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Executives

Susannah Livingston - VP, IR and Communications

Jeff Quinn - Chairman, President and CEO

Jim Sullivan - EVP and CFO

Analysts

Laurence Alexander - Jefferies & Co.

David Begleiter - Deutsche Bank Securities

Frank Mitsch - BB&T Capital Markets

Doug Chudy - Keybanc Capital Markets

Edlain Rodriguez - Gleacher & Company

Solutia Inc. (SOA) Q4 2010 Earnings Call January 27, 2010 10:00 AM ET

Operator

Good day, ladies and gentlemen, and welcome to the quarter four Solutia Inc earnings conference call. My name Laura and I will be your coordinator for today. At this time all participants are in a listen-only mode. We will be facilitating a question and answer session toward the end of today’s conference. (Operator Instructions)

I would now like to turn the conference over to your host for today, Ms. Susannah Livingston, Vice President, Investor Relations and Communications. Please proceed.

Susannah Livingston

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

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 material that are posted on the website, along with the earnings release announcing fourth quarter results and a video highlighting our 2010 performance. Finally, Solutia's Form 10-K will be filed near the end of February.

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 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 schedules in our earnings release and contained in the slides today.

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 fourth quarter call. I especially appreciate those of you in New York braving the weather to take the call. Luckily we don’t have that kind of 20 inch snow here in St. Louis.

I want to begin this morning by discussing some of the highlights from the year and the quarter and then discuss our end markets, our working capital initiatives, make a few comments about raw materials.

Then Jim Sullivan, our Chief Financial Officer will provide a more detailed review of the numbers for the quarter and share some of our expectations for the 2011. After that I will provide some closing comments, and then we will open it up to take your questions.

Turning to slide four, by any measure 2010 was an extraordinary year for our company. First of all and most importantly, we had another very good year in the area of environmental health and safety performance. Without that strong performance not much anything else matters. Again, we are very please by our continuing trend of excellence in this area, but of course we are always striving to do better. That is really important and is a fundamental core belief of our organization.

We also delivered strong financial results for the year highlighted by a strong top line growth at 21% with the Asia-Pacific region growing at 33%. We delivered recorded adjusted EBIDTA of $504 million, 26% increase from 2009. We had strong industry leading EBIDTA margins of 26%, strong cash flow generation with free cash flow for the year at $213 million and the year end global liquidity of $466 million and a very compelling total return for shareholders of about 89%.

I am very pleased that we are able to deliver these results whilst at the same time enhancing our strategic positioning by continue to work to enhance our portfolio of market leading businesses through the two highly synergistic acquisitions that we did during the year, the commencement of high return internal growth projects in Asia and the shutdown of unprofitable other rubber chemical businesses and also at the same time improving our capital structure through the refinancing activities which putting in place the new cash flow revolver and the new term loan and extending our debt maturities.

In 2004, when I had the privilege of becoming CEO of Solutia I had a vision for what Solutia could be at some point. Four years of bankruptcy reorganization later a global economic meltdown under our belt and a lot of hard work by the men and women of Solutia 2010 was in some ways the year that that vision became a reality and I think I can say without hesitation now that Solutia has become a premier world leading specialty chemical and performance materials company. We have built a unique culture founded on our high performance cultural guidelines. We have constructed one of the best portfolios of market leading businesses in the sector. We have attracted and groomed an exceptional management team.

We have created a sustainable low cost operating structure that is at a level that even we previously thought was unattainable and have created a capable structure that will allow us to explore internal and external growth opportunities around the globe in high growth markets. We know that all we really have created up to this point however, is the possibility of future success. We must deliver that success and we know what lies ahead; more hard work. We are grounded and focused, we believe in this company and the fact that the best indeed does lie ahead, but you know what happened in 2010 was not bad either.

As you move to slide 5, it shows our historic progression of our results and we begin this year with an economic uncertainty ranging from fears of a double dip to the European debt concerns of mid year and many other uncertainties in our markets. But in typical fashion for our company we focused on what was in our control and our efforts paid off. The transformation of our cost structure that we implemented in 2009 as a trend of stabilizing improving demand in our end markets occurred throughout the year.

As seen on this slide and as I indicated, we ended with adjusted EBIDTA of $504 million, 26% increase over 2009 and had an adjust EBIDTA margin of 26%. That $504 million in adjusted EBIDTA represents a 13.7 CAGR in EBIDTA growth over the last five years. We recorded $1.57 in earnings per share. This makes the best earnings year in Solutia’s history and represents a 30% improvement in adjusted EPS over 2009. 2009 showed the resiliency of this portfolio in a down economic environment and the impact of our cost structure work, 2010 showed what the new cost structure is capable of producing in a more robust economic situation. We feel the cost structure that we have created and the margin profile that we have created are indeed sustainable.

Moving to slide 6, as I mentioned earlier, the strong cash flow generated for the year part of that was a success of our working capital initiative. This was a real success story for us in 2010. As we have discussed before Jim Voss and his team launched this initiative early in the year to improve the efficiency of our working capital and they achieved outstanding results. In 2009, working capital averaged about 24% of the sales for the company. Throughout 2010 working capital has been steadily declining and at the end of the year at about 17% sales and sales of $1.95 billion. This initiative has generated about $60 million of cash while improving receivables by approximately 10 days and inventory by about four days.

The key to success in all these areas has been to increase the level of communication and collaboration among the departments. People from across the company met and have surpassed the chancing targets we established at the outset. Going forward, our balance sheet have strengthen and our earnings are stable and we intend to grow the company’s top line while maintaining this new more efficient level of working capital at around 17% with sales and of course we will continue to look for improvement in this area.

Turning to slide 7. As you have heard me say before we take very seriously the commitments we make and this year was no exception. As you can see on the slide, we far exceeded the guidance we laid out early in 2010. You will remember that as 2010 started we were coming off of a 2009 well we actually exceeded the guidance for the year. So as we started with the year we were not positioned for quite as much year-over-year improvement as some of our peers. The guidance we gave at the beginning of the year compared very favorably to what the sector as a whole was seen but as the year developed an markets improved we challenged ourselves to do even more. We increase our guidance on EBITDA and then guided then guided towards the high end of the range, we increase our guidance twice on cash solvent and then again guided to the high end of the range towards the end of the year and the same on earnings per share. I am very pleased that we were able to exceed even the final guidance we gave in October.

If you look at our year-over-year improvement is good but if you go back and compare 2010 and 2008 I think that is when you see the real true scope of what we have accomplished here at Solutia and we were very pleased with those results.

Moving on to slide 8, we made continued investment to meet the growing demand in the Asian Pacific region and we have done so very purposely the consistent with our strategic intent. We ended the year with 29% of our revenue coming from this region as noted on the bar and on the top of the page, which is 2% higher than in 2009. The Asia Pacific region is now the second largest market eclipsing the US.

As you would probably expect the Asian Pacific region was the fastest growing area of the world for us during the year with revenue growth of about 33%. The numbers in the table at the bottom of the page by business segment reflects the annual growth we have seen by region of the world. Advanced Interlayers sales in the Asian Pacific region have grown in all their end markets architectural replacement glass, automotive OEM and of course solar. The US numbers remained strong all year mainly due to the recovery in the automotive.

Performance Films strong demand was in Asia mainly due the improvement in the automotive market and the strong growth in edisplays and energy. The Flexvue business experienced more than a 110% growth in 2010 in Asia. Technical Specialties growth has been stronger around the world as we gain nearly all the insoluble sulfur market increase when the tire market picked up. The US grew slightly less in the area than in other world areas mainly because this region experience early growth in 2009.

Moving on to slide 9 and looking at our end markets, we are very pleased with how demand has evolved in 2010 and look to further strengthening in 2011. The electronic industry though small improved by 59% for 2009, a reflection of the strong demand for e-readers, touch screen and tablet devices. We look poor to the strong demand expected from this market going forward.

The architectural market represents about 11% of our revenue. The construction market particularly in the mature regions of the world remained soft. However, we saw an increase of 20% in our architectural business in Asia in 2010, and it now represents a second largest region for us as I said. We continue to expect the architectural market to be challenged and we do not expect recovery before the back half of 2011 on a global basis.

Energy Solutions is up 30%. This is a new grouping for us including our solar industry products PVB and EVA which are used as encapsulants in the solar modules and Therminol used in concentrated solar power applications, as well as our solar window films for both architectural and automotive applications out of our performance films segment.

The solar area was strong in 2010 as expected. The consensus is that there was between 15 gigawatts and 16 gigawatts capacity in 2010, nearly doubling over 2009’s demand. The German government seems to be close on amending feed-in tariffs policies which would likely moderate German installations in 2011. We view this as a positive step towards retaining a sustainable German PV market. Further, we see certain southern hemisphere countries and other developing markets taking up demand in 2011, further supporting a moderate growth year for photovoltaics. The demand for encapsulants will follow this trend. In addition, our aftermarket products and performance films continue to show growth in part tied to increasing interest energy efficiency in our new Interlogix product.

Automotive OEM represents 18% of our sales and has been a bright spot for our business this year. This end market has grown by 22%. JD Power forecast of global builds continues to improve now at $77.1 million in 2011. This is an increase of 5% over 2010 with China increasing at around 10% and the India increasing around 9%. As emerging markets such as China and India work to develop affordably produce fuel efficient automobiles, they continue to look to Solutia as we continue to innervate and provide unparalleled technical service.

One new innovation to help with fuel efficiency is our new Saflex solar absorbing interlayers which reduces solar heat gain in vehicles and reduces air conditioning uses and less CO2 emissions. This product was commercialized and sold in China during the month of December.

Our largest end market is the replacement market, whether that is in replacement automotive glass, architectural glass, aftermarket film applications, or the tire and rubber markets. This represents over a third of our sales.

A key indicator for many of these businesses is US miles driven which has been steadily increasing in the past few months. As it relates to tires, freight tonnage is up in Europe and truck tonnage in the US is favorable over 6% versus last year. Larger markets like tire and rubber benefit from the trends like radializtion which are driving above GDP growth. Growth in radializtion rates influenced our Crystex insoluble sulfur brand where we have seen volume improvements up 29% in Europe and 32% in Asia. Hence, our recent announcement that we are expanding Crystex capacity at our Kuantan, Malaysia plant.

Moving over the slide 10. Before I am turning over to Jim, I would like to make some just a couple of comments about the fourth quarter. This quarter, we experienced a year-over-year improvement in revenue with net sales of $489 million, up 7% over the last year quite good considering the strong fourth quarter experience last year due to the automotive recovery at that time. Sequentially, due to seasonality as expected the revenue for the quarter is down 4%. The adjusted EBITDA of $116 million was down 3% year-over-year mainly driven by higher incentive expense and unallocated expenses. In addition, we experienced raw material pricing pressure this quarter in both Advanced Interlayers and Technical Specialties when compared to last year.

However, on a sequential basis, this raw material impact was slightly positive as we expected. Importantly, and as we have been stating all year, our cost structure is our main intact helping to maintain our strong earnings. From an earnings standpoint, we have recorded an adjusted diluted EPS $0.36 for the quarter net of certain charges, which Jim will cover shortly.

Moving over to slide 11, we also completed the sale of our Perkalink and sold selected primary accelerators assets during the quarter. Both these business were part of our other rubber chemicals sector in Technical Specialties.

As we have stated in the past our goal is going to exceed the ORC business in a cash neutral position and these sales proceeds will alleviate some of the closing calls associated with the primaries business.

The photovoltaic market saw strong growth in 2010 due to the strong demand. We continued to see demand for our encapsulants. We are announcing additional production line supporting our EVA encapsulants at our Suzhou, China facility. This capacity will start to come online in mid 2011, which will nearly double our capacity we have today. Importantly, Vistasolar’s performance this year outpaced our deal promises on both volumes and earnings, and this quarter we completed the system integration, the last of the integration steps.

Also in Advance Interlayers, we completed our architectural future projects at our Ghent, Belgium plant during the fourth quarter. We produced A grade material which was qualified by our customers and shipped. Importantly, we have already firmed up our 2011 contracts with this new material. We continue to strengthen our balance sheet.

In the fourth quarter once again we produced outstanding results around cash generation in part due to the improvement in working capital. Due to the strong performance we made a voluntary pay down by a total reduction in debt at $50 million on our term loan quarter. This repayment brought our net debt ratio to below 2.5 as at the end of the year. As we have ended the year with $466 million of liquidity we have taken the opportunity to further strengthen our balance sheet and made an additional $50 million repayment on the term loan this week. Since the end of June 2010 we have paid down approximately $130 million in debt.

So that’s my quick assessment of 2010 and for the fourth quarter. And all of us here at Solutia look forward to 2011 and are confident in our ability to deliver strong results. 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 with Solutia’s consolidated sales and earnings from continuing operations and then breakdown results by recording segment. I will conclude with comments on cash flow, debt and our 2011 outlook.

As always, to enhance the transparency and highlight the key underlying trends of our business, we have adjust the reported EBITDA in all period to exclude certain gains and charges. Slide 13 details the gains and charges excluded in our calculation of adjusted EBITDA for the fourth quarter of ‘10 and the fourth quarter of ‘09. In the fourth quarter of 2010 we have recognized a $5 million gain on the sale of the Perkalink other rubber chemicals product line which offset accounting charges related to previously announced restructuring actions and a loss resulting from the settlement of the contractual dispute with the former glass laminator of ours in Australia.

Turning to slide 14, here we bridge the company’s year-over-year and sequential quarterly movements in sales. As Jeff mentioned, in the fourth quarter we continued to see year over year top line progression with net sales of 33 million or 7%. Volumes were up 5% which is really quite an accomplishment considering the fourth quarter of 2009 with a typically the strongest quarter of the year. The acquisitions contributed 6% with unfavorable currency movements mainly from a weaker euro versus US dollar accounting for a 3% decline, and average selling prices down slightly at 1%.

Compared to the third quarter of 2010, sales in the fourth quarter were down $22 million or 4% which was better than expected, but reflects a more normal lower seasonal volume pattern in 2010. The combination of improved average selling prices and currency translation boosted sales 3% sequentially.

Slide 15 features the companies fourth quarter adjusted EBITDA again on year-over-year and sequential basis. Adjusted EBITDA for the quarter was a $116 million down primarily 3% versus the same period in 2009. Year-over-year increased sales volumes including the acquisitions and manufacturing and SG&A related cost reductions did not quiet offset the earnings decline from modestly lower average selling prices, increased raw material cost and expense associated with reinstatement of our annual compensation plan in 2010. Versus the third quarter of 2010, adjusted EBITDA in the fourth quarter was down $14 million or an 11%. Seasonally lower sales volumes and higher manufacturing cost from planned year end maintenance shot downs and inventory control action more than offset the sequential gain realized from increased average selling prices, lower raw material cost and currency translation.

Slide 16, which is the company’s year-over-year and sequential quarterly movements in earnings per share. EPS in the fourth quarter in 2010 totaled $0.36, a decline of $0.09 compared to 2009 driven primarily by higher depreciation and amortization expense related to the acquisition and a higher tax rate in 2010. Our tax rate in the fourth quarter of 2009 was effectively zero. This was due to gains from the reversal of certain 1048 tax reserves in the quarter last year.

Compared to the third quarter of 2010, EPS in the fourth quarter was down by $0.06, primarily due to seasonally adjusted EBITDA, in particular in unallocated segment due to some of expenses Jeff mentioned. The combination of lower debt balances, a reduce rate on the term loan due to the lower leverage levels that we achieved in the fourth quarter, and the elimination of mark-to-market changes in the underlying value of the interest rates swaps with new hedges put in place in August lowered interest expense sequentially and benefited EPS by $0.04.

Now let’s turn to our business segments starting on slide 17, with the Advanced Interlayers. Fourth quarter sales for this business total $222 million up 3% year-over-year. Volumes were basically flat but considering the unusually strong year-end-buying pattern experience in the fourth quarter of 2009, as our customers reached to meet their annual volume commitments this was the solid result.

Acquisitions added 10% while average selling prices were down 3% and currency translation again primarily from a weaker euro versus the US dollar resulted in a 4% decline.

In the quarter, automotive OEM and replacement volumes continue to improve, up 2% over 2009 mainly due to strong recovery in the US and steady growth in Asia, more than offsetting decline in Europe and the world areas.

Architectural volumes overall were down in the quarter about 3% year-over-year with the decline centered in Europe again mostly due to unusually strong buying experienced in late 2009. However, during the quarter we did see continued strength out of Asia with architectural volumes in this region up 30% year-over-year.

Solar volumes were up in the fourth quarter versus year ago period due to the acquisition of the Vistasolar EVA encapsulant business and proprietary resin and other intermediate chemicals in the segment continue to grow versus last year consistent with recovering end markets.

Advanced Interlayers adjusted EBITDA for the fourth quarter total $50 million, up $1 million or 2% year-over-year. The earnings improvement from the addition of business solar sales and lower manufacturing cost more than offset raw material cost increases and average selling price declines. Sequentially sales for Advanced Interlayers were up $10 million or 5% with the combination of volumes in average selling prices up 2% and favorable currency translation accounting for the remaining 3%. Adjusted EBITDA was up $2 million sequentially with higher sales and a slightly improved raw material cost position more than offsetting higher manufacturing cost from inventory control actions and an increased project expense from higher capital spending levels.

Overall, Advanced Interlayers performance in 2010 was very strong with sales and adjusted EBITDA both up about 20% compared to 2009. The significant operating leverage and attractive incremental margins that were bolstered in the year by further cost reduction provided the foundation for significant gains from the strong volume recovery and more than offset selling price decreases, raw material cost inflation and increased expense associated with the reinstatement of the company's annual incentive plan in 2010. The net result was record sales and earnings which is quite impressive in light of the fact that we still have not experienced the recovery in the architectural market segment.

Looking ahead we expect sales volumes in Advanced Interlayers in the first half of 2011 to be slightly ahead of the pace delivered in the fourth quarter of 2010. We expect this improved volume profile in combination with product mix as we continue to penetrate the market with innovative value-added premium products, increased sales pricing from the 2011 contract negotiation and higher manufacturing utilization rates, all this will more than offset raw material cost inflation and modestly lift the EBITDA margins for the segment from the levels achieved in the fourth quarter.

Performance Films results are summarized on slide 18. Net sales for the fourth quarter total $54 million, up $10 million or 23% compared to the fourth quarter of 2009. Volumes are up 7% with the inclusion Novomatrix sales in 2010 accounting for the remaining 16% year-over-year increase. Precision coating sales remained very strong in the quarter up 25% versus 2009 in large part driven by volumes into Asia which experienced an increase of a 100% mainly driven by Flexvue growth in e-reader and touch display markets.

Aftermarket automotive window film sales in the quarter were up versus 2009 in part due to the acquisition of Novomatrix and further supplemented by gains in Asia and the US more than offsetting declines in Europe and South America. Aftermarket architectural window films sales in this segment we are down about 13% in the quarter versus 2009. The business continues to focus on increasing market awareness of the significant energy savings benefits of our architectural window film and while the quarter in total was down year-over-year there was a notable strength experienced in the month of December coming from the combination sales of our new Interlogix product and the completion of some larger architectural projects a year end.

Performance films fourth quarter adjusted EBITDA totaled $6 million up $1 million or 20% versus the year ago. This earnings improvement was driven by higher sales volumes including Novomatrix partially offset by increased manufacturing cost, most notably from unfavorable raw material yields and slightly higher sales and R&D expenses.

We spoke about unfavorable raw materials yields also in the third quarter and noted at that time that we have some challenges in this area as we managed the shift in business mix more to precision coatings applications. While there was some progress made in this area during the fourth quarter there is room for further improvement as we move into 2011.

Sequentially, performance films sales in the fourth quarter were down $19 million with adjusted EBITDA down $7 million due primarily to normal seasonality of the business.

Taking a look at the full year results for Performance Films segment were much improved over 2009. Net sales were up 36% with 13% coming from the acquisition of the Novomatrix and the remaining 23% increase split almost evenly between growth and Flexvue electronic applications and the remainder in automotive window film. Like we talked about in advanced interlayers, the architectural film segment of this business while representing a very exciting growth opportunity in the future was not a significant driver of improved performance in 2010.

So, looking ahead for Performance Films, we expect in this segment strong year-over-year volume growth in the first half of 2011 with adjusted EBIDTA margins on par with the levels achieved in the first half of 2010. As the benefits of higher sales and production volumes will be moderated somewhat by higher raw materials and continued investment in selling and R&D related growth programs.

Turning to slide 19, Technical Specialties net sales for the fourth quarter total of $213 million, up $19 million or 10% compared to the fourth quarter of 2009. Volumes were up 11%, average selling prices were up 1%, and currency translation resulted in a 2% decline. Crystex and Saniflex volumes remained strong in the quarter, up 14% and 12% respectively year-over-year and generally consistent with the growth that we see in the global tire markets. Therminol heat transfer fluid volumes were also up significantly year-over-year in the fourth quarter, in particular in US and Asia as the business continues to find success placing product in new markets.

Technical specialties adjusted EBIDTA for the fourth quarter of 2010 total of $75 million flat with prior year. The strong volume performance, higher average selling prices, and lower SG&A cost were offset by raw material cost inflation and increased manufacturing cost mostly related to planned maintenance turnarounds and increased process technology spending.

Sequentially, technical specialty sales were down about 5% and adjusted EBIDTA was down $7 million or 9%. The sales decline was driven by lower volumes in Saniflex [Sanidegradance] and heat transfer fluids. The modest decline in margin in the fourth quarter versus third quarter was from lower manufacturing utilization rates, higher spending on maintenance turnarounds and incremental investment on process technology initiatives.

Technical Specialties had another very successful year in 2010. Net sales were up 19% and adjusted EBIDTA was up 25%, both records for this business.

Looking ahead, volumes for Technical Specialties in the first half of 2011 are expected to be improved from the fourth quarter levels as we continue to see strengthen the tire market in particular truck and bus, as well as concentrating fuller applications in other new market applications for Therminol. The increasing volume profile and sales pricing increases are expected to more than offset raw material cost increases and drive a modestly higher adjusted with the margin profile as compared to the level achieved in the fourth quarter of 2010.

Moving on to slide 20, here we highlight results for our unallocated and other reporting segments. Total net expense in the quarter was $15 million, which was up $5 million versus the fourth quarter of 2009, $7 million of higher expense provision associated with the reinstatement of the annual incentive plan, which we talked about was reinstituted in 2010. That was partially offset by year-over-year gains and miscellaneous income primarily attributed to cash dividends that we received in 2010 from our 2% retained ownership position in the nylon business.

Slide 21 details the companies operating and investing cash flows. Cash from operations less capital expenditure in the fourth quarter totaled $47 million, which is previously communicated did include approximately $23 million of cash payments made in December to employees under the incentive plan. The total amount earned under this plan as a result of the strong financial and strategic achievements in 2010 is approximately $42 million with the remaining $19 million expected to be paid in the first quarter of 2011.

The significant year over year growth and cash earnings in combination with lower restructuring payments and an improved working capital profile which Jeff touched earlier were the primary drivers of the $102 million increase that we saw in cash from operations in 2010 versus 2009.

Capital spending in the fourth quarter totaled $38 million which was up $24 million versus the third quarter. As the Saflex acoustic project in Ghent, Belgium was completed and spending on the previously enough Saflex and Vistasolar capacity expansions in Suzhou, China are well underway. For the year capital spending total $66 million, up $22 million versus 2009.

Turning to discontinued operations cash flow for the fourth quarter was $7 million as we successfully monetized some working capital and sold certain assets related to the primary business. For the year, discontinued operations was at $22 million use of cash well below our most recent guidance of $30 million to $40 million use. Going forward, nylon related outflows are behind us and we will see a modest cash use at the primary shutdown lines down over time.

Moving on to slide 22, here we summarize the debt and liquidity profile of the company. We ended the year with net debt of $1.272 billion which is down $60 million from the third quarter. As Jeff mentioned, the company voluntarily prepayment $50 million of the term loan in the fourth quarter which reduced the outstanding balance to $764 million.

In terms of liquidity the company ended the year with a very strong position of $466 million. Based on continued strong cash generation and the surplus liquidity we made an additional $50 million voluntary prepayment on the term loan in January which further reduced the term loan balance to $714 million.

Taking into consideration pro forma full year adjustments for the acquisitions, the company’s net debt to trailing 12 month adjusted EBIDTA as of the end of the fourth quarter was 2.4X. As previously indicated in under our credit agreement, when this ratio falls below 2.5X, the pricing on our term loan revolver drops by 25 basis points which occurred during the fourth quarter and will modestly reduce interest expense going forward.

We have swapped $500 million over a floating rate term loan to fixed rate of 2.24% for 2011. With the live work flow of 1.5% in currently low interest rates these results in a swap premium of 74 basis points as of today.

Finally, due to additional funding and favorable asset returns in 2010 the company’s frozen US post-retirement obligations reduced by nearly a $100 million from $310 million in 2009 to $213 million at the end of 2010.

Now, let’s move to our 2011 outlook which is summarized on slide 23. As we have discussed with the investor day back in November, we expect to see strong top line and bottom line growth in 2011 compared to 2010. We expect revenue to be up in the range of 13% and adjusted EBIDTA up between 11% and 19%. In total, we would expect adjusted EBIDTA margins to improve very modestly year over year. As a reminder, the first quarter is typically lower than the second and third quarters due to seasonal sales volumes specifically in performance films and the Chinese New Year impact on all segments and the fourth quarter like 2010 is typically our lowest revenue in earnings quarter of the year.

So for the full year 2011, we are maintaining our targets of revenue between $2.1 billion and $2.2 billion adjusted EBIDTA in the range of $560 million to $600 million, adjusted EPS of $2 to $2.25 with four year cash in continuing operations less capital expenditures in the range of $150 million to $200 million. In addition, we expect our capital expenditures for the four year to be about $125 million inclusive of many growth projects recently announced like the Saflex and Vistasolar expansions in China and the recently announced Crystex expansion in Malaysia. This spending level is higher than the past few years but really reflects the strong growth opportunities we see especially in Asian Pacific.

So with that, I will turn it back to Jeff for some closing remarks. Jeff?

Jeff Quinn

Yes, thanks Jim. Before we open up for your questions just turn to slide 25 for a moment. I believe that this slide depicts the clear record of execution that we have been delivering and on doing what we say what will do. That is something what is very important to us in part of our ingrained DNA at Solutia now. We talked about many of the things on the slide today and I won’t repeat those. We have also talked about 2011. The 2011 guidance were providing we think is aggressive appropriate plan and we’re very, very focused on delivering that. We like to compare ourselves to what we do; we like it when you hold it accountable for doing what we say would do, and we feel very good about our track record in that regard, and we look for ward to having that conversation at the end of this year when once again talk about delivering on the commitments we have made to you.

So thanks very much for your time today and with that I turn it back to the operator to open up your questions.

Question-and-Answer Session

Operator

(Operator Instructions)

Susannah Livingston

Lora, we are ready for our first question.

Operator

Your first question comes from the line of Laurence Alexander.

Laurence Alexander - Jefferies & Co.

The first question I want to focus on is it sounds to me commentary as if for 2011 you expect pricing to light raw materials in the two films businesses and can you detail in terms of the offset to what degree you are depending on further productivity as opposed to operating leverage to help you offset the raw material headwinds?

Jim Sullivan

Lawrence, this is Jim Sullivan. Let me address that. We expect raw material inflation year-over-year to be in the range of 6% to 8%. That’s pretty close to what we saw in 2010 versus 2009, we were about 8% on an average in 2010. So that continuation of raw material push, as you know we have announced price increases in Advanced Interlayers on the Saflex side and also on the Technical Specialties and even saw some evidence of the price increases coming through in the fourth quarter. We have the ability in that segment to get price and you noted in the fourth quarter we did see a pretty strong raw material push in that segment.

So overall, to answer your question in terms of films businesses we are still optimistic that we can achieve price increases on average across the year that will mitigate most of the raw material inflation if not all, but slight caveat could be in the Vistasolar business where we are seeing a run up in EVA resin and while we are getting selected price increases in that area we are not (inaudible) a lot of following in the industry. So, the pricing in that segment and we always know we could come down a little bit more than we originally thought in 2011.

Overall I would not say it is a tremendous drag in Advanced Interlayers, the interplay between our raw material and selling prices. We are going to do everything we can if there is any erosion there between those two indicators to continue to take cost out of the division and keep that EBIDTA margin in the mid 20 range, which is where we believe it should be based on the value we deliver to our customers.

In terms of performance films, really we do not see a lot of inflation in that segment of the business. Lawrence, I think we had very, very little in 2010 versus 2009 and kind of the same feeling in 2011, there might be a little bit there. There is ability to get price in that business but more importantly in performance films it is really about building out the volume platform in precision coatings and reaching out in window film internationally. So that’s really more of a volume story.

As I said in my comments for the first half of 2011, we do expect the margins in that business to be on par with what they were in the first half of 2010 which was pretty good. We are trying to build the segment over the year to get back in the mid 20s. We will take a step forward in 2011 in that area, where we get all the way there probably not.

Laurence Alexander - Jefferies & Co.

Secondly could you update on your thinking on the relative uses of cash, the appeal of the internal projects versus small bolt-on acquisitions versus vertical integration?

Jeff Quinn

Obviously that the CapEx level for the year that we have been talking about is a bit of a step up. We have very attractive growth projects that have been announced in the Asia region, and that obviously is one of our high priorities in terms of use of cash.

Obviously, as we have said in previous occasions in keeping the balance sheet strong, keeping that net leverage ratio, where it is and improving on that are very important to us. The thing that I think is so good is that we believe we have a clear vision for delivering value to our shareholders creating shareholder value that relies on just with executing well on these internal projects that we have been growing the business internally because of our innovation in our technology.

We do not have to do deals to be successful in to grow this company. Obviously, we have the desire to do external stuff if it makes sense and if it’s really highly synergistic, high return type project or type deals, but we don’t feel any compulsion that we have to go out and do that. That’s a real strength of this company right now. I believe the ability to create the shareholder value among things that are more within our control.

Operator

Your next question comes from the line of David Begleiter.

David Begleiter - Deutsche Bank Securities

Jeff just on the Crystex expansion, what are you presently sold out Crystex lines and what percent increase was represent of the Crystex capacity globally?

Jim Sullivan

David, this is Jim Sullivan. Crystex really has strong year. The global entire market really grew in 2010. We expect continued growth especially as I said in the truck and bus. The operating rates in that segment of the business at year end were in the low 90s.

Malaysia is our second largest plant. Our largest plant is in Hamburg, Germany and basically what we are looking to do is double the capacity of that, but remember we have seven plants around the world. This is an important plant for us because a lot of the growth that we see in insoluble sulfur is in the Asia region. We are excited about that. That’s really a low cost facility and we are getting some tax incentives from the Malaysian government.

David Begleiter - Deutsche Bank Securities

Jeff in terms just on Vistasolar how do that business do and your expectations, and what your forecast for 2011 is above or below what you expect when you first acquired it look at last year?

Jeff Quinn

For 2010 the business did significantly better both on the top line and the bottom line then our acquisition premises and as we move forward in to 2011, we see the business continued to perform above what are the case that our acquisition was based on. We have been very pleased with that and we have been very pleased with the quality of the business that we acquire in terms of the people and the technology in the manufacturing nohow and what I have been really pleased with is how that business has bloomed into Advanced Interlayers and there is a sharing of technology and knowledge back and forth between the SAFLEX business and Vistasolar business.

As we have moved forward on EVA expansion in China, it has been really good to see how the business as a whole has worked to bringing those EVA lines on. I was very pleased the couple of days ago to get pictures from the EVA line in China, where we produced the first product of the line. Things are going really well in that regard and it has given us the base foundation for a growing EVA in [SAFLEX] business as we thought it wouldn’t and we think some really positive things ahead for us in that business.

David Begleiter - Deutsche Bank Securities

Lastly Jeff and Jim with in Q1 will rise ahead of selling price increases?

Jim Sullivan

I don’t think meaningfully certainly David to your point, I think what you are talking about is we had some outages on the ethylene chain, they were trading a little bit of a spike with propylene and that it does impact a few of our materials. Though yeah there is a little bit of bump there in the first quarter, but I don’t think its too meaningful, I mean we have got these price increases that are coming in net all of that it shouldn’t be a big swing between those two.

Operator

The next question comes from the line of Frank Mitsch.

Frank Mitsch - BB&T Capital Markets

Jeff, when I read the release last night and I saw the line about Solutia is being very well positioned to take advantage of the attractive growth opportunities that lie ahead. My initial thought was because you have done some external deals that it was more M&A related, but it sounds like today you are really talking at least about your internal opportunity with perhaps M&A supplementing that. Is that fair way to characterize Solutia’s opportunities?

Jeff Quinn

Yes, that’s well stated. Perhaps the real difference for me over the last several years as things have developed here more fully is that I feel very confident in the robustness of our internal opportunities and as we have been able to look for ways of expanding capacity in some of the real high profit product areas. I feel very comfortable in that regard and those are our highest priority, no doubt about it.

We will do M&A opportunistically as things come up and we continue to do what I think is a really fine job of diligently looking for those opportunities and analyzing those, but its the mentality of not having to do that of feeling very comfortable serving our own skin. What we can do here on things that are more within our control.

Frank Mitsch - BB&T Capital Markets

When you are going through the list of your growth in markets and looking at one of our OEM up 22% year-over-year for 2010 that looks to be an excess of what the billboard and you are looking at 5% bill increase in 2011, are you anticipating its from your perspective you will be able to exceed that, is that how we should be thinking about that.

Jeff Quinn

I think genuinely we have always started our growth, if you might remember back on our investor day presentation, we had that slide that shows really what segment growth would be and then what we thought our growth would be. We see because of the products we offer, because of the innovation in technology, because moving to the high growth regions and obviously because we think our customers value the high level of technical sales and service would bring to the table. We do expect to see incremental growth above some of those sectorial trends.

Frank Mitsch - BB&T Capital Markets

Lastly, you were referring to the higher manufacturing cost in the fourth quarter doing par to far some plant shutdown turnaround etcetera those are behind us in 2011?

Jeff Quinn

That was mostly in Technical Specialties Frank and yes we have those behind us, so as we entering the year with the facilities in good shape to take on that incremental volume of what we talked about.

Operator

Your next question comes from the line of Doug Chudy.

Doug Chudy - Keybanc Capital Markets

This is Andrew Don, Andrew Don on for Doug. I was hoping maybe I could just press you a little bit more looking at the Performance Films segment, specifically at the margins. Just noted sequentially over the last couple of quarters your margins have come down looking at a year-over-year basis, the margins have like as this year flat maybe a little dip and also despite volume increases, so I was wondering if maybe you could get a little more granular in terms of what you are going to do in the next year to bring those back in with the timing might look like in terms of bringing those margins back to your goal.

Jeff Quinn

What we have seen in Performance Films; our focus in this area has been to growing the business, growing the top line. As the business has become more complicated and that really is because of the tremendous growth of our Flexvue line and some of the different demands in terms of products. We probably have uncovered more opportunities for improvement on the production side in terms of the manufacturing side.

We are going to get back to those mid 25% margins by growing the top line, while at the same time really improving our manufacturing efficiency and some of the things at the plant level. As Jim said in his comments, we will make progress on that in 2011 and certainly I’d like to think that we would get all the way back there, but that may be a bit ambitious, but we will definitely make progress there and in return fully to that level by 2012. That’s our internal targets and we see some possibilities of doing it faster and exceeding that, but that’s currently the best view we have.

Andrew Don - Keybanc Capital Markets

Okay great thanks very much for that.

Jeff Quinn

Andrew, one of the thing there, obviously we made a change in the leadership of that business late last year and that manufacturing orientation and the need to do that was exactly one of the reasons for that change and we have been very pleased, Mike Donnelly and his team, the work that we began to do there. We have a clear vision and path for what needs to happen and we are actually pursuing that. Mike and his team will execute on that with the same degree of precession that Mike and his team did in Technical Specialties, when he was running that business for us.

Operator

Your next question comes from the line of [Christopher Butler].

Christopher Butler

The first question you touched on architectural class a couple of times in your initial statements as it pertains to Advanced Interlayers and Performance Films, some good things and some things about weak, continuing weakness. Could you give us one shot overview of your outlook from the architectural class standpoint?

Jeff Quinn

The real top line there is continued strong growth in Asia, moderate growth in US and an eventual recovery in Europe as we get towards the end of the year, but again for us to deliver this plan for us to deliver the financial commitments we made, we do not have to see a significant recovery in that architectural market in Europe. Our premise and our planning premise is for it not to occur until very late in the year and whatever does occur to be that will be a minimal frankly.

Christopher Butler

How about on the Performance Films side any improvements on that side of the business to get to your guidance?

Jeff Quinn

We will see improvements on the Flexvue side that’s going to continue to be an important element for us. We were very excited about what we see there some of the demand for touch screens and tablet devices and all that has been very robust so, that’s important to us. We think our growth premises there and the recovery on the automotive and architectural sides there. Frankly are very much middle of the road type of views. We do not have to have robust recovery and growth beyond what genuine consensus for us to be able to deliver on our plan.

Christopher Butler

Shifting gears AIP expense stepped up here in the fourth quarter how should we think of that going into 2011 may be give us an idea in terms of your guidance for the full year?

Jim Sullivan

We love to, to be able to deliver really topnotch performance and get to the very high end of the range and even exceed that and if we do then, I would expect probably a comparable level of the expense that would be in the numbers at that level, had a mid point when we talked to you back at the November Investor day we said at the mid point that would be about a $15 million opportunity on cost cutting in the ‘11 versus ‘10 so 15 million lower AIP provision in ‘11 versus what we had in 10 at the midpoint.

Christopher Butler

Finally a lot of questions on cash have been on investments would you look in as far as debt reduction this year notices 50 million are ready and where is the comfortable cash position that you would like to hold the balance sheet?

Jim Sullivan

Well, to operate company globally, we really don’t need much cash $25 million, $20 million globally in a system to operate of course we got the access to liquidity on the revolver so from that perspective you could take the level $30 million, $35 million of global cash versus what we have now and you could call that surplus and as we indicated again at the Investor Day we do want to bring our leverage down.

Our near-term target, near-term being the over the next 12 to 18 months would be to reduce our gross debt to EBITDA down to about two times and we got a good start on that with the payment that we made right out of the block here in January.

Operator

Your final question comes from the line of Edlain Rodriguez.

Edlain Rodriguez - Gleacher & Company

Jim quick question for you, I mean you guys confident in achieving you target goals for next year. That is fine, but when you look at the landscape ahead of you in terms of economic growth, raw materials, and factors that you can control like what concerns you the most. Let say if you want to fall short of your goals like what will be the cause of that?

Jeff Quinn

Edlaind several priority areas for us year and certainly I don’t expect to fall short of our goals in any of those areas, but the real high priority area one is for the year is strong execution on the projects that we have going on. We got a lot of expansions projects going on and each of the division and that something very important to us. We believe we are on top. We believe that we are pretty good in doing that, but that is a high priority.

The second thing is just managing the dynamic of pricing versus raw materials, we would please with how the years started in that regard, but it certainly we have talked a lot in the past about the pricing dynamics in each of the businesses and how long it takes to recover price movements in raw materials and competitive and contrasted the Technical Specialties with Advanced Interlayers and how the dynamic works there.

We were in the process of going through the annual pricing on Advanced Interlayers and we have been pleased with what we have seen so far and believe that we will be able to meet our goals in that regard. All of that is very good, but those are two very important priorities for us and once that we watch and then obviously on the cost side is maintaining our manufacturing efficiency as utilization rates strengthen, continue to run very efficient world-class facilities and frankly watching our performance on safety and environmental compliance. Those are great indicators of the how well are manufacturing units are being run and being managed. Those are probably three areas that are high priority areas for us this year that we will be watching to make sure that we don’t slip in anyway.

Jeff Quinn

In conclusion I just want to say again thank you very much for your continued interest in Solutia and now thank you for your continued confidence in us. We are pleased with the progress that we have made here, but we are absolutely focused and grounded on continuing that. We take very seriously hopefully the credibility that were built in terms of being the organization that does what it says that we will do and we don’t want to have that credibility eroded in any way so we are very focused on making 2011 another outstanding year for the company. Thanks very much. Have a good day.

Operator

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

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