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SOLUTIA: NEW LEASE ON LIFE Monsanto's former chemical operation sets strategy to raise profitability and invest in new capacity Marc S. Reisch C&EN Northeast News Bureau
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onsanto had a dilemma, and its resolution was Solutia. Spun out of Monsanto to shareholders on Sept. 1, 1997, St. Louis-based Solutia is a sizable toddler, consisting of the former Monsanto chemical operations with $3 billion in annual sales, operating income of $290 million, and 24 manufacturing sites in five countries. Independence for the chemical operations, once the focus of Monsanto, has been a long time in coming. Whereas Monsanto had been expanding its biologically focused agriculture and human health businesses since the 1970s, it had slimmed down and refined its chemicals portfolio. As a new age of biotechnology dawned, the growth prospects for the chemicals business did not appear nearly so strong as prospects for the life sciences businesses. The cultures of the life sciences and chemicals businesses were very different, too. "The life sciences businesses start with much higher gross profit margins than we do," explains Michael E. Miller, 56, Solutia's senior vice president and chief administrative officer. "They start with gross margins in the 60 to 70% range. We have gross profits in the 20 to 25% range. We have to be more cost conscious; we have to watch our nickels and dimes a lot more than the life sciences crowd has to." By late 1996, Monsanto was ready to sell, swap, or spin off its chemical operations for some other company's life sciences business. The sell and swap proposals never happened because of potential large tax consequences. Another reason the swap did not happen is that few if any were willing to "belly up to the bar." The spinoff of Solutia from Monsanto effectively gave the chemicals businesses a new lease on life. But it was a start that at least initially put Solutia in precarious circumstances: The new company started
Potter: need to maximize cash flow
out with more than $1 billion in debt, nearly $900 million in obligations to retirees, and $217 million in environmental liabilities. To shore up its balance sheet while still making the investments in new businesses and production plants that it needs to survive, Solutia has assumed a number of admittedly short-term goals to ensure its long-term survival. At least until 2000, Solutia's goals are to reduce costs so that the company can increase its earnings and maximize free cash flow. But now Solutia is in control of its own destiny. It is no longer the "cash cow" financing Monsanto's purchase of seed companies, or the development of herbicide-resistant soybeans and corn, or the promotion of products such as bovine somatotropin—a genetically engineered hormone that increases milk production in cows. Solutia is "free at last," says Chairman and Chief Executive Officer Robert G. Potter, 58. "We are now no longer the kid in the back seat of the car that is careening down the road wondering where the driv-
er is taking us," says Potter enthusiastically. "We now have our hands on the steering wheel—and it's invigorating." The Solutia chairman, who received an M.B.A. degree from Indiana University in 1962 and who has held a number of top-level positions in Monsanto's chemical businesses since 1965, knows the drawbacks of independence from Monsanto. "There is no longer a $10 billion-plus company to run to for cover." And he adds that though gaining independence from Monsanto was "exhilarating, I would not be telling you the truth if I said there was no trepidation," both on his part and for his employees. Behind some of Potter's trepidation is the need to build cash flow quickly. "The reason we must maximize free cash flow and grow earnings per share should be obvious. I've got to generate a lot of cash to manage my debt," admits Potter. And Potter notes a number of other claims on the money Solutia can make so he can strengthen the company's operations and ensure the enterprise's long-term survivability. "I've got to generate a lot of cash to get my equity account to a positive number," says Potter, referring to his goal to ensure that the company's assets outweigh its liabilities. "I've got to generate a lot of cash to reward my share owners, because I've said we are going to be aggressive on share repurchases. I've got to
Solutia at a glance Headquarters: St. Louis Sales: $3.0 billion in 1997 Operating income: $290 million R&D funding: $56 million Capital spending: $150 million Employees: 8,800 Products: Acrylicfibers;nylon fibers; nylon plastics and resins; nylon and acrylic intermediates; phosphorus products for food, personal care, fire retardants, and industrial cleaners; resin interlayer for laminated glass; specialty and industrialfluidsincluding heat-transfer, hydraulic, metalworking, and water-treatment fluids; polymer modifiers and specialty plasticizers; specialty resins including amino cross-linkers, pressuresensitive adhesives, resins for paper sizing, and resins that serve as flow and leveling agents.
MARCH 2, 1998 C&EN 19
business generate a lot of cash to grow the enterprise, because we've been underfunded. .. . And I've got to grow my earnings per share" because that influences the company's share price, "and the best antitakeover defense in the world is a high share price." Solutia has worked swiftly to increase cash. The company has already paid down debt by $240 million. It has refinanced long-term debt to lower its monthly costs. Part of the cash thereby freed up will help fund a $100 million run-up in capital expenditures in 1998 to $250 million to catch up from years of underinvestment. Solutia has announced a new investment in a world-scale plant to produce acrylonitrile—a feedstock for nylon and acrylic production—with financing help from customers who have contracted to purchase some of the new plant's output and by-product. It just committed itself to expand nylon 6,6 polymer capacity in Pensacola, Fla., by 45 million lb per year. And it soon plans to authorize the construction of a plant using breakthrough technology developed in concert with the Boreskov Institute of Catalysis, Siberia, Russia, to produce phenol directly from benzene. Phenol is an intermediate for adipic acid, which represents half of the nylon molecule. The new route replaces a much less efficient one that makes phenol from cumene. "We can do everything we want and need to do for expansion without any significant borrowing. We aren't strapped" for resources, says Robert A. Clausen, 53, senior vice president and chieffinancialofficer. The benefit of working with customers who contribute capital in the acrylonitrile expansion and the plan to do the same with the phenol project make it easier to undertake the capital projects and still have cash available for other needs, including servicing the company's debt, says Clausen. At the same time that it satisfies Solutia's internal requirements, it allows Solutia to build a world-scale facility that both reduces Solutia's and its customers' final cost per pound of product. Like Clausen, Potter does not see the debt as holding his company back. Someone said to Potter, "Well, how come you got a billion dollars in debt?" Tongue in cheek, Potter answered, "You may be shocked to learn I didn't stand up and say, 'Please give me a billion dollars in debt.'" But, he explains, "when Monsanto looked at losing Solutia's income and cash flow, the answer is yes, they have to be paid something back. One of the ways they got 20 MARCH 2, 1998 C&EN
paid back is that we got $1.03 billion of are also noteworthy because of the intheir debt. A second way was we picked come potential they have for Solutia. Says analyst Jeffrey R. Spetalnick of the investup 70% of the retirees." Potter notes that as "outlandish" as the ment banking concern CIBC Oppenheiobligation to assume the retirement liabili- mer, New York City, "Solutia's joint venties of 70% of presplit Monsanto appears, tures have more upside [potential] than "you have to realize that starting as a investors expect." And because of the fichemical company as Monsanto did, you nancial efforts the company has made to start with at least 50% of retirees from deal with its costs, Spetalnick says he exchemical operations anyway. And when pects "Solutia will continue to surprise inyou consider how many more might have vestors on the upside." Solutia's shares, served time in chemicals, how many which started trading on the New York 1 might have been in businesses that have Stock Exchange at $18 Vi6 in September, since been divested," observers could have recently traded at 27*A The latest stock price, a more than 60% then have a pretty good understanding of how Solutia ended up with such a sizable improvement since it came on the market, appears not only to be a vote of confiobligation to retirees. The $900 million obligation to retir- dence from investors, but it also may proees is not as bad as it looks, though, Potter tect Solutia from an unwanted takeover. says. That obligation works out to $1.5 mil- "When we spun [off], we had a market lion a month, or $18 million per year. "The capitalization of $2.4 billion (share price times the number of shares outstanding)," says Potter. "Today, it is about $3.6 billion. You add our debt to that and the takeover premium [of]—say 30%—[and] a purchaser would have to pay $5 billion to take over Solutia. I don't think the odds of a takeover now are very high." Structurally, Potter says that Solutia is now organized to meet itsfinancialobligations while also expanding its opera(Clockwise from tions. After Monsantop left) Greer, to announced the Miller, Clausen, split of its businesses and Mullis. into the life sciences company and chemionly thing we have cal company that to worry about is if was to become Solueveryone retires tia, "John C. Hunter on the same date, III, my [president and then everyand] chief operating body dies the following day. I don't mean to be quite that officer, and I gathered a team around us. facetious. But honestly, if I worry about 10 We literally took a blank sheet of paper and set out to organize Solutia," Potter says. things, that doesn't make the top 10." What the team did was to "eliminate Financial analysts are fairly upbeat about Solutia's long-term survival and the four superstructures that we had and ability to manage its debt. John E. Rob- form one enterprise management team. erts, first vice president for brokerage We separated the businesses to the maxconcern Merrill Lynch, New York City, imum degree possible on a business or says Solutia is "a spin-off story that will market basis into 10 business units," says be rewarding." He expects the company Potter. Before the formation of Solutia, will successfully manage its short-term Monsanto placed its chemical businesses debt and will receive significant extra in- into virtually autonomous units consisting come this year from its two largest joint of fibers and intermediates, phosphorus ventures: Flexsys, a Belgium-based 50-50 products, resins, and specialty chemicals. rubber chemicals joint venture with Solutia's 10 business units now are Acrilan Akzo Nobel, and Advanced Elastomers acrylic fiber, carpet fibers, industrial nylon Systems, an Akron, Ohio-based joint ven- fibers, industrial fluids, intermediates, nyture with Exxon. Solutia's combined lon plastics and polymers, phosphorus deshare of those two joint ventures' sales is rivatives, polymer modifiers, resins, and Saflex plastic glass interlayer. about $500 million. Generally, notes Potter, "chemical comOther analysts say the joint ventures
Workers in Greenwood, S.C., plant that uses a new nylon-spinning technology licensed from Japan's Toray Industries.
panies are organized around products. It's just sort of natural for us." But with the organization in 10 business units, "We've just gone as far as we knew how" to ally the business units with the markets they serve. "I'd go even further if I knew how to do it," says Potter. The goal for Solutia is to stay tuned so closely to the needs of customers that it offers solutions (and hence the company name Solutia) tailored to customer needs, says Potter. "We don't look at ourselves as a classic commodity chemical company," says Potter. The company's tag line "Applied chemistry, creative solutions," aptly describes what Solutia does, adds Potter. The 10 business units now share business services that formerly served the four separate Monsanto chemical units, says Potter. That arrangement allowed Solutia to cut some 600 people from the chemical operations just before the spin-off. The company will eliminate an additional 200 positions by 1999 as it puts a variety of computer software management and operations systems under one system. Miller, who oversees shared services and the supply chain, says the effort to share services "is driven by cost and efficiency." When, for example, Miller was president of Monsanto's Specialty Products unit, a $750 million-a-year operation, "I had my attorney, my human resources person, my finance person. I had a staff that made it look like I had my own company," he says. Starting as it has with such a huge mountain of debt, Solutia does not have the resources to operate in that way, even if it had decided it wanted to do so. As Solutia's units share the services of
personnel who once worked exclusively for one business, Solutia can speedily commit those people where they need them, instead of maintaining them in operations just in case they are needed. In addition, Solutia is now replacing more than 1,000 separate computer software management and operations systems with one overriding system from Germanybased SAP. By mid-1999, when Solutia completely installs the system, 70% of the computer glitches that the company must fix so its systems recognize the year 2000 will be fixed, says Miller. In addition to personnel savings, the SAP system is expected to help the company better manage its inventory and allow it to more easily serve customers because personnel can immediately track orders. Solutia has also put in place management incentives to make cooperation among its various business units work. "As president of an individual unit, my pay depended on how well my individual unit did," explains Miller. Now it depends on how well Solutia as a whole does. The company's 27 top executives get stock options depending on how well the company's stock performs. They must meet targets now set at maximizing free cash flow and growing earnings per share at 10% per year, says Potter. And they must also retain a considerable quantity of Solutia shares as long as they work for the company. Potter and Hunter, for example, must own six times their salary in Solutia stock. Solutia does not restrict incentives to the company's top executives alone. "Almost without exception," Potter says, "every one of our employees has stock options. And almost without exception, every one of our employees is a stock owner through the retirement plan, and every one of our employees is eligible for an annual incentive payout. That includes union employees and factory floor workers. They've got skin in the game." He adds, "We've got a bunch of turned-on, very empowered employees who know they are in control" and will receive ample rewards if they succeed. Potter says he has reason for the em-
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Potter: "I don't care about sales growth for the sake of sales growth. I care about profitable growth. I am paid by my shareholders to generate profit."
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phasis on a measure of growth based on earnings per share. "I don't care about sales growth for the sake of sales growth. I care about profitable growth. I am paid by my shareholders to generate profit. Now how are we going to do that? We've talked about part of the equation, which is a much more cost-effective organization." To establish that more cost-effective or ganization, Potter points out that Solutia not only has cut personnel and is planning more severances, but it has also organized into the 10 business market groups and empowered a shared-services organiza tion. In addition, Solutia has hitched to gether its commercial development and research and development organizations. "Why? I don't want discovery research as part of what Solutia does," says Potter. "We cannot do it well, and it is outside our time frame. I want my research organiza tion focused on what the market says it wants and needs. That is why I got those two organizations together." The company plans to devote about $74 million in 1998 to a combined R&D and commercial development unit, up about 8% from the year before, says O. Jer ry Mullis, 55, vice president for technolo gy. Solutia's pro forma R&D alone in 1997 was $56 million, down from $76 million in 1996. "We combined R&D and commercial development so we could get the R&D folks in closer to what the needs of the businesses are. It also helps inform the people in commercial development about R&D's capabilities, skills, and potentials. Now we understand a lot more clearly
where R&D's leverages are with the cus tomer," says Mullis. The new organization allows Solutia to develop more specialty products. Now that R&D and commercial develop ment personnel work closely with cus tomers, the company has found some unique opportunities. For instance, says Mullis, working with the Postal Service and an adhesives formulator, Solutia was able to develop an adhesive ingredient that allows easier recycling of envelopes to which new postage stamps are affixed with pressure-sensitive adhesives. The new organization, along with its emphasis on profits, does mean "we may have missed some opportunities'' for the lack of "blue-sky" research, says Mullis. But given the time in the past devoted to such research, the payback was not very great, he says. The centralization of R&D and com mercial development has turned up some heretofore unrealized "synergies among our 10 businesses," says Mullis. One devel opment "marries a product from one of our businesses with a breakthrough pro cess from another. It looks like it's going to be able to provide a really low-cost raw material for plastics." This is one of the very few longer term projects that may take more than six years, says Mullis, but will be worth investigating because of the potential cost savings. Nearly 1,000 people with scientific de grees work for Solutia in technical posi tions—including process engineers and environmental safety and health profes sionals, and they outnumber sales person nel, says Mullis. The company continues
to look for young scientists with expertise in polymers, fibers, and organic chemicals and also needs chemical engineers. Mullis' colleague, G. Bruce Greer, 36, vice president for commercial develop ment, says units that focused on technolo gy, marketing, and competitive intelli gence were previously at all different plac es in the corporation. Having those units work together allows Solutia "to focus people where they could contribute the most talent. If we see opportunities in a growth business, we don't want to limit ourselves to two people. We want to have the flexibility in our organizational struc ture to add six people," says Greer. Previously, individual business units would compete for development funds and often get only half of what they re quested. Now, the centralized R&D and technical unit can pick the best projects to balance both risk and options for growth, says Greer. "Our favorite projects generate cash," he says, and such projects include process improvements that "increase prod uct yields leading to cost savings, and [sav ing costs] generates cash." The question So lutia now asks is not, What can we afford, but What do you need to do the project? One project high on Greer's list is the promotion of Saflex polyvinyl butyral interlayer laminate for glass. The company recently introduced a reformulated prod uct with improved processing and applica tions performance. Saflex and its counter part from DuPont have been a part of many automobile windshields to protect occupants from glass shards in an acci dent, but Greer says Solutia is also promot ing Saflex for use in automotive side and rear windows to protect occupants from ejection in an accident or from attack. Car makers such as Audi, Mercedes, and BMW have begun to use side-window laminates, he says. In addition, Greer says Solutia is pro moting Saflex for use in residential win dows. Windows made with Saflex laminat ed glass meet hurricane wind-resistance standards in Dade County, Fla. Such win dows also resist burglary attempts. Market penetration for such uses is "now under 1%. An increase to just 10% would be enormous," says Greer. Not all technology and new advances are home grown. Solutia has licensed n e w technology from Japanese fiber maker Toray to produce state-of-the-art nylon fiber for automotive air bags. "It is world-class technology," says Greer, "and it was more cost-effective to license it from a willing Toray." Potter says that Solutia is "very respon
sible, very capable, and very intimately linked to our customers. We are organized to maximize those competencies. The question is, How are we going to grow profits? The answer is by how we are or ganized and by how we prioritize. We are taking [ongoing] costs out of the business. Our plan is to take $200 million of cost out by the second half of the year 2000. . . . We are going to grow aggressively by alliances and joint ventures." Among those ventures are some in
Solutia sales are in three major segments Polymers & resins 35%
Chemicals 32%
Fibers 33% 1997 sales = $3.0 billion
Asia. A recent example, says Potter, is a year-old profitable joint venture to make heat-transfer fluids with a company out side Shanghai called Suzhou Chemical. Asia accounts for only 5% of Solutia's sales now. As a result, the economic slowdown in Asia has not had a sizable effect on Solutia's sales and earnings. But because of the long-term growth opportunities in Asia, Potter says, "we will be increasing our stake in Asia" through alliances, joint ventures, and partnerships. He expects to do the same in Latin America, which also accounts for 5% of Solutia's sales. About 25% of Solutia's sales are in Europe, and the remaining 65% are in North America. Although Solutia has set immediate goals to strengthen itself by 2000, its real success will be in surviving long term. "A lot of people feel there is going to be a consolidation" soon among chemical companies with sales between $1 billion and $4 billion, says Potter. "Today, there are probably 40 companies like us in that range. Do I intend to be an active player in whatever industry consolidation takes place? You bet. Because we think we are that strong," he says.^
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