Solutia,'s CEO Discusses Q1 2011 Results - Earnings Call, May 03, 2011 Transcript

| About: Solutia Inc. (SOA)

Solutia, (NYSE:SOA)

Q1 2011 Earnings Call, May 03, 2011

May 03, 2011 10:00 am ET


James M. Sullivan - Chief Financial Officer, Executive Vice President and Treasurer

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

James R. Voss - Former Chief Operating Officer and Executive Vice President

Susannah Livingston - Director of IR


Bill Hoffman - RBC Capital Markets, LLC, Research Division

James Sheehan - Deutsche Bank AG, Research Division

Lucy Watson - Jefferies & Co.

Christopher W. Butler - Sidoti & Company, LLC

Andrew Dunn - KeyBanc Capital Markets Inc., Research Division

Unknown Analyst -


Welcome to the Q1 2011 Solutia Inc. Earnings Conference Call. My name is Monica, and I'll be your operator for today's call. [Operator Instructions] Please note that this conference is being recorded. I will now turn the call over to Susannah Livingston. Ms. Livingston, you may begin.

Susannah Livingston

Thank you, Monica, and good morning. We are pleased you have taken the time to join Solutia's first quarter conference call. Jeff Quinn, Solutia's Chairman, President and Chief Executive Officer; and James Voss, Executive Vice President and Chief Operating 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, Also, we'll be using presentation materials today that are posted on the website along with the earnings release announcing first quarter results.

Finally, Solutia's Form 10-Q will be filed within the next few days.

If you would please turn to Slide 2. During this call, management may make forward-looking statements. These statements are based on management's current expectations and are subject to change. Our actual results may differ materially. Please read our commentary on forward-looking statements at the end of our press release or the statements in our quarterly and annual SEC filings.

Our prepared remarks today include reference to non-GAAP financials in our discussions of earnings. For reconciliations of our non-GAAP measures 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.

Jeffry N. Quinn

Thanks, Susannah, and thanks to all of you for joining us this morning for the quarterly call. I am pleased to share with you another strong quarter for Solutia. I'm going to begin by discussing some of the highlights for the quarter, and I'll turn it over to Jim Voss, our Chief Operating Officer, who will discuss the current raw material environment and some of the status of our end markets. And then Jim Sullivan, our Chief Financial Officer, will provide a more detailed review of the numbers for the quarter and share our positive expectations for the remainder of 2011. After which, we'll make sure today that we open -- have some time for your questions.

Starting over on Slide 4. We are pleased with the quarter and believe we are set up well to deliver the strong performance that we promised back in November at our Investor Day. Certainly, this first quarter played out a bit differently than we have premised way back in November. But while the drivers maybe a bit different, we are very much on track. And I believe that's really the beauty of what we built here at Solutia, a portfolio that's resilient and can deliver strong financial results in a variety of circumstances. Certainly again in the quarter, the economic uncertainties around the globe have remained with us. The geopolitical instability and instability in the Middle East, the natural disasters in Japan. But again we remain focused and have delivered value to our customers and created value for our shareholders.

The strong momentum within the high-growth end markets and emerging economies served by Solutia have proven positive for both revenue and adjusted EBITDA, both up from the fourth quarter and year-over-year, with margins expanded to nearly 27%.

In fact, this quarter, our adjusted EBITDA and EPS were records for Solutia since our emergence from bankruptcy back in 2008. During the quarter, since we completed the promised reshaping of the other rubber chemical businesses by selling our DTC and Santoweb and Vocol businesses, these businesses combined would have accounted for about $40 million of revenue, last year with EBITDA about $7 million and EPS of about a nickel per share.

What remains left in the Other Rubber Chemicals businesses is only about $15 million in revenue. So essentially we are done with the promised reshaping of that portion of our portfolio. In the quarter, we expanded our manufacturing presence for our Flexvue products with the announced purchase of conductive film manufacturing assets in Taiwan, which will result in the increased capacity for Flexvue film components used in touch screens, e-Readers and solar applications in the high-growth market of Asia.

As you have probably noted from our earnings release last night, Performance Films had a stellar quarter. And a tremendous amount of their growth is coming from the Asia Pacific region. Also, during the first quarter, we generated $32 million in free cash flow, and we ended the quarter with $452 million of global liquidity. We continue to improve our capital structure by paying down $77 million of debt by refinancing our term loan which reduced our interests cost and has -- and created increased strategic flexibility. Collectively, these actions we took during the quarter have enhanced our ability to capture continued top and bottom line growth for the remainder of 2011, in line with our updated guidance that Jim Sullivan will discuss in a few minutes.

Now moving over to Slide 5. As seen on this slide, net sales were $509 million for the quarter, a 14% improvement over 2010 and 4% improvement over the fourth quarter. Adjusted EBITDA was $135 million, again, which was a record quarter for us, a 9% improvement over 2010 and a 16% improvement over the fourth quarter, with adjusted EBITDA margin expanding to 27%. We recorded $0.50 in adjusted EPS at 43% improvement over the first quarter. No doubt, we encountered some headwinds in the first quarter, most specifically the challenging raw material environment. The first quarter was impacted by higher raw material costs of $32 million compared to our first quarter of last year. Jim Voss will elaborate on the current raw material outlook for the remainder of the year. And Jim Sullivan will talk about a bit of the cost price that we have recovered through pricing as he goes through the bridges.

As for other headwinds, we received many questions from investors concerning the impact of the natural disasters in Japan. As many of you know, we have one site in Japan, which manufactures Crystex, our Kashima location. Fortunately, we had no injuries to our employees and their families and our site was not physically impacted by the earthquake and the following tsunami. The plant had been scheduled to begin a maintenance turnaround at the time of the earthquake and, therefore, had built sufficient inventory to cover this downtime.

Overall, we would expect these events to have a bit of impact on our results in 2011, but not material in any way. Some of the potential impacts will be incremental freight costs, higher input costs, in addition to some potential minor lost sales.

In addition, just this past week, our Anniston, Alabama site was hit by severe weather associated with all the storms and tornadoes in the Southeast. Again, all of our employees are safe, and the plant is safely idled at this point. Fortunately, this plant was also scheduled for a shut down in the next few weeks. So with power now having been restored to the plant we are moving forward with a shut down a bit early and don't anticipate a material impact to the businesses that we do out of the Anniston plant.

I feel really good about this past quarter. It is clear that our discipline in sustaining our low cost basis, coupled with our strong demand in emerging markets and our leading market positions, can produce solid economic results, solid financial results despite the raw material price inflation that we experienced and continuing global economic uncertainty.

To me, this is a confirmation that what we have created is a less volatile sustainable profile that will continue to deliver growth and strong financial performance as we move forward.

As we move over to Slide 6, you will note our revenue by geography. So I think the most notable thing here is that for the quarter, the Asia-Pacific region represented 30% of our total net sales for the first quarter, which is I think the highest percentage ever. The number in the tables by business segment reflected the quarterly year-over-year growth we have seen by world region. Again, Asia-Pacific remained the high-growth world area for us, with revenue growing at 30% rate over the same period last year.

Advanced Interlayers sales were strong across all regions this quarter, especially in automotive. Europe, of course, is positively impacted by the addition of the VistaSolar business that's showing strength in automotive as well. Performance Films also experienced strong demand in the Asia-Pacific region. Automotive demand across all regions was positive and the continued strong growth in our Flexvue products, which had almost 70% improvement in the Asia-Pacific region, fueled additional growth.

Technical Specialties growth remained strong around the world as tire demand has remained encouraging, most notably in Asia. Europe demand for the commercial tire market is also strong as it continues to recover from the economic slowdown in 2009, but was offset with a reduction in revenue from other rubber chemicals businesses that we exited.

Now with that, I'd like to turn the call over to Jim Voss, our Chief Operating Officer.

James R. Voss

Thank you, Jeff, and good morning. As Jeff mentioned, I will -- I'm going to start off this morning talking about raw materials here on Slide #8. Political unrest in the Middle East and North Africa, a strengthening demand environment and short-term supply issues have combined to result in the continuing surge in raw material prices globally. Our top 10 raw materials are shown here in the slide.

You can trace these materials back in their respective change to either crude oil or natural gas. So as you can imagine, we are feeling the impact. Back in November, when we presented our 2011 guidance at our Investor Day, we had believed our raw material and input costs would increase by approximately 7% over 2010.

As we sit here today, and as Jeff previously stated, we would now expect these input costs to be up around 10% to 12% on a constant volume basis. As a reminder, our raw material costs are approximately 50% of our cost of goods sold.

We are experiencing the largest run-up in price on a percentage basis to be on our EVA resin, elemental sulfur, process oil and butyraldehyde, all up 15% to 20% this year over 2010. We expect raw material prices to continue to rise in the second quarter though at a slower rate.

So what are we doing to mitigate this? As we have always stated and as it is the case today, now, our products are priced base on the value we deliver to our customers. The continuing pressure from these higher raw material and energy costs has, as you would expect, led us to implement a series of pricing actions.

In Technical Specialties, we implemented pricing actions in the first quarter. Further increases took place on April 1 across many products in the segment. We are confident we can achieve these pricing actions necessary to offset the majority of the raw material push.

As we stated in our fourth quarter call, we have implemented price increases for Saflex products during the annual contracting season. These increases amounted to low- to mid-single digits and are largely in place by the second quarter. Not all of these increases were fully reflected in the first quarter results.

At this point, we are just north of 90% complete with our contract negotiations and the remaining being implemented throughout the year.

As well as taking pricing actions that were necessary, we continue to look for other opportunities to mitigate the impact of the raw material cost increase. These include further optimization of our product mix, higher volumes, as well as yield and other cost containment actions, and finally, while we remain focused on sustaining and improving our cost position across the entire company.

Moving on to Slide #9. Let's take a closer look at our end markets. Our electronics market has continued on its growth path by improving 56% during this quarter over last year and increasing to 3% of our total revenue, driven mainly by electronic displays. The e-Reader market is forecasted to grow in excess of 45% in 2011. And the industry is expecting over 30% growth for touch screen sales this year as well.

The architectural market represents 12% of our revenue. The construction market remains slow, but our recently introduced architectural Saflex acoustic product is gaining traction in the market, with global demand up 75% in 2000 -- over 2010.

We continue to expect growth in the architectural market to be very limited in 2011 on a global basis, with the greatest demand coming from Asia. Global insight is forecasting the global construction market to be up around 2.5%.

Energy solutions is up 9%. Again, this group includes our solar industry products, PVB and EVA, which are used as encapsulants in solar modules and Therminol used in concentrating solar power applications.

Additionally, in our Performance Films division, we have our solar window film for both architectural and automotive applications. As you have probably seen, we recently announced we were awarded a contract to supply Therminol heat transfer fluid into the largest concentrating solar power plant being built in the world, slated to go online in 2013. Now congratulations in order to Greta Senn and her team. This is a long fought deal and an incredible achievement for the business.

As it relates to our encapsulants for solar modules, we believe in the strong growth potential of the solar market over the long run. We do expect volatility in demand, quarter-to-quarter, driven by government policies on Feed-in Tariffs, as well as project timing and solar installations country by country.

As premised, we are seeing modules production rapidly moving to China. And as announced last week, we are now in a position to supply EVA encapsulants from our Suzhou, China facility, the first foreign investment of its type in the country.

Overall, solar buzz is projecting a solar market -- the solar market to grow about 15% this year over 2010. Lastly, in energy solutions, our aftermarket products and Performance Films continue to grow, with the U.S. showing positive growth in architectural window film by 26%, due in part to strong demand of our EnerLogic products.

Again, I have a comment on the great success of the business team. With the addition of Mike Donelley's leadership, the Performance Films results achieved this quarter put the business well on track to meet the aggressive targets we have established for this year and the future.

Moving on, automotive OEM represents 19% of Solutia's revenue and has started the year off as expected. This end market has grown by 7% for Solutia.

J.D. Power's forecast of global builds is now right at 78 million units in 2011, with increases in China and India, partially offsetting the decline in Japan. We are forecasting an increase in automotive builds 5% over last year.

I would be remiss not to specifically mention the forecasted effects of the devastating earthquake in Japan. Before I go on, I'd like to recognize, as Jeff had acknowledged, our Solutia colleagues in Japan. As you know, we have a Crystex plant in Kashima and a small office in Tokyo. I'm pleased to report, as Jeff did, that the plant and all the people in Japan are doing very well. And I might add my deepest admiration and respect to Tatakasi San [ph] and his team at the Crystex plant for which can only be described as nothing short of heroic in very difficult times.

Okay, back to J.D. Power's. They are currently forecasting a loss of approximately 900,000 units in Japan, or an 11% reduction year-over-year. They currently do not believe the full year OEM production outside of Japan will be impacted, but instead believe approximately 1 million units will be pushed from the second quarter into the second half of the year.

Currently, we have seen only a minor impact to our demand from the disaster in Japan, though this is an area we closely watch.

Our replacement market includes replacement automotive glass, architectural glass, aftermarket film applications, tire and rubber market comprised 35% of our revenue. A key indicator for many of these businesses is U.S. miles driven, which has been increasing now each of the past 12 months.

Growth in our -- excuse me, in replacement tire and rubber sales appears low. However, this was impacted by the sale of the other rubber chemicals businesses over the past year. Exclusive of the sales of these end markets, these end markets would be up by 9%.

Finally for me on Slide #10, working capital continues to be an area of focus for us as we build on the success achieved in 2010. We improved our quarter end receivables by approximately 1 day compared to year end, and by more than 8 days compared to first quarter in 2010, as we continue to focus on securing timely payments from our customers and improving payment terms where possible.

Our inventory days on hand increased by 7 days over December. This was mainly attributed to the businesses deliberately rebuilding some inventory supply, the increased volume heading into our historically highest quarter. Overall, our working capital as a percentage of sales ended the quarter at 18%. This compared to 21% in the first quarter of 2010.

Going forward, we will continue the focus and discipline in this area. I can assure you that this lower percentage of sales rate seen this quarter is sustainable.

In summary, our market growth remained strong and despite cost pressures on raw materials, we are successfully mitigating this impact. We continue to focus on areas within our control including working capital to optimize our cash generation. Overall, another strong quarter for the business with outstanding strategic and operational execution by the team. Now, I'll like to turn the call over to Jim Sullivan, our CFO.

James M. Sullivan

Thanks, Jim, and good morning to everyone. Let's move to Slide 12 for a quick recap of the $5 million net gain excluded in our calculation of adjusted EBITDA for the quarter.

During the quarter, we recognized gains totaling $17 million on the sale of Other Rubber Chemicals businesses, which were partially offset by charges, mostly non-cash in nature, related to the relocation of the company's European regional office to Zaventem, Belgium. As we have exited nine core positions in Europe over the past couple of years, the space occupied at our Louvain-la-Neuve, Belgium was no longer a good fit.

The new facility in Zaventem is centrally located near the Brussels Airport and will reduce the company's facility operating cost in the region going forward.

Turning to Slide 13. In the first quarter, we continue to see good top line growth with net sales up $61 million, or 14%, versus the year-ago period. Volumes were up 9% with improvements achieved across all segments.

The VistaSolar and Novomatrix acquisitions accounted for 7% of the year-over-year sales increase, with the rubber chemical and plastic product divestitures decreasing revenue by 4%.

Average selling prices were up 2% and currency movements were on par with last year. Compared to the fourth quarter of 2010, sales in the first quarter were up $20 million, or 4%, as higher volumes, which were partially seasonal, and average selling prices more than offset 3% sequential decline in revenue from the divested businesses.

Moving to Slide 14. Adjusted EBITDA for the first quarter of 2011 totaled $135 million, up $11 million, or 9%, versus the year-ago period, and $19 million, or 16%, versus the fourth quarter. For both the year-over-year and sequential comparisons, increased sales volumes, improved product mix, higher average selling prices and lower manufacturing and SG&A costs, more than offset the increasing raw materials and the loss of earnings from the divestitures.

Slide 15 bridges the company's year-over-year and sequential quarterly movements in earnings per share. EPS in the first quarter of 2011 totaled $0.50, an improvement of $0.15 compared to 2010, driven by higher adjusted EBITDA, lower interest expense and a lower tax rate, partially offset by an increased depreciation and amortization expense from the acquisitions and a modest dilutive impact from the divestitures.

The lower interest expense in 2011 was driven by the elimination of mark-to-market changes, on the interest rate hedges and lower average interest rates in the quarter.

Compared to the fourth quarter, EPS was up $0.14, primarily due to seasonally higher adjusted EBITDA with lower interest expense offsetting a modestly higher tax rate. As you may recall, our effective tax rate in the fourth quarter of 2010 was lower than normal, due to gains from the reversal of certain FIN 48 tax reserves. The effective tax rate in the first quarter was approximately 15%, and this is the rate we currently expect for the full year.

Now let's turn to our reporting segments, starting on Slide 16 with Advanced Interlayers. First quarter sales for this business totaled $213 million, up 15% year-over-year. Higher revenues from volume improvements added 7%, and the VistaSolar acquisition added 8%. Average selling prices, which were up 1%, offset the impact from currency translation.

In the quarter, automotive OEM and replacement revenue was up 9% from a combination of higher selling prices and growing demand. Volumes were up 7% and were stronger in all major geographies, with the highest growth in Europe and the U.S.

Architectural volumes, which have been sluggish the past few years, were also up in the quarter, about 2% year-over-year. As Jim Voss mentioned, the revenue gains in automotive and architectural were partly driven by a continued favorable mix trend towards our premium products, in particular acoustic.

Solar encapsulant volumes were up in the first quarter versus a year-ago period, with the addition of the VistaSolar EVA product line and higher Saflex solar sales. And finally, our proprietary resonant and intermediate chemical sales in this segment continued to grow steadily, in line with demand and global industrial end markets.

Advanced Interlayers adjusted EBITDA for the first quarter totaled $49 million, which was up $1 million or 2% year-over-year. The earnings improvement from increased volumes, the addition of VistaSolar sales and higher average selling prices more than offset the raw material cost push.

Sequentially, sales for Advanced Interlayers were down $9 million, or 4%, and this was primarily due to lower solar encapsulant demand in Europe. Adjusted EBITDA was down $1 million sequentially with lower sales and higher raw materials more than offsetting the manufacturing and SG&A cost improvements and higher average selling prices.

Looking ahead, we expect automotive sales volumes in Advanced Interlayers to remain strong, with growth in subsequent quarters versus the first quarter, due to seasonality, product mix improvement and escalating demand. We continue to project modest growth in architectural volumes for the remainder of 2011 and also expect increased penetration of our premium products in this market.

Solar volumes are expected to increase in comparison to the first quarter, as certain key European countries clarify their Feed-in Tariff policies for 2011 and a material from our new China facility is qualified and sold into the market.

We expect adjusted EBITDA margins for the remainder of the year to approximate first quarter actual results, with the projected revenue increase more than offsetting raw material cost inflation.

Performance Films results are summarized on Slide 17. Net sales for the first quarter totaled $76 million, up $24 million or an outstanding 46% compared to the first quarter of 2010. The addition of the premium V-Kool and Huper Optik brands from the Novomatrix acquisition accounted for 29% of the year-over-year increase.

Excluding Novomatrix, aftermarket automotive window film sales in the quarter were up a solid 12% versus 2010, with the majority of this growth coming from Asia. Aftermarket architectural window film sales were up about 7% in the quarter versus 2010. This growth was mainly North America due to strong demand for our new EnerLogic product and success from execution of our strategy to expand sales channels at large retail outlets.

Precision coating sales were once again very strong in the quarter, up 21% versus 2010, in large part driven by a 54% increase in our Flexvue product line, which includes high-end technical films sold into electronics and medical applications. These products continue to grow rapidly driven by the strong increase in global consumer demand.

The manufacturing capability in Taiwan announced late in the first quarter is located in the right world area strategically, with Asia representing nearly 50% of total Flexvue revenue currently and with further growth expected.

Performance Films' first quarter adjusted EBITDA totaled $19 million, up $9 million, or 90%, versus the first quarter of 2010. This strong earnings increase was driven by higher sales volumes and improved mix, as well as the earnings from the Novomatrix premium brands business.

Higher SG&A costs were more than offset by a modest raw material price decline. Sequentially, Performance Films' sales in the first quarter were up $22 million with adjusted EBITDA up $13 million. Again, primarily due to higher sales volumes, some of which were seasonal in nature.

First quarter results for the Performance Films segment were very impressive. Looking ahead, we expect continued strong sales growth from this segment through the remainder of 2011, with adjusted EBITDA margins a bit lower than the 25% level achieved in the first quarter, due to modestly higher raw material cost, targeted sales and marketing program-related spending and the normal seasonal sales in production slowdown in the latter part of the year.

Overall, for 2011, we expect the adjusted EBITDA margin for this segment to improve to the low-20% range versus the 19% level achieved in 2010.

Turning to Slide 18. Technical Specialties net sales for the first quarter totaled $220 million, up $14 million or 7% compared to the first quarter of 2010. Volumes were up 11%, average selling prices were up 2%, with the divested Other Rubber Chemical businesses reducing sales by 6%.

Crystex volumes remained very strong in the quarter, up about 10% year-over-year, generally driven by strong demand in the global tire market, in particular, truck and bus.

Santoflex volumes were slightly positive and in line with rubber consumption growth rates experienced in the Western markets. Therminol heat transfer fluids were also up significantly year-over-year in the first quarter, in particular in the U.S. and Asia.

Technical Specialties' adjusted EBITDA for the first quarter of 2010 totaled $81 million, down $2 million versus the prior year. This decrease was driven by the reduction in adjusted EBITDA coming from the divested businesses. Strong revenue growth and lower manufacturing costs more than offset the raw material cost push in the quarter.

Sequentially, Technical Specialties sales were up about 3%, and adjusted EBITDA was up $6 million or 8%. This improvement was driven by higher volumes across all key product lines with increased selling prices and lower manufacturing costs more than offsetting higher raw material costs.

Overall, another solid quarter for Technical Specialties. Looking ahead, volumes in this segment are expected to remain strong, driven by growth in the global tire market, as well as in the case of Therminol, growth in general industrial activity and concentrating solar power installations.

As Jim stated earlier, we have implemented further selling price increases effective April 1 in this segment, which we believe will effectively combat raw material cost inflation going forward, and keep adjusted EBITDA margins for the segment on par with first quarter results.

Moving on to Slide 19. Here, we highlight results for unallocated and other reporting segment. Total net expense in the quarter was $14 million, down $3 million versus the first quarter of 2010, and this decrease was mainly due to reduced expense related to the company's annual incentive compensation program.

Slide 20 details the company's operating and investing cash flows. Cash from operations in the first quarter totaled $49 million, an increase of $45 million versus the first quarter of 2010. Cash generated from higher adjusted EBITDA, lower contributions to our frozen U.S. pension plan and lower working capital usage versus a year-ago period more than offset higher cash interest and taxes and payments made in the quarter related to our 2010 annual incentive compensation program.

Capital spending in the first quarter totaled $17 million, up $12 million versus the year-ago period. This increase was predominantly associated with the high returning growth expenditures that will expand capacity and extend premium product capabilities at our facilities in Suzhou, China and Ghent, Belgium.

Turning to discontinued operations. Cash flow for the first quarter was a positive $3 million, as we successfully monetized working capital in the Primaries business, which more than offset shutdown-related spending.

Moving on to Slide 21. Here, we summarized the debt and liquidity profile for the company. We ended the quarter with growth stat of $1,387,000,000 which is down $77 million versus the fourth quarter. As Jeff mentioned earlier, we refinanced our term loan in March. At the end of the quarter, we had an outstanding balance of $691 million on this facility. The initial pricing for the loan is 3.5%, which is comprised of a LIBOR floor of 0.75% and a credit spread of 2.75%. This is 100 basis points savings compared to the pricing on our previous term loan. The credit spread will decrease another 25 basis points when our net debt to EBITDA is below 2x, our current net leverage is 2.3x.

In addition, we modified other key terms in our credit agreement including moving from two financial covenants to a secured leverage covenant only. In terms of liquidity, the company ended the quarter with a very strong position of $452 million. The company's gross debt to trailing 12-month adjusted EBITDA as of the end of the first quarter was 2.7x, which was down 0.2x from year end and is tracking as expected against our target of approximately 2x.

Now let's move to our 2011 outlook on Slide 22. The far right column on this slide lays out our current guidance with the middle column detailing our previous guidance, which was initially communicated at our Investor Day in November 2010.

You will note, we have adjusted our previous guidance for the Other Rubber Chemicals divestitures that were closed in the first quarter of 2011, as these transactions were not contemplated in our initial 2011 guidance.

As discussed at the Investor Day, we expected to see solid top line and bottom line growth in 2011 compared to 2010 to steadily improving global demand environment, continued strong operating leverage and improved capital structure and an advantage tax position.

As you can see from this quarter's results, we are seeing good volume growth, with current quarter and recently implemented selling price increases higher than we originally expected, largely to mitigate the earnings impact from raw material headwinds. In addition, our new guidance assumes the euro is about 5% stronger versus the U.S. dollar than our original premise of 1.36 for the remainder of the year. This would add about $20 million of revenue translation benefit on a full year basis.

Therefore, despite a $40 million reduction in sales from the disposition of the Other Rubber Chemicals businesses in the quarter, we are increasing our sales guidance to a range of $2.125 billion to $2.2 billion, which is a 9% to 13% increase versus 2010.

Full year adjusted EBITDA is also impacted by the loss of earnings from the divested businesses, as well as the significantly higher raw material cost profile than originally contemplated. While our annual contracts in the Advanced Interlayers segment hinder our ability to get full selling price recovery in our end markets in 2011, we continue to believe with tightening supply-demand conditions and our market leading value-added product and service offering, we will achieve full recovery of raw materials in the fullness of time.

We remain committed to effectively managing raw material headwinds on a consolidated basis, with selective price increases in the portfolio as market conditions allow and with a continued rigorous, across-the-board drive for improvement in our cost structure. These actions in combination with an expected steadily growing demand environment and improved product sales mix, give us the confidence to increase the bottom end of our previous full year EBITDA guidance.

In addition, we are increasing adjusted EPS to a range of $2.10 to $2.25 to account for the updated EBITDA outlook, reduced interest expense from the March refinancing and a modestly lower effective tax rate of about 15%.

The new EPS range represents a very robust 34% to 43% increase over 2010 actual results. Our full year cash from continuing operations less capital expenditures is expected to be in the range of $150 million to $200 million. And our capital expenditures outlook remains at $125 million. With that, I'll turn it back to Jeff for closing remarks. Jeff?

Jeffry N. Quinn

Thanks, Jim. I think the quarter was a really good start to the year. And of course, you always wish that everything will click at the same time and suddenly with the choppiness we saw in solar during the quarter and the headwinds on raw materials, that didn't happen. But what we do see is very, very good with improvement in performance and Performance Films, the strength in our core PVB business, the really strong demand profile in Crystex, the geographic market opportunities we see and the robustness with which we kicked off the expansion projects in the region, both in Advanced Interlayers and in Crystex. A lot of good things are going on, and we really feel that we're on track to deliver that strong performance that we set out at our Investor Day. Now, we didn't pull any punches back in November. We told you what we thought we could do in the short term and we have laid out -- we think a compelling vision for long-term value creation. And certainly, we're not backing away in any way from those very robust goals and targets and, in fact, feel very good about what we've seen as we started the year.

If you look over on Slide 24, now this is a restatement of what our near-term focus areas are. And I want to read these to you. Most of you guys have seen these before. They haven't changed. We are steadfast in our commitment in our focus on these areas and believe that it's really compelling and a significant and compelling pathway to creating value for our shareholders. We're committed to these goals, and we look forward to building on the first quarter to deliver on those.

So with that, we would like to open it up for questions. We tried hard today to provide a little more time for Q&A. And so, operator, I'll turn it back to you and open it up for questions, please.

Question-and-Answer Session



[Operator Instructions] Our first question comes from Edlain Rodriguez. [Gleacher & Company].

Edlain S. Rodriguez

Quick question on Saflex and in terms of raw materials. I mean, to have annual contracts in the face of rapidly rising cost, that's never a great strategy. But have you ever considered going to quarterly or semiannual contracts or maybe imposing a surcharge, I mean, not being able to do that, is it push back from your customer that's preventing that or something else?

James M. Sullivan

Yes. Certainly, part of that is the historic pricing practices in that business. If you went back over the last, the medium term, certainly the trend has been towards more periodic pricing opportunities. But certainly still the annual pricing mechanism is certainly still the prevailing factor from the most predominant practice in the sector and that's what our customers expect and what they're used to and what most of our competition or -- I mean, most of the sector does it as a whole. Certainly, in times of some raw material movement, I know that can work both ways and in times like now, where you have a little raw material push, you kind of wish you weren't committed but certainly, we continue though to believe that over the fullness of time, our products in Saflex are priced on the value they deliver to our customers. And although currently, we look at the raw material versus pricing spread and that's something we work hard to manage over the fullness of time that we are still very much focused on pricing for the value delivered to our customers.

Edlain S. Rodriguez

Okay, that makes sense. Thank you.


The next question comes from Frank Mitsch of BB&T Capital Markets.

Frank J. Mitsch

On the raw side, you mentioned that raw's were up $32 million year-over-year and $12 million sequentially from the fourth quarter. What are your expectations for the second quarter?

James M. Sullivan

I think that we see, Frank, that we see some continuing rise year-over-year but not nearly at the magnitude that we've seen in the first quarter. And then, as we get into the remainder of the year, a more of a flattening out from that second quarter high, if you will. But at the same time, as you know that so the other actions that we take to mitigate that, they sort of take a while to kind of catch hold and we'll see those actions coming through for the year with pricing and the other things that we always try to do. So I think if you look at the full year, certainly we'll see more -- absolute dollar basis more year-over-year push by the end of the year but, hopefully, making significant progress to recover a lot of that.

Frank J. Mitsch

So I assume, would you -- so you think that with the high watermark in terms of the year-over-year is a 2Q event or was it 1Q in terms of how much headwind that you're facing?

James M. Sullivan

Frank, it would be 1Q. We would expect the year-over-year impact on raw materials to be less in the second quarter than it was in the first quarter.

Frank J. Mitsch

All right. Now, I think you also indicated that you hadn't gotten all of the annual pricing on Saflex in Q1. So you're still set to get some of that in the second quarter. And then as I think about that, you also indicated that 2Q is going to sit there. There will be some -- I believe you said there will be some builds pushed from 2Q into the second half. So would you anticipate then in the second half you'd not only would you have all of the pricing in but you'd also have better volumes that we should probably see some better sort of comps start coming in the second half of the year in the Saflex business there?

Jeffry N. Quinn

That's correct, Frank.

Frank J. Mitsch

All right, terrific. And then lastly, congrats on the big win on the solar field. I think you said it was the largest one that's being planned built for Therminol. When can we anticipate seeing the fruits of that labor pay off into your income statements?

James M. Sullivan

Yes. The full impact is not going to be realized until 2013, Frank. So it's a long-term project. There'll be a couple of different phases of delivering under that project, but the full impact will be realized in 2013.

Frank J. Mitsch

And some of that will be in 2012 though?

James M. Sullivan


Jeffry N. Quinn

Yes, as we start to build up a little volume in terms of supply, that large order, yes.


Our next question comes from Laurence Alexander of Jefferies.

Lucy Watson - Jefferies & Co.

This is Lucy Watson on for Laurence today. A question on the -- or two questions on the 2011 outlook. Have you factored in divestiture of the remaining $15 million of sales from Other Rubber Chemicals businesses in your new outlook?

James M. Sullivan

No. Lucy, on that, really the $15 million, they're there but it's like that's a very low maintenance little slug of revenue. We kind of groomed this portfolio to the point that some of the dilutions from doing it offset by the closing costs and the proceeds we brought in, all of that was in the segment of management time and focus and all of those kind of things was a net-net win for us. This all $15 million quite frankly, it's one of those things that we'll just kind of continue along. And if something really opportunistic happened and somebody came to us, we might do something with it. But it's really not a big issue at all for us at this point. It's just a real low maintenance little slug of revenue.

James R. Voss

And the margin on that $15 million is not bad, Lucy, not as a segment average but certainly not what we saw with some of the other disposals.

Lucy Watson - Jefferies & Co.

Okay. And if I look at the new outlook on your EBITDA line compared to your outlook provided on the January Q4 earnings call, it looks like the low-end is about the same but the high-end is approximately $10 million lower? Could you just discuss briefly the bridge between your January EBITDA outlook and the one that you provided today?

James M. Sullivan

I think and certainly we stick to the high level, Lucy. I mean, I think we view adjusted EBITDA at the low-end being higher than what we guided in November. Remember very clearly when we made that guidance in November, we excluded divestitures, so the impact from the divestiture on EBITDA basis is $7 million. So if you just reduced the prior low-end for that action, you'd be $553 million and we're saying $560 million. At the low -- at the high-end, we were at $600 million and if you reduced that by $7 million, it'd be $593 million. We're at $590 million. We're not that good to be able to predict the full year at $3 million. Clearly, on an upside basis to a range we're battling not only the raw material headwind but what Jeff talked about with respect to Kashima in Japan and some of the expenses, freight expenses and other types of cost items for the full year will impact our earnings and we're absorbing that effectively and keeping the range kind of intact. And of course, as we move forward, with one quarter behind us, the full spread, if you will, of the range is coming in.


Our next question comes from Christopher Butler of Sidoti & Company.

Christopher W. Butler - Sidoti & Company, LLC

With all of the talk of raw materials and increasing pricing, do you have any sense that the customers are buying ahead of that at all? Did we see any pre-buying here in the quarter?

Jeffry N. Quinn

I don't think so. I don't think across the portfolio, I don't think that we detected any pre-buying patterns.

Christopher W. Butler - Sidoti & Company, LLC

And looking at your solar outlook, you had mentioned the forecast of 15% growth year-over-year this year, you sound pretty optimistic. I know that the reports that have been coming in from other companies have been kind of hit or miss. What about it has you optimistic as you look at the near-term versus a longer-term forecast?

Jeffry N. Quinn

Well, I think clearly, Chris, I mean there's a continue to be a lot of choppiness there and the first quarter was a great example of what we're going to see from time to time. It's going to -- it's not going to be always be smooth. And we believe with the product offering we have in VistaSolar with the quality progress that's been made, the cost containment that we're doing sort of really getting our hands around that business completely that there's really good things going to happen there. But obviously, the biggest thing is bringing on the capacity in China and what we believe will be the receptiveness of the market as we bring in that -- that income for production capability and certainly we believe that the back half of the year will have success in placing that new production in China.

Christopher W. Butler - Sidoti & Company, LLC

And finally, how should we think of the tax rate for the remainder of the year?

Jeffry N. Quinn

Chris, so the tax rate for the full year should be right around that 15% level.


Our next question comes from Andrew Dunn of KeyBanc Capital.

Andrew Dunn - KeyBanc Capital Markets Inc., Research Division

I got to start by apologizing. I think I missed the first question. If you already answered this, again, I apologize. But in terms of that 90% of the negotiated contracts in Advanced Interlayers, when you pushed negotiated pricing on those, were you assuming that kind of 7% to 8% on raw material inflation or the kind of revised 10% to 12% inflation that you just talked about today?

Jeffry N. Quinn

Yes. Clearly, Andrew, when we begun that negotiating process back in the late fall, it was more in line with what our premises where for raw materials that we laid out back in November at our Investor Day, which is more like at 7% type range. And obviously, it's moved on us a bit more as Jim said, kind of, in that 10% to 12% type range overall. Certainly, the specific difference is business by business. So it started to say that the raw material environment, there's a bit more of a headwind than we contemplated when we set pricing thus a little bit of the lag and being able to pick up and having a little bit of a negative spread on raw materials versus pricing in.

Andrew Dunn - KeyBanc Capital Markets Inc., Research Division

And then just looking to Advanced Interlayers again, kind of look in your comments on focusing on more premium products there. If we could take raw material inflation out of the equation for just a second, which more focused on those raw material on those premium products, we should kind of sequentially start to see margins getting better there, right? Is that a good way to think about it?

James M. Sullivan

Yes. If you set aside raw materials, certainly, that would be true. I think what we said just to be clear, Andrew, in terms of the outlook for the year, we would expect our margins for the remainder of the year to be on par with the 23% that was achieved in the first quarter. There's going to be changes sequentially in selling price. Hopefully, we'll get more selling price in the second quarter, maybe a little bit of increase in raw materials and this mix improvement that you talked about. But overall, we expect the margins kind of hang in there at the level they were in the first quarter for the remainder of the year.

Andrew Dunn - KeyBanc Capital Markets Inc., Research Division

Okay, great. And if I could just sneak one more question in there. Looking forward again to that big Arizona solar project on the Therminol side, when those sales really do start hit in 2013, can you give us any way to think about kind of what percentage of your production or of your total sales of a product that particular contract might start to take up, any kind of magnitude guidance there?

James M. Sullivan

Not really. I mean, clearly, what we're talking about here is a big project. But keep in mind that year in and year out in this business, there are always big fills. So this happens to be a big fill that we're very proud of. It's going into the U.S., so I don't know that we would say that the fills overall in 2013 are going to be dramatically higher than it were over the last few years. And I think we're just very proud of the accomplishments the team brought home here.


Next question comes from James Sheehan.

James Sheehan - Deutsche Bank AG, Research Division

This is James Sheehan from Deutsche Bank. Just a question for you on your exposure to auto supply chain issues from the Japan earthquake. I'm just talking indirect effects here. What is your exposure to Japan OEMs versus non-Japan OEMs and so how should we think about or how would you quantify the impacts on a quarter-by-quarter basis for the rest of the year?

James M. Sullivan

Yes, I think it's fair to say that we have a global market share that's in that 40% area and that the share position in Japan is lower than that. So while we will be impacted, it's not going to be as big of an impact as it might be for some of the other participants in the market. I think Jim Voss had talked about in his comments that, overall, we see a risk of about $1 million builds associated with that and the pushing, if you will, to the back half of the year. But keep in mind, I mean, I think it's important that only 19% of our revenue comes from the OEM market. We have a strong position in the replacement market. So we're not going to be immune to significant changes that occur at the OEM level, but we do have a very diverse product mix and as well very good mix from a geography perspective. And we have a very strong position in China, where a lot of growth is occurring.

Jeffry N. Quinn

I think our history shows that our replacement market shows -- surge as a bit of a natural hedge against the OEM market and if the OEM market slows in a specific geographic region, a replacement firms up the overall demand for tires. So that's something that we think we'll see again as the OEM impact in Japan kind of place itself out.

James Sheehan - Deutsche Bank AG, Research Division

Okay. Just shifting over to the encapsulant market. Could you give us some color on pricing in that market? Are you starting to see any competitive pricing pressure in EVA in particular?

Jeffry N. Quinn

I think the answer is certainly. That is a very competitive marketplace. I think the pricing is a bit down compared to what we have premised going into the year. We tried to lead a bit of a price increase or price firming in the fourth quarter and didn't get a lot of support there. So, yes, there is pricing pressure, no doubt. I think pricing pressure is always exasperated by a little bit demand -- temporarily demand weakness obviously. So we're very confident from the fact that for the long-term, we will have to deliver a competitive product and as I've said many times, I think our real focus is to be able to win in China and win at good parity. And certainly by doing that, we plan to do that by producing a low-cost Asian-based products of delivering a quality Western kind of great product, and we believe that our Suzhou facility will allow us to do that.

James Sheehan - Deutsche Bank AG, Research Division

Okay. And then on the PVB side, how much pricing have you been able to get there and what's your outlook for Q2 on PVB pricing?

James M. Sullivan

Yes, I would say you saw 1% year-over-year in the first quarter and now if you were to look at just Saflex, it might have been a little bit higher than that. We talked about the full impact of our pricing actions not being in place yet. Some of that will come in, in the second quarter. I think probably low single digits around that 3% area is a good place.


Our next question comes from Bill Hoffmann of RBC Capital Markets.

Bill Hoffman - RBC Capital Markets, LLC, Research Division

Just a follow-up on the last question about the Chinese market and your production capabilities right there. Can you just update us on where you are, like, how much product is staying in China versus how much is being exported? And then also just regards to the same issue, I think, there's been some announcements of additional capacity for EVA in the Chinese market, and I'm just wondering if you could address further current competitive situation there?

James M. Sullivan

Yes. Bill, I think it's clearly the Chinese module makers are producing modules that are finding their way around the world. So the production that is occurring in China we believe is finding its way largely right now into Europe and other markets. So they are becoming, if you will, the low-cost producers to the industry. Keep in mind that we don't have the capability in place yet in China. We're working on that right now, and we expect to start selling product to the Chinese guys in the third quarter. It's really hard for us to say exactly what percentage of our sales that we sell into the Chinese market end up in China, but I think it's fair to say most ends up in other markets.

Bill Hoffman - RBC Capital Markets, LLC, Research Division

And then just on the Technical Specialties side, you indicated your expectations have been able to sustain these very strong margins that you saw obviously in the first quarter. And I just wonder that's kind of a high-level picture of it. I just want to -- if you can break down a little bit into some of the main components there to help us get a sense on how you move forward in closing this margins?

Jeffry N. Quinn

I mean, I think this the ninth quarter in a row that Tech Specialties has had EBITDA margins in excess of 30% and most of that period of time, they've been in excess of 35%. So I mean, it's not a question -- they have been sustained and will continue to be sustained. And I think the drivers there are the same drivers that they've been forever really. It's strong market leadership. It's the quality of the product. It's the outstanding customer service that we deliver. And it's the reliability of having, especially in Crystex, multiple manufacturing facilities around the world where something like an earthquake and tsunami that impacts one of your plant doesn't cause you to even blink about being able to supply your customers and you continue to be a reliable supplier. And frankly, that's what Crystex has been for decades now and will continue to be. I think those are the things. It's the quality of the product, the cost position and the service.

Bill Hoffman - RBC Capital Markets, LLC, Research Division

That's helpful. And just final question. Just curious with rising gasoline costs, obviously, everywhere on the globe, especially in North America. Wondering if you're seeing any impact on the auto aftermarket films business at this point in time?

Jeffry N. Quinn

Not really. I mean, obviously, with gas prices, we track miles driven and those type of things across because they impact a variety of the businesses. But as of yet, we have not seen gas prices actually impact any negative way and so if you think about it, sustained high gas prices should bode well for most of our products because most of our automotive related products have the energy efficiency kind of component too in terms of providing climate control in the cockpit. So are providing better mileage in terms of quality tires. So we've not seen any real negative impact on the replacement or aftermarket business because of the gasoline prices.


Our last question comes from James Synergy of Citi.[ph]

Unknown Analyst -

Just in terms of your Slide 24 where you list your near-term focus of achieving strong BB credit rating and adjusted EBITDA target of 2x, that's your near-term focus. It seems that's very doable from the cash generated and debt you've paid down. Over the medium-term, we're looking at a point when you look through potentially turn cash to shareholders giving your strong cash flow or will it be more in terms of focus on investment?

Jeffry N. Quinn

No, I think and we don't have that slide in this deck. There is a slide that we've used and it's probably out there still in some of our investor presentations that are still online of weighing out sort of our focus on use of cash. Clearly, getting to that strong BB credit rating, kind of sustaining that is important, funding the internal growth projects of a very robust internal growth projects while maintaining the proper liquidity sort of funding out and getting rid of some of those, kind of, the [indiscernible] or the pension liabilities and the couple of those those type of things cleanup the story is very important. Looking at very selective high-growth or highly synergistic both are type of things that are consistent with our strategic intent, will be a part of the story but, frankly a lot of those will be funded out of operating cash flow and yes, I mean, returning dollars to shareholders through a dividend or through a share buyback or something at some point is definitely something that is on our radar screen and something that falls in that list of priorities.

Unknown Analyst -

Okay, great.

Jeffry N. Quinn

Well in closing, I just want to thank you very much for your continued interest in Solutia and your continued support. As we said, we're pleased with the way the year started. As always, that kind of disconnect between the time you do your planning in the fall for budgets and everything and the first quarter always seems like a long time in between to see how the year really starts to shape up, but we're very pleased with what we. Certainly, there are some challenges. But as this team has done over the last 2 1/2 years, I'm very confident that we will rise to meet those challenges and deliver the performance that you expect. So thanks very much, and have a good day.


Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.

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