OMNOVA Solutions Inc. (OMN)

OMN 
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OMNOVA Solutions Inc. (OMN)

F1Q08 Earnings Call

June 17, 2008 11:00 am ET

Executives

Kevin M. McMullen - Chairman of the Board, President, Chief Executive Officer

Michael E. Hicks - Chief Financial Officer, Senior Vice President

Analysts

David Begleiter - Deutsche Bank

Analyst for Laurence Alexander - Jefferies & Company

Daniel Rizzo - Sidoti & Company

Douglas Chuti - Keybanc

John Roberts - Buckingham Research

Tom Spiro - Spiro Capital

Robert Kosowski - OFI Institutional

Bob Bridges - Sterling Capital Management

Presentation

Operator

Ladies and gentlemen, thank you for standing by and welcome to the OMNOVA solutions second quarter earnings discussion. (Operator Instructions) I would now like to turn the conference over to our host, Mr. Kevin McMullen, Chief Executive Officer and Chairman. Please go ahead, sir.

Kevin M. McMullen

Good morning and thank you for joining us for our conference call to discuss second quarter 2008 results. Joining me today is Mike Hicks, Senior Vice President and Chief Financial Officer. I would like to turn it over to Mike to make comments about forward-looking statements.

Michael E. Hicks

Thanks, Kevin and good morning. 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’s management 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 in our earnings release today could cause business conditions and the company’s actual results to differ materially from those expected by the company or expressed in the company’s forward-looking statements. Kevin.

Kevin M. McMullen

Thanks, Mike. OMNOVA Solutions continued to show strong sales growth year over year as revenues in our 2008 second quarter increased nearly 17%. The increase was due to a number of factors, including consolidation of sales from our former Asian joint ventures, product pricing and favorable foreign exchange. Overall volumes were down slightly, primarily in product lines that serve the residential housing new construction market, such as chemicals for carpet backing and laminates used in kitchen and bath cabinets.

The big news during the quarter was the extraordinary pace of raw material cost inflation precipitated by the extremely volatile oil situation. The cost for a barrel of oil has climbed to nearly $140 a barrel. This has rapidly and significantly increased raw material cost for OMNOVA. In response, late in the second quarter we successfully increased prices across performance chemicals and decorative products with minimal volume loss. As pricing actions took hold during the quarter, margins expanded from month to month and in May, the last month of the quarter, operating profit represented 70% of the quarter total.

Additionally, as costs for raw materials such as butadiene spiked upward in June, we announced further price increases of up to 30% across many of our product lines in performance chemicals. While the latest increases were not in time to positively effect our second quarter profit picture, they are providing needed pricing momentum for the third quarter and beyond. At current volume levels, third quarter price increases are anticipated to be more than double the second quarter levels.

Volumes in several key product lines were up in the quarter versus last year, and above industry trends. Paper chemicals as an example; despite weakness in the North American paper industry, OMNOVA has been able to grow market share because of our innovative product offerings and reputation for technical service that adds real value to our customers. Volumes across several specialty chemical product lines increased as well in the second quarter with non-wovens and tape applications leading the way.

Still, weakness in carpet chemicals remain a concern as the prolonged housing downturn looks to continue into 2009, according to industry experts.

These sources report that the carpet market was down approximately 13% in the first half of the year while new residential housing construction was down about 15%. In decorative products, sales in the second quarter grew year over year in domestic contract interiors, coated fabrics, and European wall coverings. While we continue to encouraged by the sales growth, we are seeing slowing in some of our end use markets related to general weakness in the U.S. economy.

The tremendous inflation and weak market conditions have masked some of the many improvements we have made to our cost structure which, excluding raw materials, is lower than at any time since our formation in 1999. The current operating environment is unfortunately also reducing the impact we would otherwise experience from our strong lineup of exciting new products and services.

In a moment, I’ll provide greater details on individual business segment performance and opportunities, but first I would like to summarize our second quarter financial results as reported in our earnings release.

OMNOVA Solutions had a net loss of $3.1 million, or $0.07 per share, compared to a net loss of $9.8 million, or $0.23 per share in the second quarter of 2007, which included $12.4 million of debt redemption costs.

Selling, general and administrative expenses were $27.5 million, up $2.3 million from a year ago. SG&A for the 2008 second quarter includes $1.7 million from the decorative products Asian businesses, whereas these former joint ventures were not included in 2007 SG&A results since sales were not consolidated last year.

As a percentage of sales, we reduced SG&A by nearly 100 basis points to 12.5% in this year’s second quarter versus 13.4% for the same period in 2007. We remain vigilant in controlling discretionary spending.

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