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Solutia Inc. (NYSE:SOA)

Q3 2009 Earnings Call

October 27, 2009 10:00 am ET

Executives

Susannah Livingston - Director of IR

Jeff Quinn - Chairman, President and CEO

Jim Sullivan - EVP and CFO

Analysts

Laurence Alexander - Jefferies

Douglas Chudy - KeyBanc Capital

Bill Hoffmann - RBC

James Sheehan - Deutsche Bank

Tariq Ahmad - JPMorgan

Operator

Good day, ladies and gentlemen, and welcome to the quarter three Solutia Inc earnings conference call. (Operator Instructions).

As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Ms. Susannah Livingston, Director of Investor Relations. Please proceed.

Susannah Livingston

Thank you, Sharla, and good morning to everyone. We are pleased that you have taken the time to join Solutia's third 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.

First, I'd like to remind you that we are webcasting this call, which you can access through our website solutia.com. Also, we will be using presentation materials today, which are posted on the website, along with the press release issued last night announcing third quarter results. In addition, Solutia's third quarter Form 10-Q will be filed within couple of days.

If you'd 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 statements in our quarterly and annual SEC filings.

Our prepared remarks today include references to non-GAAP financials in our discussions of earnings. For reconciliation of our non-GAAP measure to GAAP figures, please see the schedule in our earnings release and contained in the slides today.

Also just to be clear, we define EBIDTA as earnings from continuing operations before interest, taxes, depreciation, amortization, non-controlling interest, and reorganization items. Adjusted EBITDA is EBITDA excluding certain gains and charges and stock-based compensation expense.

Now let me turn the call over to Jeff.

Jeff Quinn

Thank, Susannah and thanks to all of you for joining us this morning for our third quarter 2009 earnings conference call. I want to begin this morning by discussing some of the highlights from the quarter. Then I had plan to turn the call over to Jim Voss, our Executive Vice President of Global Operations who was going to talk about the state of our end markets, some of holder value, but unfortunately Jim came down with pretty bad case of the flu last nightour management initiatives and what we are doing beyond just cutting cost to create share and won't be able to join us this morning, so I'll talk about those topics as well.

Then Jim Sullivan will then provide a more detailed review of the numbers for the quarter and our expectations for the 2009, after which I'll provide some closing comments, before we open it up to take your questions.

I want to begin on slide four, but just recalling that last quarter, I stated that the second quarter was one of the most eventful in the history of our company. While the sale of the Nylon business did mark a significant milestone for Solutia, the exceptional performance of the men and women of Solutia during the third quarter, in spite of continued unprecedented challenging market conditions is perhaps is more telling as to the future of Solutia.

A particular note is that in the third quarter, we delivered the highest quarterly adjusted EBITDA and a highest EBITDA margins for our current portfolio of businesses since the formation of Solutia in 1997.

For the quarter, we made $119 million of adjusted EBITDA and had EBITDA margins of 26.5%. We raised our guidance for the year back in September. We had disclosed the strong results, we experienced in July and August, and I'm pleased to say that obviously those trends continued through the remainder of the quarter.

We closed the quarter with net sales of $448 million, up 9% sequentially and down 24% year-over-year. The adjusted EBITDA of 119 million was up 24% sequentially and up 7% year-over-year. We are particularly pleased to see favorable year-over-year comparisons here as is the first time we've had a favorable year-over-year comparison this year.

Earlier in the year, I had thought that the fourth quarter would be the inflection point in looking at year-over-year results on both the revenue and EBITDA lines, but we are very pleased we got their quarter sooner on the EBITDA side.

By all measures, it was an excellent quarter and what remains a challenging environment. Our continued success in controlling our spending and implementing cost reductions across our portfolio of businesses, in addition to the improvement, improved sequential volumes were the key drivers of our performance.

Lastly, we reported adjusted diluted earnings per share of $0.37 excluding the certain charges which Jim Sullivan will cover shortly. Though demand levels had been weak through 2009 compared to last year, we remain confident in our ability to continue generating increasing shareholder value with significant upside as market conditions continue to improve.

Now, turning to slide five to drill just a bit deeper on some of the highlights for the quarter. Volumes improved sequentially by 9%, as expected decline compared to 2008. Again, Asia was an integral part of the results for the quarter, especially in technical specialties in CPFilms, both of which reported increasing volumes over second quarter 2009.

In addition, Saflex experienced positive growth in the automotive sector, especially in the US as inventory rebuilding occurred aided by the Cash for Clunkers stimulus program, as well as Europe's good customer mix.

Importantly, this volume increase coupled with the improving manufacturing utilization, and our continued focus on maintaining the new cost position we have created is driving further EBITDA margin expansion and gives us the confidence today to once again increase our 2009 EBITDA guidance to the range of 350 to 365 million and maintain our cash from operations less CapEx guidance at a 125 million.

You will recall that last month we increased the guidance to 340 to 350. Speaking of improvements, here on the next two slides our graph depicting the percentage change in our sales and adjusted EBITDA, both year-over-year versus 2008, and on a sequential basis quarter-by-quarter. Despite revenue still being down year-over-year, the trend has been improving throughout the year with a notable improvement in the month of September.

As we have been stating all year, the trend on a sequential basis has been positive growth since the first quarter. In that regard, the year has progressed much likely predicted it would earlier in the year. The adjusted EBITDA story is even better with our third quarter trending in the positive range on a year-over-year basis for the first time this year with a sizeable increase in September.

Let me just emphasis that point once more. In the third quarter, with sales down 24% year-over-year, we posted a 7% increase in adjusted EBITDA. Again on the sequential basis, most businesses have remained positive since the first quarter with the exception of CPFilms, which was flat due to predominately to the seasonality in that business. Once again, aggressive cost management in combination with increased volumes was the key to this performance.

Turning to slide eight, I would like to briefly address our capital structure about which Jim Sullivan will speak in more detail in a few minutes. As announced earlier this month, we issued $400 million of senior unsecured notes that bear an interest rate of 8.75% per annum. The offering was lead by Deutsche Bank, Jefferies, Citi and JPMorgan. There was really a great execution by the bankers and Jim Sullivan and [Jim Tischner] and their internal financial teams and my hats off to all of them.

We used $300 million of the net proceeds to pay down our term loan. In addition, during the quarter we amended our revolver and term loan. Among other things, this amendment allows for increased liquidity cushion, more covenant headroom and importantly will provide us operational flexibility to move this company forward with our strategic plans.

As you may note, this transaction does leave Solutia with a pro forma cash balance of 190 million and pro forma liquidity in excess of 300 million, which is much higher than we need to run our businesses. However, at this time, we felt it was prudent to maintain this amount on our balance sheet. Many factors could impact the use of this cash. As many of you know our pension obligations for 2010 will increase over 2009 to at least $60 million to a high range of 80 million.

In addition, as we have noted in the past, we continue to review highly synergistic bolt-on acquisitions that would expand our geographic reach and improve our technology position in our growing businesses. Further portfolio restructuring might also require additional spending needs.

Lastly, we will continue to reduce our debt through our mandatory amortization and excess cash flow payments in our term loan. The bottom line is that we do not intend to let this amount of excess cash just sit on the balance sheet. We will put it to work. We will put it to work prudently and wisely.

Now moving on to slide 10, we first make a few brief comments about our end markets. On the left side of the slide, is the exposure we have to our various end markets. There is no doubt that automotive volumes remained challenge in the third quarter compared to last year, but demand has improved versus second quarter. In fact, September was the best month for global automotive production in more than a year due in part to rebuilding stock after the incentive programs concluded.

As this side highlights is always important to remember, our exposure to the replacement market for both Saflex and technical specialties, replacement demand remains a very large and stable part of the business. In Saflex this demand is estimated over 20% of revenue and is of course driven by government regulation.

For technical specialties the tire replacement market represents almost half of the segment revenue, significantly impacted by miles driven, which continue to trend up. To this end, you may have noted a few weeks ago that we announced our plans to reopen Monongahela plant in Pennsylvania. The reopening of this insoluble sulfur or Crystex plant signifies the increasing demand, where we are ready to meet the needs of our customers.

On the OEM side, global automotive builds have stabilized as evidenced by recent release of JD Power's forecast of 58 million builds for 2009, the same as last month and a modest increase to 61 million global builds in 2010. In North America, we are seeing some of the lowest OEM inventory levels in recent history, and expect replenishment in the fourth quarter.

The inevitable recovery in the Auto sector maybe slow, but we have proven that our businesses can in fact perform well in the current environment and are positioned extremely well for this upside. The construction market represents 19% of our revenue with almost 80% of this being commercial exposure and the remainder residential.

As we have been saying all year, we continue to expect this market to be challenge and we do not expect much of the recovery in 2010, however Saflex architectural volumes continue to improve in Asia, as volumes were up sequentially and basically flat year-over-year.

In addition, CPFilms flat glass volumes in Asia were up sequentially and year-over-year. More importantly, the global trend towards energy efficiency will benefit all of our division, especially Saflex and CPFilms, as government stimulus monies are spent. In fact, CPFilms' improvements in architectural volume this quarter were predominantly due to energy benefits delivered by CPFilms products.

Lastly, in our industrial end market specifically Therminol, we continue to experience sequential growth. This is due in large part through our continued success in the solar market. As was announced back in August, Therminol was selected to be used in two new concentrating Solar Power plants in Morocco and Algeria. Therminol recognizes the value of energy generation from renewable sources and continues its strategy to grow with this expanding market.

Moving on to slide 11, I have spoken to many of you about in the past, we implemented a near term plan to enhance cash flow generation last fall. First let me review the results from our cost reduction program.

In assets and spending, we are well on track to reduce our capital expenditures spend by about $50 million over 2008 with our target range at 40 to 50 million. Our maintenance spending levels are around 30 to 40 million annually. So the businesses can operate comfortably in this year's range of 40 to 50 million, while making prudent incremental investment to drive revenue growth and lower variable cost, while always operating safe, efficient, and reliable plants.

Additionally, we started out the year, eliminating discretionary SG&A spending and reducing fixed cost or cost to all sites. Our SG&A cost reduction initiatives and efforts to better align our manufacturing footprint to the geographic demand profile has established a new lower cost base for the company.

Managing working capital has continued to be a focus for the divisions as well. We have remained disciplined in our efforts to control our inventory levels as sales volumes have improved. As our balance sheet continues to improve, so will our payable terms.

Moving onto structure and employees, our workforce reduction of over 10% has been met as we shifted to a leaner organizational structure throughout the company. Importantly, as volumes have improved, we have not let these costs creep back into our organization and we will not let them as we go into 2010.

Just as a reminder, the actions we previously mentioned around the significant changes to our incentive compensation structure through the suspension of our company's 401(k) match for employees, and the freezing of all salaries and wages to the extent allowable are included here as well.

Some of these compensation costs will be reinstated in 2010, but we would do so in a prudent fashion. While we initially targeted a goal of 160 million in cash and $110 million in EBITDA, today we have already realized savings of 145 million in cash and 105 million in EBITDA. Due to the success of our business performance improvement actions to date, we now expect cash savings of approximately $180 million over 2008 and EBITDA savings of approximately $130 million this year. This was no small feat and in large part is due to our employees around the globe embracing the challenge to reset our cost profile and permanently change the way we do business.

While we reacted quickly to the economic downturn, our cost reduction plans was thoroughly planned, embedded and targeted and will be sustainable as we move forward. Another important factor contributing to our successful quarter is our manufacturing utilization as noted on slide 12.

As our end markets have improved over the near terms, so too have our manufacturing run rate through the year. Of course, this chart represents an overall average for the company and as you would see Saflex running at a higher clip with average utilization rates increasing each quarter and CPFilms starting to trend down in the third quarter due to the seasonal weaker quarter.

Increasing utilization in combination with the cost savings mentioned earlier, improved logistics cost and a lower raw material cost profile have resulted in the significant margin expansion experience this quarter, with an exceptional EBITDA margin of 26.5% and a year-to-date margin of 22.6%.

While, I believe we have demonstrated the ability to act decisively and successfully in the face of the economic downturn that has not been our only area of focus. Solutia's new organizational structure has allowed us to examine our business performance at many levels and in different ways.

For example, in CPFilms, we have significantly improved execution in our commercial and technical areas, opening up new sales channel, developing exciting new energy savings products and selling unique technical films for electronic displays like the Amazon Kindle Reader.

In Saflex, we are investing new capital in order to significantly expand our capacity of high performance products like architectural and Automotive Acoustic sheet. In addition, we are focusing our technology programs on fast growing areas like photovoltaic's.

In technical specialties, we have steadily increased our investments in technology in order to accelerate our pipeline of new products like Crystex high dispersion and Skydrol 5, our latest generation of aviation hydraulic fluids. Supporting all of our specialty businesses, we are building a strong foundation of business process. For example, we recently moved to create a single corporate supply chain, one which will deliver improved costs, greater efficiency and better service for our customers.

In addition, we are also working on the people side of the equation by improving our programs and introducing talent management processes and carrier letters to all of our people. We believe these actions will drive significant growth opportunities for the company in the future periods.

In summary, Solutia has faced challenges, has faced challenging times due to the economy this year, but our team continues to deliver solid results and remain focused on the long term opportunities that drive value and growth for our shareholders, our customers and our employees.

Importantly, all these opportunities coupled with a strong bias for action enhance our management approach that position Solutia to continue to deliver exceptional financial results as we move forward. Now I'd like to turn the call over to Jim Sullivan, our Chief Financial Officer. Jim?

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.

While the slides in the presentation deck today provide comparisons of our third quarter results versus the second quarter of 2009 and the year ago period, I will focus the majority of my comments on the sequential information, which highlights the continued positive progression of the business. I will then conclude with comments on cash flow, debt, liquidity in our updated 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 charges and gains and stock based compensation. Slide 15 details items excluded in our calculation of adjusted EBITDA, a few comments on the more significant items in the third quarter of 2009.

During the third quarter, we incurred several charges related to our ongoing restructuring and portfolio enhancement activities. First, we took a $4 million charge for severance and training cost associated with our company wide cost reduction program. We also recorded a non-cash pension settlement charge of 6 million resulting from the significant amount of year-to-date distributions from our US pension plan, which was driven predominantly by headcount reductions associated with our 2009 restructuring actions.

Finally, we recorded a $6 million loss from the sale of our North American plastic products business in August. This business included the legacy Monsanto Daisy doormat product line and in 2008 it had revenue of roughly $11 million and an EBITDA loss of 2 million. Net cash received from the sale of this business totaled approximately 2 million.

Turning to slide 16, here we bridge the company's sequential and year-over-year quarterly movements in sales. Compared to the second quarter, sales were up 38 million or 9%, volumes were at 9% with lower average selling prices of 2% offsetting currency gains of 2%. Year-over-year, net sales were down 139 million or 24%. Volumes were down 18%, average selling prices were down 4% with currency translation losses primarily from a weaker euro and pound, sterling relative to the US dollar making up the difference.

Slide 17, bridges our third quarter adjusted EBITDA of 119 million, versus the second quarter adjusted EBITDA was up 23 million or 24%. Improved sales volumes and increased manufacturing utilization rates, as Jeff noted earlier, accounted for most of the sequential increase in earnings. Our manufacturing and SG&A cost reduction programs continued to benefit EBITDA in the quarter and in combination with the lower raw material cost profile help to offset the modest earnings decline from lower average selling prices.

Year-over-year, adjusted EBITDA was up 8 million or 7%. The sales and manufacturing volume related declines of over $50 million were more than offset by the favorable net impact of raw material cost movements versus selling prices, as well as the benefits from our cost reduction efforts.

Now let's turn to our business segment starting on slide 18, with Saflex. Third quarter sales for this business totaled a 182 million, up 14% compared to the second quarter with volumes up 11%, currency up 3% and average selling prices roughly flat. As anticipated, automotive related volumes increased on a sequential basis once again in the third quarter driven primarily by increased automotive demand from the government stimulus initiative in United States and some inventory rebuilding.

In addition, we saw the benefits of favorable product mix with our automotive Q series acoustic volumes continuing to grow nicely in the quarter albeit off a relatively small base. Architectural volumes were also up sequentially about 8% due to market share gains and increased activity levels in Asia. We continue to see robust demand for architectural acoustic products which led us to announce last month the upgrade to our Ghent, Belgium manufacturing facility. This upgrade will enable us to better serve the fast growing acoustic architectural markets in Europe and Asia.

In architectural applications, the use of our Saflex Q series product offering reduces the perceived level of noise up to 50%. Saflex delivered adjusted EBITDA of 47 million in the quarter, up 8 million or 21% versus the second quarter. Sequentially higher volumes, improved manufacturing utilization rates and a lower raw material cost profile helped Saflex achieve a record EBITDA margin of 26% for the quarter.

Year-over-year, third quarter sales were down 39 million or 18%. Volumes decreased 12%, average selling prices were down 3%, and unfavorable currency movements accounted for the remaining 3% decline. Sales volumes were down in both architectural and automotive product lines, but to a much greater degree in automotive.

Solar energy volumes continued to trend up on a year-over-year basis, and are inline with our targeted growth rates in this product line versus the third quarter of 2008, Saflex adjusted EBITDA was up 11million or 31%.

Manufacturing and SG&A cost reductions and the favorable net impact of year-over-year changes in raw materials versus selling prices more than offset the earnings drag from sales volumes and lower production rates.

CPFilms results are summarized on slide 19. Net sales totaled 53 million in the quarter, down one million, or 2% compared to the second quarter. The 2% sequential volume decline experienced in the third quarter this year was significantly muted versus historical seasonal patterns by strong automotive sales in part due to our new automotive product bundling promotions, good, better and best, which led to the month of September sales outperforming even last year and strong architectural and technical coding sales in Asia.

CPFilms third quarter adjusted EBITDA totaled $12 million, down 2 million versus the second quarter due to seasonally lower volumes and lower manufacturing utilization rates. CPFilms adjusted EBITDA margins for the quarter remained in line with historical ranges at 23%. Third quarter 2009 sales were down 10 million or 16% compared to the prior year.

Most of this decline is volume-related with a modest loss attributed to currency translation more than offset by average selling price increases. CPFilms year-over-year adjusted EBITDA was down 3 million or 20%, again mainly due to lower volumes and lower manufacturing utilization, partially offset by improved selling prices and SG&A cost reduction.

Turning to slide 20, technical specialties net sales for the quarter totaled 209 million, up 19 million or 10% compared to the second quarter. Volumes were up 13% and average selling prices were down 4%. Sales volumes were up sequentially across most product lines with very strong growth coming from Asia and Europe. Adjusted EBITDA for the quarter totaled 72 million, up 14 million versus the second quarter, mainly due to improved volumes and increased manufacturing utilization rates, partially offset by the decrease in average selling prices.

The decrease in average selling prices in this segment is mainly in our Santoflex and other rubber chemicals product lines, as supply demand conditions in these markets remain relatively weak. Technical specialties adjusted EBITDA margin in the quarter was 34%, reflecting the current significant operating leverage and attractive incremental margin profile of the segment.

Year-over-year sales were down 85 million or 29%. Overall, volumes were down 22%, selling prices were down 6% and currency accounted for the remainder of the decline. Adjusted EBITDA was down three million compared to the third quarter of 2008 due to lower volumes, lower average selling prices and lower manufacturing utilization rates. This was nearly offset by our cost reduction efforts and lower raw materials.

Moving on to slide 21, here we highlight results for the unallocated and other reporting segment. As previously mentioned, in August, we sold our small US plastic products business. This business contributed to the two million adjusted EBITDA loss reported in this segment year-to-date in the quarter in 2008.

We are left with the European side of the business, which is primarily spray suppression systems for trucks. This business is currently about breakeven with the impact of lower year-over-year volumes primarily offset by lower cost due to the relocation of manufacturing activities from Belgium to Romania late 2008. Corporate spending in the quarter totaled $9 million down $1 million versus the second quarter and 8 million versus the year ago period. Currency fluctuations on working capital and other balance sheet exposures have been slightly negative this year compared to gains in 2008.

As Jeff mentioned earlier, cash generation and debt reduction continue to be key focus areas for the company. Slide 22 details the company's 2009 and 2008 year-to-date cash flows from continuing and discontinued operations. For the quarter, cash provided by continuing operations less capital expenditures totaled $30 million.

Sequentially, cash generation is down primarily due to a use of working capital partially offset by higher earnings and lower cash interest. Tight control on inventories remain for the quarter, however, we are not enough to offset an increase in accounts receivable from an improving sales volume profile.

Capital spending in the quarter totaled $4 million, which approximates maintenance levels. We will see a slight uptick in capital expenditures for the fourth quarter, as we begin spending on the Q series expansion at the Ghent Plant in Belgium. Cash interest in the quarter was down versus the second quarter, because we had only three months of prime based interest payments versus five months of LIBOR and prime based interest payments in the second quarter.

Year-to-date, cash from operations less capital expenditures totaled 96 million versus 42 million over the same period of 2008. Lower year-over-year adjusted EBITDA was more than offset by lower cash interest due to deleveraging activities, reduced working capital levels and lower capital spending.

Turning to discontinued operations, cash flow was a minor use in the third quarter at $6 million, driven by the settlement of certain liabilities related to the Nylon sales transaction.

Moving on to slide 23, here we have summarized our leverage profile taking into consideration the new bonds issued on October 15. On a pro forma basis, we ended the quarter with net debt of 1.108 billion, which is flat with the second quarter. Net cash flows from continuing and discontinued operations for the quarter about offset fees and expenses associated with the bond issuance and credit facilities amendment.

The third quarter debt position was comprised of 875 million on the term loan, 19 million of other short term foreign debt and 400 million on the unsecured bonds netted against the 190 million of cash. Our quarter ended with 304 million of global liquidity pro forma for the bond transaction.

Briefly in reference to our term loan financial covenants as of September 30th, the maximum leverage covenant remained at 4.5 and our actual performance was 3.51. The maximum leverage covenant was one of the items addressed in the credit facilities amendment and will remain at 4.5 through the end of 2010.

The minimum fixed charge coverage covenant remains at 1.15 versus our actual performance as of the end of the quarter of 2.12. Importantly, the credit facilities amendment also provides increased strategic and operational flexibility for the company. Among other things, the amendment gives us increased flexibility to restructure or divest certain assets, reduce the company's foreign tax burden, acquire high performing businesses to fit with our strategy and manage our debt portfolio across time.

Now let's move on to the annual guidance on slide 24. As we enter the fourth quarter, overall demand levels are holding steady and our current outlook for October and November is for sales volumes in the aggregate to be relatively flat with the third quarter run rate and then turn down in December, which is a seasonally slow month when many of our customers reduce manufacturing run rates or take holiday shutdown with the facilities.

Overall for the quarter, we expect sales to approximate the fourth quarter of 2008 levels with adjusted EBITDA margins improved year-over-year, but down versus the third quarter of 2009, due primarily to lower manufacturing utilization rates from reduced customer demand and year end inventory control measures.

Accordingly, we are increasing our adjusted EBITDA guidance for the year to the range of 350 million to 365 million and are maintaining our previous announced full year guidance for cash from continuing operations less CapEx of approximately 125 million.

You'll also note, we increased the range for restructuring payments to 40 to 45 million in line with the increased cost reduction targets that Jeff outlined earlier. Please note, our cash guidance excludes up to 15 million of cash use from discontinued operations in the fourth quarter.

These cash outflows are associated with contractual obligations to the buyers of Nylon business and includes such things as transition services, certain employees severance obligations, reimbursement of certain indirect residual cost associated with Lyondell's early exit from the Chocolate Bayou facility and a potential closing date working capital trueup.

With that I'll turn it back to Jeff for some closing remarks. Jeff?

Jeff Quinn

Thanks, Jim. A few final comments to make before we open it up for questions.

First on slide 26, as I mentioned during our last call, our portfolio is weighted heavily towards growth. Our two Films businesses will deliver the majority of the top line growth. These businesses share many similar attributes in market leadership, innovation and cost advantage that will provide this earnings growth over the next three years. Crystex and our specialty fluids businesses are core businesses with strong cash flow contribution to support growth. They too share quality leadership in their respective industries and a global manufacturing footprint to serve the customer's worldwide.

Finally, we are actively managing our portfolio to address businesses that do not meet our growth in earnings expectations. We will continue to reposition PPDs and other rubber chemicals to optimize cash from these businesses as we determine the best strategic direction for these segments.

As noted on slide 27, our portfolio has changed dramatically over the last six years. We're strengthening our current businesses by investing in our core businesses around the globe and divested of our inherited commodity businesses. In addition, we increased our market presence in growing regions of the world.

While this year, our necessity due to the economic meltdown, our focus has been on our cost base to right size our businesses. We have not lost sight of the growth in product innovation opportunities that will move us to the next level, and secure our place as one of the leading performance materials and specialty chemical firms in the world.

We have one of the strongest portfolios in the space, as evidenced by our year-to-date margins of 23%. We believe we are well positioned to deliver outstanding financial results for our shareholders as we move forward.

Many of you have heard the story over the last 20 months, and you have seen the results. You've hopefully appreciated the focus on delivering on what we say we will do. The transformation has happened, the evolution is continuing and the future is ours for the making. There is work to be done, we recognize that, but the path we have traveled as an organization to get where we are today, gives us confidence and optimism about the future.

Now, I'd like to turn it back to Susannah to open it up for Q&A.

Susannah Livingston

Thanks, Jeff. Sharla, if you could give some instructions, we are ready to take questions-and-answers.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Laurence Alexander from Jefferies. Please proceed.

Laurence Alexander - Jefferies

Good morning, two questions. First, given if you (inaudible) the divestures and given your (inaudible) what's your perspective on the M&A environment including CPFilms?

Jeff Quinn

Laurence, I'm sorry. That cut on our line when you're asking your question, we only caught about half of that, would you mind restating your question. We couldn't get it?

Laurence Alexander - Jefferies

Certainly. What is your perspective on the M&A, this particular CPFilms?.

Jeff Quinn

Yeah, as you know that aftermarket window films space is very fragmented and we believe that there are a lot of attractive growth opportunities out there. Certainly, we have been actively reviewing that area and especially as I said in my comments, those things that provide enhancement to our technology and a geographic expansion or acceleration, but we're going to be very prudent about looking for those growth opportunities and the things that are first and foremost on our list are things that are very highly synergistic and can after synergy basis be acquired at a very, very attractive price.

Laurence Alexander - Jefferies

Then secondly, can you sort of expand a little bit on specifically cash flow outlook for Q4? I mean, are you starting to build inventory in anticipation of Federal order patterns in the first half of next year?

Jim Sullivan

Lawrence, this is Jim Sullivan. No, we are going to keep a close eye on inventory as you know, year-to-date we've generated cash from our inventory focus. We did so in the third quarter as well. We'll continue to hold the line on inventory in the fourth quarter.

We're at $96 million of cash from continuing operations less CapEx through the three quarters and our target is approximately 125 million, which on a point estimate basis remain about $30 million of cash flow in the fourth quarter, which is comparable to what was generated in the third quarter.

Operator

Your next question comes from the Lawrence Jolin from Barclays Capital. Please proceed.

Unidentified Analyst

Hi. This is actually (inaudible) on behalf of Lawrence. You already touched on this briefly, but the CapEx number in the quarter was kind of low and just if you can provide any sense of guidance on where you think that this might go for the fourth quarter and then over 2010 and possibly 2011. Thanks.

Jim Sullivan

Sure, CapEx in the quarter was $4 million, if you analyze that you get 28 million close to 30 million, which is our maintenance level of capital spending. We are running at little higher level this year. We have guided 40 to 50 million this year, as a result of some projects that were started late 2008 that we went ahead and completed in the first quarter of 2009. So, since then, we really have been running at maintenance levels of spending. Frankly, we are well set up in our facilities, because of the significant investments that we made over the past three years on the growth side.

Turning the calendar to 2010, we see CapEx being about the same range as what we saw in 2009 in that 40 to 50 million range. Again, we will spend 15 to $20 million above maintenance levels next year, part of that is going to come from the investments that we have announced at Ghent, where we're increasing our capability to produce acoustic product, which is really in demand both in architectural and automotive applications.

Unidentified Analyst

Then my second question is the margins within the technical specialties segment were at historic highs in the third quarter. Can you walk us through where you see the margins in 2010 and 2011 kind of relative to this year? I mean are you concerned all about with rising crude prices, any kind of inflation coming on the raw material side and do you think you can raise prices in response to that?

Jeff Quinn

Lawrence, you know, we have not given margin guidance obviously yet for '10 and '11. So I'm not going to kind of go there on the call, but that means a couple of couple comments. One, as I said in our remarks, we believe that the cost structure, the improved cost structure is sustainable with the exception of those couple items that we called out that were kind of come back and there is some incentive plan in the 401(k). So, obviously, that new cost structure benefits the technical specialties area as well.

As you know that the many of the raw material inputs into our products are very much [remain] from crude down the value stream. So while crude may move bit, we don't see a direct correlation to the movement in our feedstock costs.

Then finally, we will continue to focus on the value delivered by our products and base our pricing on value pricing and the attributes our products bring to our customers. There will always be pricing pressure as we move forward, but we really believe that the products offer great value, but don't forget that the current margin profile in technical specialties includes PPDs and ORCs.

As you know, as we work our way out of those businesses, which in the case of PPDs have good margins now but low obviously in Crystex and ORCs really which have no margin. As we work our way out of those, as we've said that the overall margin profile of that space will go up pretty significantly.

Operator

Your next question comes from the line of Douglas Chudy from KeyBanc Capital. Please proceed.

Douglas Chudy - KeyBanc Capital

Good morning. Nice quarter. I guess my first question, of the 130 million in EBITDA savings now expected in 2009 versus 2008, can you give us a sense of what component you expect to be sustainable versus what component would be more temporary type actions?

Jim Sullivan

Yes Doug. Hi, this is Jim Sullivan. We talked about the incentive program in 2009 being eliminated. That's in that number, order of magnitude twentyish million dollars for that program. The 401(k) match is order magnitude, 5 to $7 million. So those two programs will look to bring back in particular the cash incentive program will be brought back in next year. We see it as self funding in the sense that there won't be payout on that program unless we see continuation of performance.

On the 401(k), we've not made any decisions in terms of bringing that back, but obviously it's a benefit. It's important to our employees and to continue to retain the top quality people that we have. We will have to continue to look at those kinds of things. In addition to that we just brought up or are in the process of bringing up the Monogahela, Crystex facility.

So there is some fixed cost that was included in the year-to-date numbers that will come back in starting in the fourth quarter partially and then depending on forward demand will continue into 2010. But the remainder of the cost reduction is viewed by the company as permanent in nature and in the spirit of continuous improvement, we are always looking for new and better ways to do things and find additional productivity improvements.

I would say most of our focus now is on the units themselves in terms of operating our facilities well, maximizing yields and energy usage across the facilities et cetera. I hope that answers your question.

Douglas Chudy - KeyBanc Capital

Yeah, no that's very helpful. I guess secondly kind of touching even more on that with the leaner cost structure in place, what type of incremental margin potential do you see going forward as volumes pick up, I mean certainly higher than what it's been in the past?

Jim Sullivan

Yeah, I mean yes, I mean we believe that there is significant operating leverage built in and we believe that there is a significant tranche of demand that we are able to meet from our existing facilities without bringing back on before our restarting lines and those types of things.

So on average across the portfolio that might be 10% capacity that we can bring back on and clearly know the improvement in manufacturing utilization rates that we experienced during the quarter was very significant and much of that improvement fall directly to the bottom line.

Douglas Chudy - KeyBanc Capital

All right thanks. Just finally, any signs or concerns that following recent stimulus activity in the auto market that could be a stalled demand recovery here as last part of 2009 and into 2010?

Jim Sullivan

We are seeing continued strong demand as inventories are rebuilt. I think that, the good thing for Solutia's automotive related businesses are the geographic breadth of our exposure and the fact that we have balanced geographic exposure as well as the strong replacement in aftermarket business.

So we see a continuation of some nice demand profile obviously not back to the historic levels, but we take a lot of comfort in the fact that we have shown that our automotive related businesses can do very well in this type of environment.

Operator

Your next question comes from the line of Bill Hoffmann from RBC. Please proceed.

Bill Hoffmann - RBC

Jeff, I wonder if you can talk a little bit about this fourth quarter visibility. I mean, normally as you said, the demand does fall off in December, do you get any sense of from the breadth of your customers and I guess also it's going to be mostly targeted here towards the Saflex business, how much inventory they are carrying, how much sort of down turn they expect to take in their own businesses towards year end?

Jeff Quinn

Bill, I think what we are seeing probably is a lot of discussion about whether the customers will be taking December time off consistent with historic practices. Actually the, most of the chatter is that they may not be doing that in terms of following their historic practices. So I mean, because the economic downturn started last year in the fourth quarter, clearly the fourth quarter is an important quarter for us and a quarter that we expect to see revenue being flat if not a bit above last year and EBITDA performance being favorable compared to last year. So December will be a big month there, but certainly what we've seen so far here, as we began October is a continuation of nice demand profile, following on from the strong demand profile in September.

Bill Hoffmann - RBC

Then the other question is just, when you look at your operating rates, running about at let's say sort of 75%, [80%] at this point in time, any thoughts on your asset positioning where some of these future growth that we expect out of Asia?

Jeff Quinn

Yes, I mean, I think it's clear that if you look at where the growth is going to come, obviously, a lot of it's going to come out from Asia. It's also equally clear that we benefited from having our manufacturing footprint global to meet that demand, so certainly it's a very logical conclusion to say that as manufacturing utilization rates get to levels that are sort of theoretical maximums or putting a realistic maximums that that growth will come in Asian region.

Not many of you have heard us talk about, (inaudible) second line, you heard us talk about eventually some day of Crystex plant, another Crystex plant in Asia. Probably even a Saflex resin plant in Asia at some point. So all those things are serving in the long range planning, but we will continue to rely on a global manufacturing footprint to meet that global demand.

Bill Hoffmann - RBC

You also indicated selling some of the technical specialty lines given the better financing markets. Could you just give us an idea of how far long you are with some of those opportunities?

Jeff Quinn

Yeah. I think, that I think, what we've said, previously, 12 to 18 months type thing, we'll be working to sell all those businesses and yeah, certainly we're having a little more robust financing market obviously helped that thing, but I think that same timeframe is still very realistic.

Operator

(Operator Instructions). Your next question comes from the line of James Sheehan from Deutsche Bank. Please proceed.

James Sheehan - Deutsche Bank

Can you talk about the Saflex, your architectural volumes in Europe, what trends are you looking at there in Q4? Do you expect to continue gaining share in that business?

Jim Sullivan

I think the trend that we saw in the third quarter versus the second quarter James, is probably about right for the fourth quarter. We did see some gain in share in Europe. Some of it has to do with certain of our customers and the timing of those contracts and them trying to meet their annual volume commitments in order to get rebates etcetera. So as we sit here today we would expect the fourth quarter to be relatively consistent with the third quarter.

James Sheehan - Deutsche Bank

Just a follow-up on the earlier question on inventory restocking in the auto end market. If you see further inventory building in Q4, is there a chance that you see sort of weaker volumes in Q1 or Q2 sometime after that. What's your outlook for sort of the follow on of inventory restocking?

Jim Sullivan

I think as we said on the call, there is probably a little bit of that in the third quarter, inventory levels that the auto manufacturers are pretty low. So there probably will be some continuation of that in terms of the incentive programs in the US, we are realistic that at least part of that increase in demand that we've seen in the third quarter was a pull forward from 2010. Having said that we still see 2010 total auto global volumes being up about 3 million versus 2008.

So as Jeff said earlier, we promised in December that there will be the normal inventory control measures at the customer level. That could change and if that does change then that will impact the fourth quarter potentially to the detriment of the first quarter, but maybe it's a little too soon to tell. As Jeff said October is very strong so far.

Operator

Your next question comes from the line of Tariq Ahmad from JPMorgan. Please proceed.

Tariq Ahmad - JPMorgan

Can you talk a little bit about what you're seeing in sulfur costs in October and how do you expect that to develop over the next few months.

Jim Sullivan

Sulfur in the quarter was pretty consistent with what we're seeing for the year, which is down dramatically versus '08, when we were seeing the impacts of pull from the fertilizer markets, as you know the material has come down pretty substantially. But we haven't really seen anything dramatic in terms of that material across 2009.

Looking forward, we haven't really seen, we're not seeing much in terms of increase. It's important to note that we have Crystex plants located around the world, and we have relationships with local refineries that allow us to pull in the most efficient way our needs in that particular material. The pricing does vary depending on the world area.

Jeff Quinn

Understood. I think the other thing that your fertilizer demand has still been pretty weak, the inventories are at higher levels especially in China. So I think that's obliviously are pricing on sulfur quite a bit.

Tariq Ahmad - JPMorgan

Okay, great. Then I guess on, you talked a little bit about October being relatively flat versus what you're seeing in September. Any changes in terms of geographies, you are seeing stronger demand than of your upper Asia versus what you saw in 3Q?

Jeff Quinn

No, I think from the preliminary kind of demand profile looks a lot like September, both in terms of stability of some pretty nice volumes in the geographic origin of those.

Operator

There are no questions at this time. I would now like to turn the call over to Mr. Jeff Quinn for closing remarks.

Jeff Quinn

All right. Thank you. I guess that in conclusion, I just want to reiterate that we have a significant focus in Solutia in delivering on what we say that we'll deliver. Certainly, the third quarter was a very strong quarter for us. We take great pleasure here being able to meet the expectations of the strength in our shareholders and we remain focus on delivering our guidance that we've updated as of today. So thanks very much. We appreciate your time and your interest in Solutia.

Operator

Ladies and gentlemen that conclude today's conference. Thank you for your participation. You may now disconnect. Have a great day.

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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.

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Source: Solutia Inc. Q3 2009 Earnings Call Transcript
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