the significant cost reduction and cash savings that Jeff talked about earlier. Capital expenditures will run at about $45 million to $50 million for 2009. Taking all of this together, we are increasing our guidance from cash from operations, less capital spending by $25 million to the current range of $50 million to $100 million.

With that, I’ll turn it back to Jeff for some closing remarks. Jeff.

Jeff Quinn

Thanks Jim. A few last comments to make on slide 24, before we open it up for questions. There can be no doubt about it; the down turn in the global economy had a tremendous impact on our businesses in the first quarter.

We know over the last five years as we battled through our restructuring, and then emerged from bankruptcy into the most difficult economic environment in decades, we have refused to let events that we cannot control define this company; rather, we have chosen to be defined by how we respond to those events and how we manage and play the cards that are dealt to us, and that will continue.

We will continue to focus on those factors that we can control. We will complete our transformation into a pure place specialty materials business, by closing the nylon sale in the second quarter. We will continue to focus on bolstering our liquidity. We will not waver as we continue to take out costs to match the lower demand environment. We will continue to focus on growth in emerging markets and the value and innovation our products bring to our customers.

In summary, our strategy is strong. We have a diversified portfolio and a strong commitment to action. We remain focused on delivering the promise of Solutia as markets improve. Thank you.

Susannah Livingston

Vitrie, if you could give some instructions, we are ready to open up for Q-and-A.

Question-and-Answer Session

Operator

(Operator instructions) Our first question from the line of James Sheehan with Deutsche Bank. Please proceed sir.

James Sheehan - Deutsche Bank

Good morning.

Jeff Quinn

Good morning.

James Sheehan - Deutsche Bank

Technical specialties margins are performing particularly well here in Q1. Do you think those strong margins in that business are sustainable in 2009?

Jeff Quinn

Yes, we do believe that that margin environment will be sustained as we move through the year.

James Sheehan - Deutsche Bank

Okay, and also on the auto and auto replacement market, you made some comments last quarter about replacement tire trends, possibly stabilizing in US and Europe. Can you give us an update on the situation there?

Jeff Quinn

Yes, I think that replacements continue to be a significant portion of the business. Probably the most important driver there in terms of replacement are miles driven. Miles driven, basically increased 13% from the start of the decade through 2008, and then had a 4% decrease from January 2008 to 2009.

We believe as economic activity starts to recover, those miles driven trends will reverse and stabilize. So we still see the replacement market as being very important for us in terms of both the Flexsys business and the Saflex business.

James Sheehan - Deutsche Bank

Okay and then just on pricing in Saflex, has pricing continued to hold up there, and what kind of push back are you seeing from customers in terms of your pricing actions from last year?

Jim Sullivan

This is Jim Sullivan. We continue to see some erosion in pricing in that segment. As you commented, we did implement price increases across 2008, including one in the latter part of the year. We held on obviously, to some of that in the first quarter. Going forward we do expect the volume environment to be somewhat challenged and while we don’t expect price declines, we would expect to see some erosion of some of the price increases that we did put in, in 2008.

James Sheehan - Deutsche Bank

Okay. Thank you very much.

Operator

Our next question comes from the line of Laurence Alexander with Jefferies, please proceed.

Laurence Alexander - Jefferies & Co.

First question is on the prospects for sales in the European market. You remarked that you thought volumes might be flat and this is on the construction side of the market. What is your confidence level around that prediction? I mean how confident are you that the slow down in Eastern Europe in particular won’t be coming worse than you are looking for?

Jeff Quinn

I think the factors of just the energy requirements, the trend towards energy conservation, design trends, just the use of more glass and more laminated glass, gives us the confidence to believe that those trends continue and will be positive.

We see the growth will be mainly in Eastern Europe, but I mean, it’s to slow down the beginning in mid 2008, we don’t see that recovery happening really in 2009. We see recovery in to ’10, but we believe that the overall long term trends that are positive for the business are still there, those facts haven’t changed and as the economy starts to stabilize and recover, those will again drive demand in the segment.

Laurence Alexander - Jefferies & Co.

And then in Technical Specialties in the rubber chemicals business, what are you seeing in terms of competitive behavior, particularly in Asia?

Jim Sullivan

I think in that segment Laurence, we see some competitive activity clearly on the anti degradent Saniflex product line. We would expect that we will have to take price down in that business across the year, to hold our number one market position around the world. As Jeff commented earlier, we do expect margins in this business to stay, in call it the high 20 range for the remainder of the year, notwithstanding that price decline, but I would say where we see the most competitive activity is on that particular product line.

Jeff Quinn

Yes, certainly a different perspective on that product line and in Crystex.

Laurence Alexander - Jefferies & Co.

Finally, just in terms of liquidity, do you have any other pockets of liquidity so to speak, that you could access to help sort of address sort of the constraints in the US or do you feel you would need to access any of them or are you comfortable with where you are now?

Jim Sullivan

Certainly we do have other pockets in the credit agreement that we could use, but I don’t think that we feel now that we need to use it, given what we just accomplished on the German debt raise. Laurence I think we feel very good about our liquidity position. Hopefully we highlighted that on slide 21.

I think the other thing I would say is that, with the continuing operation business, we think we have a good chance of improving payment terms with our suppliers. That maybe we’re a little bit reluctant to do that for not only the reason of being in chapter 11, the early part of ‘08, but also because of some of the volatility associated with the nylon business.

So with the significant reduced volatility of continuing ops, I think we can drive some liquidity improvement there and then of course, our projection is to have cash flow for the year being at $50 million to $100 million range, which is going to be at least another $35 million for the rest of the year and could be up to $85 million.

So I think our liquidity, we feel good about now. We’ll always be proactive with that and continue to monitor conditions and do what we have to do, in order to protect and preserve it the way we have done today.

Laurence Alexander - Jefferies & Co.

Okay. Thank you.

Operator

Our final question comes from the line of [William Rain] with Contrarian Capital. Please proceed.

Ed Scott - Contrarian Capital

Thank you, this is Ed Scott; just a quick question. I’m having a little difficulty understanding and maybe you can take us through this. How is it that you are actually able to raise prices across your product line, in the midst of massive volume declines? That’s number one and it sounds like the sustainability of that is in question, but number two, maybe you could take us through a little bit of the manufacturing cost savings that are flowing through here, as well?

Jim Sullivan

Okay. This is Jim Sullivan here. First on the pricing front, keep in mind that this is new price increases that have gone in, in the first quarter of 2009. Really, its price increases that were implemented in ’08, that weren’t resident if you will in the numbers in the first quarter of ‘08.

I think we feel for the most part, good about our ability to retain the pricing in our markets, because of really, frankly, the market position, as well as the premium that we bring to the market on the product and the service that we offer. I did talk about the risk associated with price declines in our Saflex anti degradent line. I think we see that happening across the year. Our Crystex franchise, we are not raising prices right now, but we certainly expect to hold onto the price increases that we implemented in 2008.

Then in Saflex, pricing there as I said, is somewhat shifting downward as we continue to hold our world leading market position, but we don’t expect it to result in significant price declines from where we stand today. I think what we are saying there is some of the premium we put in, in ‘08, will erode across the year. So I think it’s really the position in the market, the structure of the market and the value that we bring to our customers.

Ed Scott - Contrarian Capital

I see, okay. So in order to sort of grow this business to get up to the 325 or whatever the number is, in terms of EBITDA, the real bet that’s being made here is on a substantial volume recovery; would that be a fair assumption?

Jim Sullivan

Well, the way we look at it anyway is the volume declines year-over-year experienced in the first quarter; clearly included a significant level of one-time destocking. So I don’t know that it’s, for example, in our rubber chemicals business, we were down on a volume basis in the low 40%. Clearly about half of that was just inventory destocking. That was not the volume decline that was being seen, if you will, at the consumer level.

So now that that’s behind us, moving forward as I said when I talked about guidance, we do expect volume to be down year-over-year in the second and the third quarter, but at a reduced rate; and then the inflection point we would see being in the fourth quarter is, the fourth quarter ‘08 was pretty weak.

So we are not really thinking about it necessarily as we need a robust recovery here, soon in order to hit the volumes that underlie that 325 to 350. We are really kind of saying we are realistic about what the market environment is right now. Clearly it’s a lower level of demand than what we experienced in ’08 and that we see that kind of sequentially improving as a result of the destocking being behind us.

Jeff Quinn

In addition to the general seasonality of our business, as we are moving into the quarters, generally our strongest quarters, we think that seasonality will still exist, regardless of the economic environment.

Ed Scott - Contrarian Capital

Well, we’ll see about that. The last question I really had was with respect to the manufacturing cost savings. If you could shed some light on that, that would be very helpful.

Jim Sullivan

Well, we are pulling it up here in St. Louis, if I can get that up. On slide seven, I think Jeff covered really the key elements of the cost reduction. If you look at our bridge on the consolidated adjusted EBITDA, I think it’s showed a year-over-year cost benefit of $32 million. So it’s going to be a combination of all the various items that are highlighted on slide seven. Does that help or I mean what specifically, are you looking for in addition to that?

Ed Scott - Contrarian Capital

Let us come back to you about that off line, perhaps?

Jim Sullivan

Certainly.

Operator

(Operator Instructions) Our next question comes from the line of Jeff Gates with Gates Capital Management.

Jeff Gates - Gates Capital Management

Yes, what’s the risk that nylon wouldn’t close and what has to happen for that transaction to close? The operating plan as you laid out to the buyer, are you generally on track with that?

Jim Sullivan

I think the answer to the last question first. I think the operating plan, operating prospective for the nylon business is becoming a bit stronger as we move through the last few weeks, as demand in China has started to recover a bit. So yes, I think we are very much on the operating plan that was laid out.

I think there were a number of conditions, contingencies related to the sale. We believe we have made significant progress on those, and are including consents, financing, etc, etc and we believe we are moving forward and the major hurdles there are well in hand and we anticipate closing the deal in the quarter.

Jeff Gates - Gates Capital Management

Are there any financing contingencies that the buyer has to…?

Jim Sullivan

Yes, there was in the agreement, a financing contingency with the buyer and their work on their financing has progressed nicely, and we believe that that is well underway and will be resolved in the quarter quite easily.

Jeff Gates - Gates Capital Management

Okay. Thank you.

Operator

At this time I would like to turn the call back over to Ms. Susannah Livingston for closing remarks.

Susannah Livingston

I just want to thank everyone today for your time and your continued interest in Solutia. If you have any further questions, please contact me. My number is on the press release at the bottom. Thanks and goodbye.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect, and everyone have a great day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY’S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY’S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY’S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: [e-mail]. Thank you!