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OMNOVA Solutions Inc. (NYSE:OMN)

F1Q08 Earnings Call

April 2, 2008 11:00 am ET

Executives

Kevin McMullen – President and CEO

Michael Hicks – Senior VP and CFO

Analysts

David Begleiter – Deutsche Bank Securities

Robert Felice – Gabelli & Company

Lucy Watson for Laurence Alexander – Jefferies & Company

Daniel Rizzo – Sidoti & Company

Tom Spiro – Spiro Capital Management

Operator

Ladies and gentlemen, thank you for standing and welcome to the OMNOVA First Quarter Earnings Discussion. At this time all participants are in a listen-only mode. Later, there will be an opportunity for your questions; instructions will be given at that time. If you should need assistance during today’s call, please press star then zero. As a reminder, this is conference is being recorded.

I would now like to turn the conference over to Chairman and Chief Executive Officer Kevin McMullen. Please go ahead.

Kevin McMullen

Thank you and good morning. Thanks for joining us for our conference call to discuss First Quarter 2008 Results. Joining me today is Mike Hicks, Senior Vice President and Chief Financial Officer. As always our practice, I’d like to turn it over to Mike to make comments on forward-looking statements.

Michael Hicks

Thanks. During this conference call, OMNOVA representatives may make forward-looking statements as encouraged by the Private Securities Litigation Reform Act of 1995. All statements in this conference call and in subsequent discussions with the Company, other than historical information, are forward-looking statements. These statements represent management’s current judgment on expectations for future operations. A variety of risk factors highlighted in the Company’s 2007 Form 10-K and our most recent earnings release could cause business conditions and the Company’s actual result to differ materially from those expected by the Company or expressed in the Company’s forward-looking statements.

Kevin McMullen

Thanks, Mike. The strong sales momentum OMNOVA Solutions achieved in 2007 continued into the new year as the Company posted record first quarter sales. Revenue in our 2008 First Quarter increased nearly 16% with both business units experiencing solid double-digit growth that included higher volume pricing and consolidation of sales from our former Asian joint ventures. As a result, our operating loss in the quarter, which is seasonally our weakest, was almost cut in half from a year ago.

It was encouraging to see growth above industry trends in many cases even as our two largest markets, paper and carpet, remained weak overall. While our reported results included one month’s consolidation of sales from our Decorative Products joint ventures in Asia, excluding those sales, 10.7% of the growth was organic.

With oil up 68% in 2007 and hitting a record high of $111 per barrel in the new year, an obvious challenge for OMNOVA in the quarter was the significant increase in raw material and transportation costs. These extraordinary cost increases are putting pressure on gross profit margins. While we have implemented price increases across virtually all of our product lines, it has not been enough to offset this unprecedented inflation. As a result, a clear priority for our Company is take actions to increase margins to more acceptable levels.

Effective December 31, 2007, the Company acquired the remaining interest in our joint ventures in China and Thailand, an exciting move which greatly OMNOVA’s global strategy. I mentioned this acquisition during our last earnings conference call in late January and I will provide an update in a few minutes.

Both business segments were affected by the continuing slowdown in residential housing. About 10% of OMNOVA’s sales are directly from new residential housing and uses, primarily chemicals used in carpet backing and laminates for kitchen and bath cabinets. Industry sources report that the carpet market was down approximately 5% in the 2008 first quarter compared to the same period in 2007 and new residential housing construction was down about 20%.

Despite the market weakness, our sales in carpet were up slightly over last year. Unfortunately, the residential housing has been longer and deeper than originally anticipated by our customer’s and industry experts and we know expect weakness into 2009.

The tremendous inflation and weak market conditions have masked some of the many improvements we have made to our cost structure, the pricing actions we have taken, and our strong lineup of exciting new products and services. They have also adversely affected our ability to get the full benefit from the strong volume increases, especially in Paper Chemicals and in Specialty Chemicals which rose by double digits in the first quarter. Likewise, volumes were up in the Decorative Product segment in contract interiors and coated fabrics.

In a moment, I’ll provide greater detail on individual business segment performance and opportunities, but first I’d like to summarize our first quarter financial results as reported in our earnings release sent out last night. OMNOVA Solutions had a net loss of $3 million or a loss of $0.07 per share compared to a net loss of $5.1 million or a loss of $0.12 per share in the first quarter of 2007.

Selling, general, and administrative expenses were $25.1 million, down $300,000 year-over-year. As a percentage of sales, SG&A was 13.2% in this year’s first quarter compared to 15.4% for the same period last year. We remain vigilant in controlling discretionary spending.

First quarter consolidated sales were up $25.8 million from last year or almost 16% to nearly $191 million. Performance Chemical sales increased $13 million or 12%. Sales in Decorative Products increased $13 million as well or 22%. The Decorative Product sales number included $8 million of consolidated sales for February for the Decorative Products Asian operations as results are recorded on a one-month lag. Prior to acquiring full ownership of the Asian operations, OMNOVA did not consolidate these sales. Excluding the Asian consolidation, Decorative Products sales grew nearly 8%.

Consolidated segment operating profit was $2.5 million, down $300,000 from a year ago. Raw material costs were up almost $6 million for the Company, driven by the high price of oil in the U.S. and tight supply, especially for styrene and butadiene; and OMNOVA’s transportation costs also increased by about $1 million.

OMNOVA finished the first quarter with total debt of $196.6 million, up $46.7 million from the fourth quarter of 2007 and almost $31 million higher than the first quarter of 2007. Debit increased due to $32.4 million in purchase price transaction fees and debt assumption related to the acquisition of the Decorative Products Asian operations. Normal seasonal first quarter working capital usage was $14.3 million. Our debt is comprised of $145 million under our term loan B credit facility, $47.4 million drawn against our $80 million 5-year revolving asset-back credit facility and $4.42 million in Asia. Credit availability was in good shape as OMNOVA had $33.2 million unused and available at the end of the first quarter.

You’ll recall that OMNOVA completed a refinancing in the middle of 2007. As a result of the improved terms achieved through the refinancing, the weighted average cost of borrowing as of the end of February was 7.32%, a significant reduction from the average ratio of 11.2% at the end of February last year. Interest expenses declined $1.5 million from the first quarter of 2007 to $3.4 million. If LIBOR rates stay at current levels, our average cost of borrowing will drop further in the third quarter as we have a large LIBOR tranche maturing at the end of the second quarter.

The assets supporting the credit facility continue to be of very good quality. Domestic inventory turns increased to 9.3 times versus 9 times in 2009 and domestic DSO of our receivables portfolio remain steady at 43 days. Our term loan B covenant leverage ratio of net debt to EBITDA at quarter end was 3.9, up from the fourth quarter of 2007 ratio of 2.9. The term loan B covenant excludes our Asian EBITDA until cash dividends are repatriated to the United States. Definitions of EBITDA and net debt are in our first quarter earnings release.

Turning to the business segment results, first in Performance Chemicals, sales were $119 million in the first quarter, an increase of 12% or more than $13 million from a year ago. Unit volume was up 10%. Operating profit was $2.6 million, a decrease from $3.6 million in the first quarter of 2007. The increase in sales was driven by Specialty Chemical sales into the nonwovens and tape markets.

Continued strong performance in Paper Chemicals where our GenCryl Pt latex has been enthusiastically embraced by our customers and very modest year-over-year growth in sales to the carpet industry.

Volume in Specialty Chemicals were double digit due to a new business in nonwoven application such as filtration, construction materials, and personal hygiene, as well as our polymer systems for higher end masking tapes and graphics and oil filled applications. Our advanced tape release coatings and saturants continue to win new business for OMNOVA in the United States in Asia. While some production of masking is moving offshore to Asia, our release coatings are world class and we’ve been able to deliver value added products to this market segment through export channels.

Despite the weak housing market, which is into its 20th-month of decline, our sales to the carpet industry increased modestly in the quarter due to higher volumes and pricing; however, the Company lost future volume of approximately 20 million pounds annualized at the end of the first quarter as a carpet customer closed a plant. Pricing was slightly higher than the fourth quarter of 2007, but margins remained compressed and OMNOVA announced further product price increases for the second quarter. While the slowdown is expected to continue into 2009, we have seen stable volumes per month to the carpet industry since March of 2007 as refurbishment and commercial sales have offset some of the new construction decline.

Raw material costs for this segment increased $4.5 million, only partially offset by $2.2 million of increased product pricing. Higher transportation costs of $900,000 in the quarter also contributed to margin pressure. To address this situation, we have announced price increases for the second quarter for nearly every chemical product line. We continue to focus on all actions that will improve margins in this challenging environment.

Primary raw materials used in the Performance Chemicals business are styrene, butadiene, and various acrylics. Styrene costs are at an all time high. We buy about 220 million pounds of styrene a year and a penny a pound change in styrene impacts our operating profit by approximately $2.3 million annually. Industry forecasters, CMAI, says it believes that styrene prices will go even higher in the coming months. The environment is still quite dynamic as benzene, the key input to styrene has been extremely volatile for the past 90 days, trading between $3.50 and $4.00.

Butadiene costs once again hit new record all time highs during the quarter. We purchased about 150 million pounds of butadiene a year and a penny a pound change impacts our operating profit by approximately $1.4 million annually. Due to a shortages of a key raw material feed stock known as crude C4, butadiene was on allocation by all major North American suppliers in the first quarter of 2008; although, OMNOVA was able to meet all of our customer needs. With the feed stock shortages, industry experts forecasted butadiene costs will continue to rise and remain at record levels throughout this year. In fact, butadiene prices have gone up $0.05 per pound just this month.

Non-styrene/butadiene raw materials, especially acrylonitrile, have increased dramatically year-over-year as well and have contributed to the margin compression.

In addition to focusing on implementing essential price increases given the raw material situation, Performance Chemicals continues to focus on cost reductions in the dry operational improvements and productivity gains through Lean SixSigma efforts and by leveraging investments in our SAP enterprise business system. The business achieved record improvements in productive as measured in pounds produced per employer and also an inventory turnover. This has been critical to reducing the impact of raw material inflation and the weak residential housing market.

Turning to the Decorative Products business, sales in the first quarter were $72 million, up 22% from the prior year. This included about $8 million of consolidated sales from the Asian joint ventures for the month of February. The segment had an operating loss of $100,000, an improvement of over $800,000 loss in the first quarter of 2007. As with our Performance Chemicals business, clearly a priority for Decorative Products is to improve profit margins.

Included in the sales increase was $3.6 million in higher volume despite several weak end use markets, domestic contract interiors, coated fabrics, and our wall covering business in the United Kingdom all grew year-over-year, while the weak residential housing market affected sales of laminates in the kitchen and bath cabinet applications. The housing market slowdown, lower consumer spending, and the high price of gas is also having an impact on the floor and ceiling tile marine and recreational vehicle markets. However, we have still been able to gain share in these markets.

Sales at our domestic Contract Interiors product line, which includes commercial wall covering and upholstery, were up compared to last year as a result of steady refurbishment activity in our markets and innovative new products. This includes our unique digital wall murals which experienced double digit sales growth year-over-year. Digital murals are another example of where we’re leveraging our expertise to expand into new related applications. Recent wins include a major national education consultancy. In addition, trials and sampling are ongoing at several large hospitality accounts.

During the quarter, OMNOVA completed the initial launch of our new ECORE wallcovering which are based on nanotechnology. This truly innovating offering is designed to appeal to those designers and specifiers who have been looking for a non-PVC substraight that delivers comparable performance features to traditional vinyl commercial wallcovering.

ECORE wallcoverings have a strong environmental profile. They have low VOC emissions, utilize a water-base inked system, and are 100% recyclable. In addition, the supplier's patented EVOLON nano structures are made using a low-energy manufacturing process. Vinyl wallcoverings remain the product of choice for most designers and specifiers, especially in healthcare and hospitality. With ECORE, we are offering an industry-first alternative to vinyl wallcovering without any comprise in performance and design.

Coated fabrics experienced solid volume gains in the first quarter led by shipments to new marine seating and trim customers with the volume potential of $4 million per year. While the marine industry is down overall, our sales are up year-over-year as we continue to win key accounts with nations’ top boat builders.

Our versatile Boltasoft upholstery along with our well known Nautolex brand upholstery is sold into the marine market as well as transportation. OMNOVA’s brands are known for outstanding clean ability and abrasion and stain resistance as well as leading designs.

OMNOVA continues to win business for its coated fabrics and performance films in new related markets that leverage our competencies in vinyl calendaring and printing. Examples of related markets we have begun to serve include inground swimming pool liners, shower pan liners and projection screens.

Sales in laminates were down versus a year ago but only slightly despite the extremely weak kitchen and bath manufactured housing and recreational vehicle markets. Sales picked up toward the end of the quarter with increased volume of laminate (inaudible) into 3-dimensional applications. OMNOVA’s SURF(NYSE:X) 3D laminates provide the capability for rounded edges that give designers of furniture, horizontal work surfaces and store fixtures increased flexibility. In addition, SURF(X) laminates offer excellent scratch and stain resistance.

OMNOVA Solutions acquired the remaining interest in our Asian joint ventures effective December 31, 2007. Results from the operations are recorded with a one-month lag. Part of the acquisition to sales were not consolidated, therefore first quarter results reflect consolidated sales for the month of February only. Total operating income for the Asian operations including equity income was breakeven as improved results in China year-over-year were partially offset by losses in Thailand. We are moving swiftly to transition these strategic businesses to the OMNOVA operating style and standards. We expect these operations to be accretive to earnings beginning in 2009 as investments are needed this year related to information technology and Sarbanes-Oxley compliance.

We are very excited about the opportunity that facilities in China and Thailand will provide as we look to participate more fully in the tremendous growth occurring in the region. The Chinese economy is expected to continue to grow at about 10%-plus per year for the foreseeable future. In addition, Asian manufacturing capability provides OMNOVA with an important advantage over smaller competitors who are not able to follow U.S. customers who have moved their manufacturing to Asia and require suppliers who can serve them with quality products on a global basis.

At the beginning of the first quarter, our first Decorative Product sites successfully completed implementation of the SAP business planning system. The remaining Decorative Products facilities will be brought into SAP throughout 2008 with completion scheduled for early 2009. The implementation of SAP and Decorative Products is benefiting from a seasoned in-house team that launched SAP across our Performance Chemicals business a little over a year ago. To date, six of the OMNOVA nine domestic plants are up and running on SAP. A seventh plant in Monroe, North Carolina, will go live in the second quarter of this year.

In summary, despite a very challenging operating environment, OMNOVA continues to make progress overall. The Company achieved strong sales growth during the quarter as volumes increased in both Performance Chemicals and Decorative Products. Business won through new products and market share gains in the second of 2007 ramped up to normal production levels. In addition, we were encouraged by the year-over-year improvement in earnings per share in what is typically our seasonally weakest quarter.

The swift unrelenting inflation in raw material costs and higher transportation costs have not allowed our pricing initiatives to catch up. This has frustrated our efforts to realize improved profitability from our sales growth and unfortunately it appears that this inflation continue for the near-term. In light of this very difficult raw material cost environment, we have announced additional pricing actions for the second quarter in every part of our Company. Also, we continue to drive for increased productivity. Improving profit margins is clearly our highest priority.

The 2008 first quarter did have many positive outcomes, particularly in 3 areas. First, we were able to grow sales despite several weak end use markets. This showcases how our leadership positions have enabled us to take advantage of weakened competitors and cease market share opportunities in certain key segments. It also highlights our increasing effectiveness in identifying and entering new related markets that leverage our competencies.

Second, we have greatly enhanced our global position with the acquisition of the Decorative Products operation in Asia. This gives us a definite edge for our smaller competitors and will allow us to more fully participate in the tremendous growth occurring in the Asia Pacific region.

Third, our cost management and capital structure continue to provide flexibility for the business. We continue to reduce SG&A costs as a percentage of sales and discretionary spending is tightly controlled. The refinancing completed last year has significantly reduced our borrowing rate and despite our recent acquisition, debt levels are in good shape and our leverage ratio is reasonable.

Uncertainty in the economy with weak demand in certain end use markets and the unprecedented escalation in costs for our oil-based raw materials all combine to make our operating environment highly dynamic. Our focus as a Company is to expand margins and drive profitable growth in spite of the challenges, and all of our associates are fully engaged and united in this pursuit.

With that, I’d like to turn it over to the operator for any questions that you might have.

Question-and-Answer Session

Operator

(Operator Instructions) We’ll go to David Begleiter with Deutsche Bank. Please go ahead.

David Begleiter – Deutsche Bank Securities

Thank you. Good morning. Kevin, you mentioned the release on paper, some re-bidding of latex by customers post consolidation. Can you talk about that, what the might impact be going forward?

Kevin McMullen

Yeah, it’s a dynamic situation. We’re very committed to getting margins up. It is ongoing, and that’s about all I can say about it now. It’s ongoing in the industry. This is not atypical; it happens on a fairly regular basis within the industry. But it’s ongoing and certainly our highlight engaged and involved it, but very committed to getting our pricing up in light of the unprecedented raw material inflation.

David Begleiter – Deutsche Bank Securities

Is it a large portion of your paper business?

Kevin McMullen

It’s pretty significant pieces of it, yes.

David Begleiter – Deutsche Bank Securities

Fair enough. On the carpet volume loss, what percent of the business did that represent?

Michael Hicks

That would’ve been, Dave, about 15% of the business.

David Begleiter – Deutsche Bank Securities

Thanks, Mike. Lastly, Kevin and Mike, just on Decorative Products, when you look at sequentially, sales increased versus Q4 but profitability obviously declined sharply. Was that all due to raw materials?

Michael Hicks

We also had some one-time costs in the first quarter with the ECORE launch. We had some costs associated with SAP because the first plant didn’t come online last year until September, and we had a customer that we’re converting from vinyl to paper. So as we go forward, we think we’ll certainly do better than what we did in the fourth quarter, in the first quarter which is seasonally always our weakest.

David Begleiter – Deutsche Bank Securities

Mike, could you quantify those numbers? Is it a million dollars? Is it more or less?

Michael Hicks

I would say it would round up to about $0.02 a share.

David Begleiter – Deutsche Bank Securities

Thank you very much.

Operator

We’ll go to Robert Felice with Gabelli & Company. Please go ahead.

Robert Felice – Gabelli & Company

Hi guys, a couple quick questions. I guess it looks like you had about 2% pricing during the quarter and raws were up about mid single digit and as you mentioned situation, looks like it’s getting quite a bit worse with all your raws up significantly over the last couple of weeks. To that end, can you talk a little bit to the pricing outlook and the competitive environment in light of weak end market demand? How comfortable are you that your pricing initiatives will stick, and do you think you can narrow the price cost gap?

Kevin McMullen

We are very committed to the pricing actions. We think that we have done a lot of work on productivity, on improving the efficiency of our operation to try to mitigate some of the raw material inflation, but we think that price increases are clearly justified in light of this unprecedented inflation, and we’re very committed to achieving those. With that said, there are negotiations with our customers that are ongoing. It’s not like we’re the only supplier in the industry that’s experiencing this unprecedented inflation in raw materials. We believe that our competitors are seeing just as much inflation, perhaps even more in some cases. So we think everyone in the industry is suffering from the issue of squeezed margins; and as one industry participant, we are very committed to improving our margins to make it more sustainable and more viable as a business model going forward.

Robert Felice – Gabelli & Company

In terms of the announced pricing at this point, is it sufficient to offset the raw material costs, the incremental raw material costs that you’ll face?

Kevin McMullen

We will need to go out with more price increases than what is announced now in light of what has been announced in butadiene from a cost standpoint here recently. But we have pricing actions in the marketplace right now and we’ll need to go out for more.

Robert Felice – Gabelli & Company

So as we look at right now, the 2Q gap has actually widen versus where you stood as of the end of 1Q?

Kevin McMullen

I think that’s probably right. If we’re successful in the pricing actions, which we are very committed to being successful, than that will certainly help narrow that gap.

Robert Felice – Gabelli & Company

One last quick question, in the release, you mentioned that higher volumes contributed about $14 million and then you also cite about $15.2 million of higher costs due to the higher volumes; and I’m not sure if there’s something I’m missing there, but at first glance it looks like the new business is actually coming at a loss.

Kevin McMullen

I’m not sure. I’ll have to take a look at that and get back, we can get back to you offline. Obviously we’re consolidating the Asian business this year which we have not done in the past. I’d have to take a look at that more closely and get back to you on that.

Robert Felice – Gabelli & Company

I’ll follow-up offline.

Operator

We’ll go to Douglas Chudy with Keybanc Capital Markets. Please go ahead.

Douglas Chudy – Keybanc Capital Markets

Good morning. First question: With the closure of a customer’s I guess paper, I’m sorry, carpet facility, it looks like the headwind for 2008 would be about $13 million. Can you just talk about your comfort in offsetting this volume loss with growth in Specialty Chemicals and Paper?

Kevin McMullen

We have a lot of activity going on, particularly in our Specialty Chemicals business. I think certainly the intention is to offset that, but it’s a little speculative in terms of how much of the business opportunities that we’re focusing on in specialties we will win. We’re very encouraged by the feedback we’re getting on some of the new businesses. We’ve obviously shown in the quarter that we grew our specialty business at 14% year-over-year. We would expect to continue to find new opportunities for further growth. (Inaudible) working on them, have active development activities going with specific customers, so I think we’ll have a reasonable shot at it but that remains to be seen.

Robert Felice – Gabelli & Company

Thank you. Secondly, can you comment on what you’ve been seeing in Decorative Products, particularly in terms of office refurbishment trends? Has the slowdown in the economy been having an affect here? You continue to post volume improvement in Decorative Products; I was just curious what you’ve been seeing.

Kevin McMullen

Yeah, I think the office refurbishment is still been, the momentum has still been continuing positively there. What is really driving Decorative Products than office has been hospitality refurbishment and new construction. We expect there will be some slowing as the economy slows there, but there’s still been a fair amount of momentum, particular in the hospitality side of things.

Robert Felice – Gabelli & Company

All right, thank you very much.

Operator

We’ll go to Laurence Alexander with Jefferies & Company. Please go ahead.

Lucy Watson for Laurence Alexander – Jefferies & Company

Hi. This is Lucy Watson speaking for Laurence. Good morning. I just had a question, in your press release you mentioned that volumes per employee improved by 11% in the Performance Chemicals segment. I was wondering if you might be able to give us a little bit more detail into other productivity actions that you’re taking in the balk half of this year in the rest of the business?

Kevin McMullen

We have… This is a way of life in our Company. We have ongoing productivity initiatives. Largely through our LEAN SixSigma efforts, we are looking for ways of streamlining, standardizing, simplifying our operations, redefining process so that we can eliminate non-critical work. That is ongoing across all of the Company and all facets of the Company.

Clearly we think the investments in SAP will enable us to accelerate some of those activities as we go forward and also you may have seen last, late last year we announced a reduction in our manufacturing footprint in one of our SB latex plants of about 50 million pounds. We believe that was critical to match the market realities, so we continue to look for opportunities of what makes sense in terms of our manufacturing footprint as well. So those actions are ongoing. As you may know, we’ve taken about 15% of our headcount out since the spin-off, so we’ve had, or sorry, more than that, about 35% or 40% of our headcount out since the spin-off. So we’ve had a lot of reductions over the last couple of years, but we continue to drive productivity, The Performance Chemicals business has done a good job of achieving productivity in a tough environment.

Lucy Watson for Laurence Alexander – Jefferies & Company

Great. Just one other question, on the paper market: Can you give an update on both the trialing activity and confirmed market share gains?

Kevin McMullen

I think in 2007, we don’t have current. .. We don’t have quarterly information from the industry at this point, but in 2007, we believe we gained somewhere between 6 and 9 points of market share in the industry, again, through this new platinum product. It is an improved printability product line that the market has very positively embraced. So through the new technology that we believe we’ve gained that market share.

Lucy Watson for Laurence Alexander – Jefferies & Company

Great. Thank you.

Operator

(Operator Instructions) We’ll go to Daniel Rizzo with Sidoti & Company. Please go ahead.

Daniel Rizzo – Sidoti & Company

Hi guys. Is debt reduction now a focus, or you’re going to be looking to do more acquisitions maybe in Decorative Products for the smaller competitors?

Kevin McMullen

We have ongoing activity to look at acquisitions. We’ll be very selective at that. We’ll look at areas that we think are good opportunities. So nothing planned now, nothing to announce at this point, but we will selectively look at things if we think it makes sense and improves our competitive position. Clearly consolidation in the Decorative Products industry is ongoing.

During the quarter, one competitor closed its doors, another competitor closed a plant and that continues to represent an opportunity for us to gain market share and improve our position. In some cases, we believe we could win the business in the marketplace without paying an acquisition premium. In other cases, we might look at selective bolt-on acquisitions.

Daniel Rizzo – Sidoti & Company

You talked about shuttering some of your manufacturing, your footprint, your manufacturing capabilities. I wonder if you’re going to be doing more of that in the year as well?

Kevin McMullen

We have ongoing activity to look at that. Obviously the calculus there is as we see industry consolidation opportunities, particularly in our Decorative Products business does it make sense to look at our manufacturing footprint or do we think taking new on business as a result of that consolidation represents a better opportunity. So that is ongoing work that we’re doing.

Daniel Rizzo – Sidoti & Company

One last question, in terms of the net operating loss carry-forwards, is that done or is it close to being done?

Michael Hicks

No, we have $133 million of federal NOLs with very lengthy expiration dates, so we still anticipate using them in the coming years.

Daniel Rizzo – Sidoti & Company

All right, thanks, guys.

Operator

We’ll go to Tom Spiro and Spiro Capital Management. Please go ahead.

Tom Spiro – Spiro Capital Management

Tom Spiro, Spiro Capital, good morning. A couple of questions: Number one, do you expect the Company to be a user or generator of cash in Q2?

Michael Hicks

We would be a modest generator of cash as we usually would be seasonally in the second quarter.

Tom Spiro – Spiro Capital Management

Secondly, with the dollar as weak it is, apart from the translation impact, could you review us any other major impact you think that may have as a competitive matter on the Company?

Michael Hicks

A positive would be on the paper industry shouldn’t be manufacturing more product here in the U.S. and not source as much from Europe and (inaudible) doubt as to whether that’s happening. On a negative side, since oil is all priced in dollars, that’s led to the much higher oil costs of course that we’ve been experiencing. Other than that, our chemical business produces product that’s an emulsion polymer that’s mostly water, so our ability to export that with the exception of certain niche products is somewhat limited.

Tom Spiro – Spiro Capital Management

You mentioned the paper industry, Mike; what volume trends is the industry expecting over the next few months?

Kevin McMullen

I think the forecast for the industry is probably flat to down a couple of points here domestically in terms of domestic production. There’s a couple of different countervailing forces working. This is an election year and an Olympic year; that tends to provide a positive boost to demand. The overall economy is a downward drag on that and so that’s the net forecast that the industry has right now, how that plays out over the year remains to be seen.

It does appear that from our customer standpoint, the industry is healthier than it’s been. Utilization rates for the paper producers seem to be better. We understand that they’ve been able to secure pricing actions with their customers, so the industry’s gone through a lot of consolidation rationalization over the last several years and it seems like it’s healthier domestically is improving.

Tom Spiro – Spiro Capital Management

Thanks much and good luck.

Operator

We’ll go to Bob Bridges with Sterling Capital Management. Please go ahead.

Bob Bridges – Sterling Capital Management

Good morning. Looks like you took on a good bit of debt to complete the consolidation of the Asian joint venture. Could you maybe just review for us what your expectations are for growth and profitability over the next few years in that business?

Michael Hicks

We took on about $33 million including the assumption of debt. The Asian operations have been growing about 10% a year. I think as we look at the next couple years, we expect to continue to see that kind of growth. From an operating profit perspective or an EBITDA perspective, they dropped from $10 million of EBITDA in 2006 to about $6 million last year.

A lot of that was driven by very PVC resin costs and by much stronger tibod [sic] which hurt their profitability in 2007. We expect by 2009 to return to margin levels closer to 2006 and that’s going to be driven by a change in product mix improving their cost of quality. In Thailand, we will need I think some weakness of the tibod, but again we see a lot of good opportunities and expect the deal to be accretive and have EBITDA margins close to 2006 next year.

Tom Spiro – Spiro Capital Management

You mentioned on that carpet customer who’s closing the plant who’s 15% of your business. Do you have any sense as to what percent of U.S. carpet capacity that was to the industry?

Kevin McMullen

Probably around 5% roughly.

Michael Hicks

Yeah, we would just guess 5%, that’s hard to say because we were actually at plants with that customer. They closed one plant and then they realigned and went to 2 latex suppliers instead of 3, so at this facility I would guess 5%.

Tom Spiro – Spiro Capital Management

Then lastly, in your Performance Chemicals business you called out in the release in the three different business lines, it looks like you’ve got between good growth, actually you have very good volume growth in Specialty, what are you hearing from your customers? I mean that just seems almost counterintuitive based on what’s happening in the overall economy as things slow down. What are you hearing from your customers in terms of volume for the remainder of the year and into next year? I mean that’s impressive growth and I hope it can persist.

Kevin McMullen

Yeah, I think from a market standpoint, we don’t believe that the market grew at that level. Specialty’s grew at 14% in the first quarter; we don’t think the market grew at that level. We clearly have gained market share and picked up several new accounts that helped drive that. I guess our sense is that, it’s very hard to tell because Specialty’s is comprised of a lot of different niche markets, but I think the general slowing of the economy is going to affect many of those niche markets. So if Specialty’s overall, the markets were growing last year say in 3% to 5% range, I suspect it would slow by a point or two here in 2008.

Michael Hicks

When we talked about trialing activity of the 3 businesses, we clearly have the most opportunities in 2008 to win more business in Specialty’s, so we’ll see how that works out. But we still expect to post growth here at least for the foreseeable future here on a year-over-year basis in Specialty’s.

Tom Spiro – Spiro Capital Management

Great. Thanks a lot.

Operator

We have no further questions in the queue, please continue.

Kevin McMullen

Well I’d like to thank you all for joining us for the quarterly conference call. We’ll look forward to speaking with all of you next quarter.

Operator

Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation and for using AT&T Executive Teleconference Service. You may now disconnect.

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Source: OMNOVA Solutions Inc. F1Q08 (Qtr End 02/29/08) Earnings Call Transcript
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