Cytec Industries Inc. Q3 2008 Earnings Call Transcript

| About: Cytec Industries (CYT)

Cytec Industries Inc. (NYSE:CYT)

Q3 2008 Earnings Call

October 17, 2008 11:00 am ET

Executives

Jodi Allen - Investor Relations

Shane D. Fleming - President, Chief Operating Officer

David M. Drillock, Vice President, and Chief Financial Officer

David Lilley, Chairman and Chief Executive Officer

Analysts

Michael Judd - Greenwich Consultants

David Begleiter - Deutsche Bank Securities

Robert Koort - Goldman Sachs

Laurence Alexander - Jefferies

Douglas Chutney – Keybanc

John McNulty - Credit Suisse

Steve Schuman - New Vernon Associates

Operator

Welcome to the Cytec Industries Inc. third quarter conference call. (Operator Instructions) For opening remarks and introductions I would like to turn the call over to Jodi Allen.

Jodi Allen

We appreciate your participation in our conference call. For our call today Shane Fleming, President and Chief Operating Officer will provide an over view of operations and Dave Drillock, Vice President and Chief Financial Officer will review the financial results and the special items noted in our press release. David Lilley, Chairman and Chief Executive Officer will then finish with some commentary on our outlook for the remainder of 2008.

This call is also being web cast in listen only mode and it will be archived in audio format on our web site for three weeks.

During the course of this presentation and in responses to your questions, you will hear certain forward-looking statements. Our actual results may differ materially. Please read our commentary on forward-looking statements at the end of our news release or the statements in our quarterly and annual SEC filings. In addition our discussion includes certain non-GAAP financial measurements as defined under SEC rules. We have provided a reconciliation of those non-GAAP financial measures to the most directly comparable GAAP measure as the end of our press release. A copy of our press release is available on our investor relations web site.

Before I turn the call over to Shane, let me remind you that we are postponing our previously planned Investor Day as stated in our recent press release. The new date is March 3, 2009, so please save that date in your calendars.

Now I will turn the call over to Shane.

Shane Fleming

When we began the third quarter we were faced with some difficult challenges including weak US demand, particularly in the coatings industry as well as higher raw material costs driven by record propylene prices. As we reached the end of the third quarter our challenges became even greater as the ongoing financial crisis drove further softening of global demand for our coating products, a major hurricane impacted our Building Block Chemicals business and a strike was announced at one of our major aerospace customers. Despite these challenges we delivered good performance in the quarter with overall earnings per share, excluding special items, of $1.06 per share. This compares with $1.04 earnings per share in the same period in 2007.

The Performance Chemicals business delivered solid results for the quarter with sales of $199 million which represents a 2% decline in volume, a 9% increase in selling prices and a 3% benefit from currency exchange.

The Mining Chemicals product line performed extremely well, offsetting some weakness in product lines such as pressure sensitive adhesives which are more sensitive to the declines in the construction and automotive industries.

In Polymer Additives the results of last years restructuring activities continues to benefit the earnings, but the volumes are slightly lower due to our exit from certain commodity products. The segment did very well implementing price increases to offset the rise in raw material costs and this achievement combined with an improved product mix led to increased operating earnings of $28.2 million in the quarter, up from $18.3 million in the same period last year.

Sales volume in the Surface Specialties business met our expectations in July and August, but fell off in September due to a further decline in demand in the US and a significant softening of demand in Europe. The net result was segment sales of $434 million which represents a 5% decline in volume, a 3% increase in selling prices and a 7% benefit from currency exchange.

Taking a look at the product lines, liquid coating resins and powder coating volumes were down significantly as a result of demand weakness in both the US and Europe. The shortfall was specifically seen in the housing and automotive markets, more than offsetting growth in Asia led by volume increases in the Waterborne and Radcure product lines.

In recent discussions with our major coating customers we have been told to expect to see a 10% volume drop in the US architectural demand for 2008 and again in 2009 and a similar drop in Europe in 2009.

The segment had some success in implementing price increases to help offset the large increases in raw material costs, however we still have more work to do with pricing and we have not yet realized any benefit from the recent reduction in energy and propylene costs.

Although a substantial portion of our raw materials used in surface specialties are derivatives of propylene we do not expect to see any cost benefit into early 2009. This is partly due to supply and demand imbalances and certain derivatives forcing a tight supply situation for some raw materials. The net result in the third quarter for this segment was operating earnings of $22.2 million compared to $31.2 million in the same period last year. The earnings include a charge of $1.4 million for accelerated depreciation related to the exit of our Pampa, Texas site.

Sales in Building Block Chemicals were $139 million representing a 30% decline in selling volumes and a 47% increase in selling prices. The decrease in selling volumes was primarily related to demand destruction in the acrylic fibers market as our current costs are not competitive with substitute materials such as polyester or cotton due to the high price of acrylonitrile. This has significantly limited our exports of acrylonitrile into Asia.

Also in the quarter the segment was adversely affected by a forces shut down and subsequent damages to our Fortier plant due to damages from Hurricane Gustav which resulted in a $3 million earnings impact in the quarter. The net result for Building Blocks was an operating loss of $1.3 million compared to operating earnings of $9.4 million in the third quarter of 2007.

Engineer Materials again demonstrated very good performance delivering sales of $191 million in the quarter, an increase of 18% versus the prior year quarter. The volumes in this segment increased by 15% and we realized selling price benefits of 3%. Volume growth was strong across each major aerospace market led by growth in business and regional jets, large commercial transport and rotorcraft.

In September the International Machinists announced a strike at the Boeing Company. During the month our order book remained strong and we were not directly impacted by the strike. David will address our future assumptions related to the strike later in the call when he reviews our revised earnings outlook.

We continue to invest in the future growth of Engineered Materials business by adding resources to Operations and Research and Development and the net result was operating earnings of $37.9 million, up about 32% versus the $28.8 million achieved in the third quarter last year.

Now let me turn you over to Dave to go through the financial detail.

David Drillock

I will begin with a review of our gross margin followed by an overview of our operating expenses and some cash flow highlights.

Our gross margin, after adjusting for the special items in both years decreased about 1 1/2$% over the prior year period. This decrease resulted primarily from a large decline in our Building Block Chemical segment and as Shane just reviewed moments ago was associated with poor margin spreads on Acrylonitrile and the impact of the hurricane.

Surface Specialties had a slight decline due to selling prices not fully covering higher raw material costs, but this is more than offset by increasing gross margins in Performance Chemicals and Engineered Materials.

In regard to raw materials let me remind you that we are on a FIFO method of inventory costing, so the higher raw material costs of the third quarter are mostly flowing into our fourth quarter.

Also in the third quarter we had two special item charges included in the manufacturing costs of sales. The first is a severance related charge of sales. The first is a severance related charge of $5.7 million principally for the reduction of approximately 40 personnel in our Specialty Chemical segments. The second is accelerated depreciation of $1.4 million which relates to our planned exit of Radcure manufacturing at our leased Pampa, Texas facility and rationalized US manufacturing of Radcure products at our North Augusta facility.

Operating expenses are up about $4 million year-on-year with unfavorable exchange rates changes accounting for all of the increase in operating expenses. As a percent of sales operating expenses are down about ¾% so we did get some leverage this quarter.

Other extra expense for the quarter was a net expense of $2.1 million compared to a $1.4 million net expense in a prior year was mostly due to exchange losses. We are actively working some favorable transactions such as real estate sales, insurance and legal settlements and while we are hopeful to close on some this year, all of the economic turmoil makes predicting these even more difficult.

Our annual underlying income tax rate increased about 1½ % versus last year. This increase is principally due to an earnings mix towards higher tax jurisdictions, primarily the US driven by the growth in our Engine and Materials segment. Our forecast for the annual underling effective tax rate is expected to be in a range of 31 to 31 ½ %, down about ¼ point from our last forecast primarily due to the recent reinstatement of the R&D tax credit.

Moving on to cash flow for the quarter, our cash flow from operations was $89 million down from the prior years $104 million and the decrease is related to higher net working capital, which was driven by higher inventory levels. Our inventory value increased due to higher raw material costs that we have been talking about and our days were up 7 to a total 80.

Influencing days was the slow down of demand we saw at the end of the quarter and our operations did not have enough time to adjust production levels in line with the lower demand.

Our trade accounts receivable dollars declined due to the lower sales when comparing the quarter sequentially and days are flat at 58.

We do see ample opportunity to improve our cash flow by reducing our net working capital and we are launching initiatives this quarter to get at this benefit.

Capital spending for the quarter was $46 million up from $26 million in the third quarter of 2007 with almost all of the increase due to investments in our Engine Materials segment as we continue to invest in this growing business. Our expectation for the full year 2008 remains at $180 to $200 million. Our growth outlook for Engine Materials remains intact and although short-term impacted by the Boeing strike, we plan to continue to invest in the projects to meet the expected increasing demand for our products.

While our business plan for 2009 is not finalized, on a preliminary basis one should expect an increase in capital spending next year to be about 1 ½ times 2008s range for work for ongoing projects moving further along in the construction phase, such as our Carbon Fiber plant in South Carolina and our composite prepreg plant in China, plus our expectation for new projects in engineered materials.

During the quarter we repurchased 575,000 shares of our common stock for about $27 million and we have $45 million left on the current authorization. Going forward our stock repurchases will be modest, at best, given the economic turmoil and uncertainty.

In this uncertain economic environment we felt it prudent to draw down $25 million of our revolver in September and another $25 million on October 1, so you will notice that our cash on hand is higher than our normal run rate. We are fortunate to have 11 banks participate in our revolver, although at the recent merger news two of the banks in a facility will change, but nothing else. Still the overall number of banks on a revolver is a good risk mitigator. Let me add that we have very manageable debt levels, our debt to book capital of about 30% and have not scheduled debt maturities until October 1, 2010.

We have taken some other defensive measures too. We had changes our equity allocation in our pension funds in Q3 of last year to a more conservative 50 to 55% allocation from 70%. Our investments are in plain vanilla index funds. As we are all painfully aware, equities are at a loss position compared to this time last year. If returns remain as is I expect our global pension contributions could double next year from this years $35 million. That is preliminary, but we feel it is also manageable. Right now we see pension expense for 2009 remaining somewhat flat with 2008, but this will be driven by where interest rates are at year-end.

Although we have been working very hard to mitigate any risks from the uncertain economic environment we are in, I have talked about aggressively going after working capital improvements, our cash is conservatively invested, our insurance is spread over several carriers so it as not to have a concentration in any one, we have covered our benefit plan assets. These are difficult times with events happening almost daily. We will continue to focus on what we can control and continue to take steps to mitigate those risks we cannot.

With that I will turn the call over to David.

David Lilley

Let me spend a few moments focusing on the whole year estimate and specifically how we are dealing with the various challenges. As Shane indicated the amount from our service specialist customers rapidly eroded at the end of the third quarter and their forecasts for the balance of the year are very weak, reflecting the impact of reduced consumer sentiment. It is also shown that J.P. Morgan’s global manufacturing procurement moneys index which tumbled late in Q3 and now shows at levels equivalent to that just after 9/11.

We are still expecting some growth in Asia, although Chinese exports will be reduced. Clearly conditions in North America and Europe have further deteriorated. In this situation, we will continue our focus on our customers and promote the value of our eco friendly technology. We also will intensify our effort to significantly reduce discretionary and operating expenses across the company and be smarter and faster in everything we do.

We recognize that there has been a step down in demand and we will look for opportunities to lower our cost base by right sizing our asset base and organization to align with market conditions. Reduction of crude oil price has not yet been reflected in the price of propylene derivatives which are our key raw materials, but we expect some relief towards the end of the fourth quarter or early 2009 of our hired costs inventories are depleted and the price of epoxy resin, glycols and acrylamide start to fall. However, this will not be sufficient to offset the impact of reduced demand and we now expect operating earnings to be in a range of $75 to $80 million compared to our previous guidance of $90 to $95 million.

We continue to believe that we have the right strategy and plan to improve and grow service specialties and we are taking the appropriate steps to deal with the recessionary situation, yet preserving our ability to prosper when volume demand returns.

For Performance Chemicals we are retaining our prior earnings guidance given their strong performance year-to-date and the continuing growth in the Mining Chemicals area. Polymer additives and pressure fitted adhesives are impacted by reduced economic demand, but the continuing growth in metal production coupled to the value of our new products allows us to continue the growth of our Mining Chemicals franchise.

We have just commercialized our new product Max Gold [ph] which enables our mines to optimize their recovery of this precious metal and at the REIT R&D review were impressed by the pipeline of new products, not only the traditional copper and aluminum affective, but also other base metals and in industrial minerals.

So for the full year operating earnings are unchanged and that is in a range of $77 to $79 million which our people should be very proud of as they continue to deliver double digit earnings improvement. For Building Block chemicals, despite some hard efforts we cannot find ways to fully offset the $3 million cash impact of Hurricane Gustav.

We are running the melamine unit at full capacity as there is strong demand, but acrylonitrile is another story. Shane has already described the demand destruction in the acrylic fiber market, so acrylonitrile exports to Asia and the USA has basically stopped. This situation has been exacerbated by the recent disconnect in the pricing of acrylonitrile in Asia and the US as propylene costs are faster in Asia than the United States.

The Asian demand is unlikely to be restored until early 2009 when pricing settles down and the acrylic fiber demand picks up. In the meantime we expect to run the Acrylonitrile plant at about 70% capacity and the end of all of this is that we now expect operating earnings to be in a range of $15 to $17 million compared to our prior estimate of $20 to $22 million.

As Shane mentioned, Engine Materials is having another great year with sales and earnings for the year- to-date up 19% and 29% respectively. Our people did a magnificent job in meeting this customer demand, but we are now being adversely impacted by the Boeing strike. We have no knowledge of when the strike will end so we have assumed what we hope is the worse case scenario of a year-end settlement. On that basis the impact will be a reduction of about $25 million in sales and $15 million in operating earnings.

Our expectation for full year range now will be in a range of $138 to $143 million compared to our prior expectations of $153 million to $158 million. This also takes into account bringing some custom orders forward where possible and also reshaping our operations to just having early and extended Christmas breaks. We regard this as a temporary event. Although they will probably be no capture of lost business we would expect to continue our growth trajectory in all of the major customer sectors next year.

Looking a bit longer-term, given the tightening of the global credit market there is the potential for some commercial airplane cancellations, but given the large existing backlog we expect that open slots could be quickly filled as indicates to date.

We are also expecting a steady wrap up of a 787 and also the F-35 Joint Strike Fighter next year. All the capital projects to support the growth are on track for interval timetable and spending and we have re-authorized engineering capital to prepare for an investment in initial pre-break [ph] fabric [ph] and tank capacity to support the growth, particularly for our military customers.

In summary, we remain bullish about the prospects of this franchise business in the short, medium and long-term. I would also like to reinforce Dave’s comments about Cytec’s cash flow and strong balance sheet. This year we will deliver EBITDA of over $450 million with CapEx spenditures of about $190 million.

The escalation of raw material costs and our own increased selling prices increased our working capital significantly. We would expect some relief as raw material costs start to decline; we are not satisfied with that. We are now launching various initiatives to reduce working capital to best in class status for the Specialty Materials Company. We have the appropriate financial liquidity and we continue to expect that we can fund our CapEx spenditures and these other cash needs such as pension contributions from our operating cash flow and utilization of the revolver when we have spikes in our cash needs.

[Inaudible] face many challenges and we have reacted positively and aggressively in a very focused and proud [ph] way to continue to improve the company and reward shareholders for their faith in us. We have a strong wind at our back for engine materials, but certain of these specialties continues to face headwinds from the economic downturn; however I am very confident in the abilities of a tried and tested organization well led by aligned, experienced, community leadership team really practiced in housing shareholder value.

I have completed ten years of service now as CEO and for an extra two years past my 60th birthday to steward the integration of a surface special [ph] acquisition. While the current economic environment is uncertain right now, one thing I am certain of is the excellent long-term outlook for this company. It is now time to hand over leadership of Cytec to my successor Shane Fleming. Shane had demonstrated exemplary leadership skills over his career, so I am delighted I am handing the reigns over to him at the end of the year and I believe that he will lead Cytec to the next level of performance thus rewarding you, the shareholders, with greater value.

With that I will now hand it over to our moderator Michelle so that we can respond to your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Michael Judd with Greenwich Consultants.

Michael Judd - Greenwich Consultants

Yes, thanks for all the help, David, over the years. My first question is that obviously we are in difficult economic times here, but it certainly is helpful for shareholders if there are high dividend payouts, in other words you get paid while you wait so to speak. I am just wondering, I certainly understand that you guys have been very prudent and your not looking at doing any further share repurchases, but could something be done on the dividend side so that your dividend is more in line with perhaps some of your peers there at the higher end of the range?

David Drillock

We have talked about our uses of cash in Cytec and in this order it is obviously cash for capital projects for maintenance of the business; it’s funding the capital projects for our growth businesses and the growth opportunities; it’s then followed by debt pay down which we’ve done a pretty good job on over the past two or three years; then stock both in acquisitions if they pass the stock buy back hurdle rate, which I know you’re familiar with, then it would be stock buy back in increasing dividends. As you know we just increased our dividend last year, so we have put that increase through; but I think at this point that is our uses of cash.

Operator

Your next question comes from David Begleiter with Deutsche Bank Securities.

David Begleiter - Deutsche Bank Securities

David and Shane just on selling price increases what is your expectation within the Chemicals business as your propylene based fee stocks come down? What is the lag and how much will be retained in your view?

David Drillock

I will answer the first part of your question first. The lag for us is a little bit depending on which derivative we’re talking about, but typically 30 to 90 days between when you see a reduction in the price of oil, when that transfers to propylene and then further down the chain to acrylic and acrylades and materials and impact have, so if you see relief on oil price you are probably not going to see it in terms of procurement for 60 to 90 days.

In terms of the assumptions we’re holding on to price going forward, the word out to our sales organization is we still have a lot of backlog pricing that we have to pay for that has not come through our income statement yet and we have no intent to give up pricing in the short-term. Longer term if we continue to see the reductions that we’re seeing today in oil pricing there is no doubt we will have to get some of that pricing back, but we just have to do it in a disciplined majored basis and make sure that we protect our margins as that takes place.

David Begleiter - Deutsche Bank Securities

Shane can you assume the recession for the full year next year in both Europe and the US, as well as declines in raw materials, do you think Surface Specialties has down earnings, flat earnings, or up earnings?

Shane Fleming

Well I don’t think we’re at a point where we can predict earnings. We are still trying to sort out the demands going forward. If you look at both US and Europe, the industrial markets that are prime rate markets for our cuttings business are clearly softening and I think there is some chance they’ll continue to soften. We are still looking at all the levers we can pull here. Obviously the raw material situation is a big impact as well, but I am not in a position right now to be able to give you guidance on 2009.

David Begleiter - Deutsche Bank Securities

On CapEx, could any of your’09 CapEx spending be deferred in a tougher environment? We are looking at a very large increase in a very tough year.

Shane Fleming

Both David and I are trying to answer that. I am going to give you my shot and then he will as well.

I think we are looking carefully at all of our CapEx and there are areas where there is potential for deferment, but we have also got some very exciting growth projects in CM and to a lesser degree in chemicals and it’s important that we fund those for the future, but we will again use discipline to make sure that we are funding these at the appropriate time given our updated view on the demand.

David Drillock

I don’t have anything more to add to that. Shane has answered that correctly. I mean we are matching all these projects up with the demand level, so that is the answer.

Operator

Your next question comes from Robert Koort with Goldman Sachs.

Robert Koort - Goldman Sachs

Shane I am not sure if I heard you right, but did you say earlier that your customers are telling you architectural coatings demand could be down 105 in both the US and Europe?

Shane Fleming

For 2009, I mean those are comments from a couple of customers, so I wouldn’t use that as gospel, but that is a deco market Bob, which as you know is not necessarily directly aligned with our markets but it is indicative of what we can see from our architectural applications which represents about 30 to 40% of our portfolio.

Robert Koort - Goldman Sachs

In Europe I guess I can understand given the lag there, but in the US given that markets already cratered for several years do you think there is an inventory issue associated with that or do you think actual application of paint could be down another 10% on walls and surfaces>

Shane Fleming

The feedback from my prepared comments came directly out of the mouth of one of our customers and that’s their expectation for demand. It truly was a 10% reduction in 2008 on top of another 10% in 2009 for the home deco market.

Robert Koort - Goldman Sachs

Got it and can you talk about, you mentioned your portfolio has a majority of sales outside of those markets, so what are some of the demand trends your customers are telling you for those more industrial and other markets?

Shane Fleming

We don’t typically get a lot of detail from our customers on some of those markets, so whether can packaging, automotive, a lot of times we are, like you, forced to look more at just the general industrial information that is available, but what you read in here about the automotive market that will be our basis for our projections going forward, same with the other major sectors. I don’t have any direct feedback from customers on those other segments.

Robert Koort - Goldman Sachs

Mining chemicals is crushing at terrific margins, but that industry is looking quite a bit less healthy at the moment as well, so do you see any early signs of some deceleration in those end markets or are you building market share? How are you able to achieve such strong results?

Shane Fleming

I think long-term we would not expect to see continued 5% to 10% growth in markets that historically grow at 3% to 4%. We have had some great tail winds over the last couple of years in both major metals we serve, both alumina and copper.

That said, much of our growth and much our earnings improvement has come from taking share, even cannibalizing our own business with new products. We expect that momentum to continue. We have got some great new products for the industry. I don’t expect to continue to see, as I said, 10% growth in the industry demand, but I do expect us to continue to deliver double-digit growth in our mining chemicals business.

Operator

Your next question comes from Laurence Alexander with Jefferies.

Laurence Alexander - Jefferies

My first question is on the inventory levels. If you were to bring inventory days back to your target over say one or two quarters what would be the impact on earnings?

David Drillock

I would have to sit down and look at that by segment because it is, the fixed cost associated with each one is a little bit different, but I would say, I don’t want to give an answer like that without sitting down and thinking that through carefully.

Shane Fleming

You’re right. If there is an impact on earnings says you’re taking your production credits down it would be down, but at this point I think bringing cash in is the important thing and matching up our inventories with demand.

David Drillock

Let me throw one thing in there. I think we also did contemplate some inventory reduction in our guidance for the fourth quarter.

Laurence Alexander - Jefferies

Secondly on engineering materials, do you have a first read on potential impact to margins from the cost associated with the new facilities in terms of either depreciation, staffing levels, training costs related to new staff, anything like that?

David Drillock

That’s more of a 2010 affect. I don’t think we’re going to see much of that in 2009, because we are still in a construction phase.

Shane Fleming

We have one plan that we are coming on right at the end of the year in China.

Laurence Alexander - Jefferies

Lastly just to follow up on one of the earlier questions, to turn this around a little bit. The surface specialties, what environment would you need to see to feel the surface specialties might be break even or losing money next year? Alternatively what is your conviction level that you can avoid that?

Shane Fleming

I think our conviction level is quite high. I mean you could get there with significant demand destruction, but as you would guess we are looking carefully at our cost base and making sure that we have the appropriate cost base given demand. You have heard us talk before about our ability to ramp up or ramp down volume based on demand. If it means for us looking at shattering some capacity or even shutting down sites for the longer term to get that appropriate balance we will do that. I don’t see our Surface Specialties business losing money next year.

Operator

Your next question comes from Douglas Chutney [ph] with Keybanc

Douglas Chutney – Keybanc

Performance Chemicals did very well during the quarter. Taking a look at your operating profit guidance for the year that would suggest a pretty steep drop off in the fourth quarter. Can you comment a little bit more on what is causing this? Are there particular areas where you are expecting some weakness?

David Drillock

I think we had a tremendous third quarter driven by the lumpy order padding we have seen in our Mining Chemicals business. I don’t see a significant drop-off anywhere in particular we just, as you saw, hit a home run in the third quarter.

Douglas Chutney – Keybanc

Can you talk a little bit about some of the actions you have taken or are currently taking to reduce the volatility in Building Block Chemicals? I think you’ve done some restructuring over the last year or so?

David Drillock

I think some of the volatility reduction has come from our ability to pick up volume on our Acrylonitrile plant outside of Asia. That has been a big swinger for us both in terms of margin there as well as volume, so we have been able to commercialize new business in North America and Europe and reduce the reliance on Asia.

David, I don’t know if there is anything from an infrastructure standpoint that is material?

David Lilley

No I think it is really dealing with the situation that we have now and meeting the demand. I think we operate to a good optimum money level and we’ll keep those levels of operation in this continuous plant.

Douglas Chutney – Keybanc

Where do you see kind of the trough to peak earnings potential for Building Block Chemicals longer term?

David Lilley

I think the longer-term word is a good word to use because we don’t see any new acrylonitrile capacity coming on stream significantly in the next few years. I think we are really seeing a relative pipe situation, let’s say two or three years once the acrylic fiber demand comes back, hopefully at reasonable propylene levels. So, I think we are seeing pretty good situations there.

I think what we are trying to achieve there is a steady cash flow from that business back to fund our growth elsewhere.

Operator

Your next question comes from John McNulty with Credit Suisse.

John McNulty - Credit Suisse

With regard to Surface Specialties in an environment where you are expecting volumes down potentially 10% in some of the areas how comfortable are you that you can actually still keep getting price increases through?

Shane Fleming

As you would guess, it is going to be somewhat dependant on which product family you are talking about. In the very commodity end of things, in some of the solvent borne product areas, if we are seeing significant levels of demand reduction we are going to be challenged. As you know we are trying to move our portfolio to more value added products where we’ve got more pricing power and in those areas I think we will be successful, so it is going to be a mixed bag.

John McNulty - Credit Suisse

With regard to the Boeing strike, in the event that it ends let’s say tomorrow or in the next week what have you how long has it taken in the past in order to kind of get back to normal run rates? I assume there is going to be some inventory in the channels that has built up over the past say month or so, so how quickly can we expect you to kind of get engineer materials back to normal again?

David Lilley

We believe it would be only a matter of days before we get back to normal operations, so maybe a week, or so. That would be the likely period.

John McNulty - Credit Suisse

So there is not much of a lag at all.

David Lilley

No, we think there is going to be some pent up demand and there will be some catching up by the tier 1 prime contractive.

John McNulty - Credit Suisse

In terms of the initiatives that you’re taking on the working capital side, first of all if you can kind of give us a little bit more granularity as to what they are. Then in terms of what improvements or what the overall net benefit should be on the working capital side for looking at 2009. If you can give us some color on that, that would be great.

David Drillock

In general we are looking at all three areas. We are looking at our receivables in terms of producing terms and cutting back on past due, we are working at that very hard right now. In terms of inventory we are looking at improving our processes and payables also and what we would like is to get an improvement of at least one turn in overall networking capital. When you work that up you will see it is a fairly good challenge for us.

Operator

Your last question comes from Steve Schuman with New Vernon Associates.

Steve Schuman - New Vernon Associates

My first question is on cotton versus acrylic. We have seen an explosion in cotton demand and pricing has been, relatively speaking, the Ag market has been fairly benign. Do you think the acrylic market is really going to come back after this spike we have seen here in oil prices and what not?

Shane Fleming

I think it is going to take some time. A number of plants down with the expectation they would restart, but I don’t think these guys are going to jump back into this market until the fundamentals get a little bit better. We are not really expecting any turn around in Q4 and it may be well into Q1 next year before we start tot see the operations step back up again.

Steve Schuman - New Vernon Associates

I guess my thoughts were that longer term we may not really see that market come back at all. The acrylic fiber market has primarily been an Asia market. As those economies progress and move upward they seem to be moving more and more to other higher value materials such as cotton and wool etc…

David Drillock

No doubt the acrylic fiber market will be shrinking in time as the quality of life improves people shift away from acrylic to other types of fibers, but there is still a big pent up demand. I am not sure every plan that shut down over the last six months will restart, but I think we’re pretty confident that you will see some of that come back.

Steve Schuman - New Vernon Associates

Same question on Europe, some of your competitors actually had a fairly decent quarter in Europe, you guys not as well. Is it more of an issue of the products, your radcures, your powder coats and that are typically not at your market type of products, they are more either industrial demand or maybe going into new homes where something is pre-painted or pre-coated. Is that the issue there or are there share issues or could you kind of highlight some of those?

David Drillock

I actually think we are pretty happy with our results through the first two months and the poor performance, if you will, relatively poor performance for Surface Specialties in the third quarter compared to previous years was really driven by the weakening demand in September. So I don’’ think it’s a share issue, I don’t think it’s necessarily a product mix issue, it is just really very soft demand in September.

David Lilley

We are basically echoing what our customers are telling you as well.

Operator

There are no further questions.

Jodi Allen

Thank you for your participation in today’s call. If anybody would like to talk to me after the call you can reach me directly at 973-357-3283. Thank you very much and have a good weekend.

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