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Executives

Jodi Allen

Shane D. Fleming - Chairman, Chief Executive Officer and President

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

Analysts

Michael J. Sison - KeyBanc Capital Markets Inc., Research Division

P.J. Juvekar - Citigroup Inc, Research Division

Laurence Alexander - Jefferies & Company, Inc., Research Division

John P. McNulty - Crédit Suisse AG, Research Division

Cytec Industries (CYT) Q4 2012 Earnings Call February 1, 2013 11:00 AM ET

Operator

Good day, and welcome to the Cytec Industries 2012 Fourth Quarter Earnings Conference Call. Today's call is being recorded. For opening remarks and introductions, I would like to turn the conference over to Ms. Jodi Allen. Please go ahead.

Jodi Allen

Thank you, Keisha, and good morning, everyone. We appreciate your participation in our conference call. For our call today, Shane Fleming, Chairman, President and Chief Executive Officer, will provide an overview of continuing operations; and Dave Drillock, Vice President and Chief Financial Officer, will review the financial results, special items and discontinued operations. Shane will then finish with some commentary on our outlook for 2013.

This call is being webcast in listen-only mode and it will be archived in audio format on our website for 3 weeks. Throughout the call, we will be referencing the supporting materials which can be downloaded from our Investor Relations website under Calendar of Events, or you may follow the slides accompanying today's webcast, which are also available through our website.

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 in Slide #2 of our supporting materials or 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 at the end of our press release. A copy of our press release is available on our Investor Relations website.

Now let me turn over the call to Shane.

Shane D. Fleming

Thank you, Jodi, and good morning, everyone. I appreciate you taking the time to join our fourth quarter call. Let me first start by saying how pleased I am with our performance in 2012. It was a year of significant change for Cytec as we continued to execute the portfolio transformation that we started in 2011. I'm extremely proud of our accomplishments to date. We sold our Pressure Sensitive Adhesives product line, recent [ph] agreement to sell the Coatings Resins business and completed the acquisition of Umeco. And at the same time, delivered strong financial results by increasing sales 20% year-over-year.

If you remove Umeco from that equation, sales grew about 10% over the prior year, and segment earnings grew by 26%. Full year net earnings from continuing operations were $141.2 million or $3.02 per diluted share, representing the 72% year-over-year increase in EPS.

Our strong financial performance in 2012 is testament to the improvements we have made in our business portfolio, as we're able to deliver solid sales growth and improve profitability in a challenging global economic environment.

Before I review the results for the quarter, I want to give a brief update on the status of the Coating Resins transaction. We still expect to complete the transaction by the end of the first quarter, and we are not concerned about any regulatory issues. We have received approval from various regulatory authorities, including the U.S., however, we still need others, including Europe and China.

Now let me review our results from the fourth quarter, shown in Slide 3. Sales from continuing operations were $471 million versus $369 million in the prior year quarter, representing the 27% increase mostly attributable to the additional Umeco sales. Without Umeco, sales growth in the quarter was 5% due primarily to the pricing actions we took in all of the business segments, as well as volume growth in our Engineered Materials business.

Fourth quarter net earnings from continuing operations were $33.5 million or $0.72 per diluted share, excluding special items, about 7% higher than the prior year quarter. Dave and I will cover results for the quarter in more detail shortly, but the impact of inventory reduction actions in the Engineered Materials and In Process Separation segment, plus the planned maintenance turnaround of our phosphines plant, reduced earnings for the quarter by approximately $0.10 per share. Overall, a good finish to the year for Cytec.

Moving to Slide 4. Our Engineered Materials segment achieved sales of $231 million, a 9% increase versus prior year period, with 5% from volume growth and 4% due to selling price increases. The volume growth was mainly driven by higher build rates in the large commercial transport and civil rotorcraft sectors. We also experienced some improvement in business in regional jet sales, as the development on the CSeries program is underway. Offsetting these higher volumes was lower sales for tooling and brakes, which tend to be lumpy.

Operating earnings in the quarter were $41.2 million, slightly down from the prior year quarter. This was primarily a result of lower fixed cost absorption related to finished goods inventory reductions, as we worked to continuously refine our working capital metrics and better align inventory levels to our customers' demand. We have made good progress by working closely with our customers to reduce lead times, thereby allowing us and our customers to carry less inventory. Overall, we achieved excellent results in Engineered Materials in 2012, with record annual sales of $903 million, 14.5% above the prior year, as well as record operating earnings of $165 million, up 32% versus the prior year.

Moving on to Slide 5. Umeco sales were $83 million in the quarter, with a shortfall to our prior sales guidance coming from the structured composites product line, mainly due to softer demand and sales deferral into 2013 in the high-end automotive and motorsports markets in Europe. Sales of Process Materials products were in line with expectations, although we are experiencing reduced demand for vacuum bagging consumables and the wind energy market in the U.S.

The resulting as-adjusted operating earnings for the segment were $3.8 million. While the soft demand for structured materials in the quarter was disappointing, we did achieve our synergy targets and we are turning our focus to growing this business.

Slide 6 summarizes the In Process Separation segment, which delivered sales of $94 million, driven by 4% selling price increases and 1% volume growth. We continue to see steady demand for our mining products for copper and other base metals, although this was partially offset by softer demand in alumina. We also experienced lower sales in phosphines products related to a planned maintenance turnaround in the quarter. Operating earnings in the quarter were $17.4 million, down versus the prior year quarter, as a result of targeted inventory reduction, higher manufacturing cost and a less favorable product mix related to the phosphine plant shutdown.

I also want to highlight that this business achieved record growth in 2012, with full year sales increasing 13% versus the prior year. The top line growth came from strong demand for our products across the mining sector, as we penetrated new geographies with our unique separation technologies. We were awarded start-up supply agreements with several new mining operations during the year, which contributed to our year-to-year sales growth. Our sales growth also was complemented by pricing improvements, which altogether led to record operating earnings for the year of $91.8 million, a 32% increase versus 2011. These improvements led to strong operating margins of approximately 24%, another record achievement for this business.

Moving on to Slide 7. Additive Technologies performed well in a challenging market environment, delivering sales of $62.2 million versus $67 million in the prior year period. The 6% volume decline was due to low demand in our Specialty Additives product line for products sold in the industrial markets, including adhesives and coatings. Demand for our Polymer Additive products held up well, despite the economic environment, and sales were essentially flat with the prior year period.

Operating earnings for the quarter increased $8.2 million, up 9% from Q4 2011, as a result of favorable product mix, lower raw materials and higher prices. For the full year, Additives ended with a 6% decline in sales, but favorable product mix combined with higher pricing led to only a modest decline in earnings and a slightly improved operating margin of 14%.

Now let me turn the call over to Dave, who will review the financial results in the quarter.

David M. Drillock

Thank you, Shane, and good morning, everyone. We had several special items this quarter, so I'd like to go over the major ones. In continuing operations under Corporate and Unallocated, we recorded a net pretax restructuring charge of $5.3 million related to reductions in the stranded costs of Coating Resins and achieving synergy cost reductions in the acquired Umeco business.

Also in Corporate and Unallocated is a pretax noncash charge of $16.7 million related to the sale of our research and development facility in Stamford, Connecticut in the third quarter of 2011. At that time, we received proceeds of $11 million for this transaction and it was recorded as a financing transaction due to our continuing involvement in certain environmental remediation at the site, which precluded us from recognizing the loss on the sales. The transaction was recognized as a sale upon satisfaction of our obligation in the fourth quarter of 2012, and as a result, we recognized the loss for the remaining excess carrying value in the quarter.

The major special items in discontinued operations included a pretax charge of $4.9 million for costs, mostly related to the sale and process of Coating Resins and a pretax benefit of $19.5 million related to depreciation and amortization that are no longer expensed, as Coating Resins is now reclassified to assets held for sale. More details on all the special items can be found in our earnings release.

Now let's go to Slide 9 and review our operating results for the quarter. Just a reminder, that all amounts and percentages I discuss will exclude any special items in discontinued operations, unless specifically mentioned otherwise. I'd also like to remind you that the 2011 full year discontinued operation results include our former Building Block Chemicals business, which was sold in the first quarter of 2011.

And as Shane has covered the change in revenues with you, let me go right to gross profit. Our gross profit dollars increased 17% to $138 million, while gross margin percentage of 29.3% is 2.5 percentage points lower compared with the prior year period. There are a few major items impacting our gross margin. First, we had a less favorable mix mostly from product mix within the In Process Separation segment and Umeco. The benefit from higher selling prices that Shane mentioned earlier was mostly offset by 2 factors. The first is the impact of the maintenance turnaround at our phosphine manufacturing facility that we mentioned earlier, and as many of you know, we're in the process of constructing a new facility to double our phosphine capacity, which is expected to come online in Q4 2014. In the interim however, this plant is running full, so any down time impacts the business.

The second is related to lower production levels in Engineered Materials due to planned inventory reductions. During 2012, the business made a number of significant -- made a significant number of productivity improvements to our manufacturing processes. As a result of these good efforts, we have significantly reduced our lead times, which enabled us to lower our inventory levels. And I'll touch on this a bit more later.

Corporate and Unallocated expenses for the quarter, excluding the special items I just mentioned, include the stranded costs from Coating Resins of $16 million. The year-to-date amount is $66 million. We are still on track to eliminate 2/3 of the cost within 90 days after the close, and we intend to get up to 75% of those costs eliminated within 24 months. The remaining stranded costs will be retained to support our businesses and the organic growth.

Along this subject, I'd like to remind everyone that stranded costs will be reclassified from Corporate Unallocated to operating expenses of the remaining businesses, once the Coating Resins transaction is closed. We'll provide you the details at that time, but I do want to add that in 2013, Corporate and Unallocated expenses will increase about $8 million, as we begin our design work in our single ARP [ph] project, targeting consulting for other improvement initiatives, and higher amortization of prior capitalized interest. This is worked into the EPS guidance that you saw in our press release.

Operating expenses were flat as a percent of sales, but higher by almost $20 million, with about 70% due to the acquisition of Umeco, which accounts for approximately $14 million and the remainder due to higher commercial and R&D expenses in In Process Separation and Engineered Materials.

Interest expense net is down about $2 million, mostly due to higher capitalized interest, which is in line with our higher capital spending this year. This will continue over the next few years as the projects we have started are multi-year projects.

Along the topic of interest expense, let me provide some quick color on 2013 that is worked into our guidance. It is forecasted that be about $20 million down due to lower interest from the notes that are due July 2013, and also higher levels of capitalized interest resulting from the significant investments we are making in our growth platforms this year.

Included in income tax expense for the fourth quarter of 2012 is a tax benefit of $3 million, primarily due to the expiration of the statute of limitations expiring in certain international tax jurisdictions. After excluding adjustments for all special items and impact to reversal of the aforementioned adjustments of tax reserves, our overall underlying annual tax rate for the quarter was 30.6%, which is lower than the 31.5% rate at the end of the third quarter of 2012. The favorable impact of the lower rate related to the first 9 months of 2012 was about $0.03 per diluted share.

Note that the 2012 full year rate of 30.6% is higher versus the comparable 2011 rate of 28.6%. This is primarily due to earnings mix and the expiration of favorable U.S. tax laws, such as the research and development tax credit. Although the U.S. passed legislation earlier this month to reinstate these favorable tax laws retroactive to January 1, 2012, U.S. accounting rules require that we do not reflect the tax benefit for this retroactive impact in our 2012 financial statements. We have included the 2012 benefit in our 2013 guidance, which was about $0.03 per share.

Now let me cover Coating Resins segment sales and earnings, on a basis prior to classifying it as a discontinued operation which is summarized on Slide 11. During the quarter, sales were $324 million and are down compared to the prior year quarter sales of $361 million. Much of the lower sales came from the divestiture of our Pressure Sensitive Adhesives product line, which was sold in the third quarter of this year and lower sales in Europe. Operating earnings of $11.9 million are much improved and compares very favorably to the prior year quarter loss of $0.4 million. This is mostly due to the benefits of lower raw material costs and lower expenses, resulting from improvement initiatives implemented last year.

So in spite of the lower sales volumes in 2012, Coatings had a great year, resulting mostly from our pricing, SKU and cost-reduction initiatives, which began in early 2011.

Moving to Slide 12. Operating cash flows from continuing operations were $73.7 million for the quarter, up from the $41.3 million of the prior year period. Our average net working capital days were down 12 to 83, compared to the third quarter of 2012. Average accounts receivable days of 48 and payable days of 46, were up 1 day and 2 days, respectively. Average inventory days were down 10 days to 82 days, compared with the third quarter of 2012, mostly due to the aforementioned focus on inventory reduction in Engineered Materials and In Process Separation.

I'd like to thank everyone at Cytec for their continuing efforts to optimize our working capital. We believe there is plenty of opportunity, particularly in our inventory days, to improve upon these metrics in 2013.

Our capital spending for continuing operations in the quarter was $61 million, bringing our annual total to $145 million for continuing operations and $178 million for total Cytec, which includes the discontinued operations in 2012. Our outlook for 2013's full year capital spending is about $300 million, with the majority of the spending related to our previously announced investments in our growth platforms.

These projects finished the year on schedule, and we are pleased to have the profitable growth opportunities ahead of us that make these projects possible. In terms of share buyback, we repurchased approximately 1.5 million shares during the quarter for $100 million. In connection with the share repurchase, we borrowed $62 million on our $400 million credit facility. In October, we announced our expanded share repurchase program with a total authorization of $650 million, with $550 million remaining in the program at year end. We expect to fund the repurchase program with a portion of the cash proceeds from the sale of our Coating Resins business, which we expect to close by the end of the first quarter this year.

We remain committed to quickly return proceeds from the sale of Coating Resins to shareholders via stock buyback, which will offset some of the dilution from the Coating Resins divestiture. Our expectation remains to complete the repurchase program by mid-year. As Shane said earlier, we had a busy year at Cytec with our portfolio transformation activities. We are on track with the integration of Umeco on synergy savings targets. I am proud of our results in 2012, and with our increased focus on our growth strategy, we're poised to deliver another excellent year in 2013. We are committed to maintain a strong balance sheet and cash flow, which will enable us to pursue value-creating opportunities for our shareholders. Thank you, and now I'll turn the call back over to Shane.

Shane D. Fleming

Thanks, Dave. And I'd now like to update you on our plans for 2013. As I mentioned earlier, 2012 was an exceptional year for Cytec and in 2013, we'll continue the good work, including the full integration of Umeco and the close of the Coating Resins transaction.

When we closed on Umeco in the third quarter of last year, we mentioned our plan to realign the Engineered Materials and Umeco business segments, based on targeted end markets. We are currently creating an aerospace materials segment, which will incorporate Umeco's aerospace products into our legacy Engineered Materials business and a separate industrial materials segment, which will combine Umeco's industrial materials business with our legacy High-Performance Industrial products.

This will allow us to focus our resources on the needs of the respective customers and tailor our strategies to the end markets. We plan to share these details with you when we report first quarter results and provide detailed full year guidance in April 2013.

Slide 14 provides a snapshot of our sales projections by business. The outlook for commercial aircraft build rate continues to look solid as we begin 2013, given the current large order backlog and announced production plans. This will continue to drive good revenue growth in this segment. Global air traffic has been growing at a faster rate than GDP and high oil prices and low interest rates should continue to support the replacement of older aircraft with newer, higher composite planes.

Cytec remains well-positioned in the market and we are projecting 10% revenue growth this year, with estimated annual sales in the range of $975 million to $1.005 billion, driven primarily by increased large commercial transport and business jet build rates.

We have maintained a conservative approach on defense-related programs, given the pending resolution on defense funding levels. The industrial materials markets are challenged by weak economic conditions, which are translated into soft demand across a number of sectors, including high-end automotive, marine and wind energy. This is particularly the case in the European industrial markets, which represent a large portion of our Structural Material sales. Despite the economic uncertainty, we continue to see and pursue multiple growth opportunities, including high-end automotive, driven by customer demand in China, the Middle East and the U.S.

In our Process Materials product line, we also have a number of growth prospects related to the aerospace market, particularly, with leads coming from our aerospace materials sales team. Also, despite some current softness in demand in the U.S., longer-term, we do expect a healthy recovery in the global wind market, which is an important end market for our vacuum bagging business.

Our focus this year is on capturing new growth opportunities identified in both product lines and delivering additional operational and cost-saving improvements that will drive earnings growth and margin expansion in the segment.

Our full year sales estimate for the Umeco business is in the range of $315 million to $335 million. This excludes approximately $50 million of low margin revenue coming from the Umeco distribution business, for which we are now considering strategic options.

All of this translates into roughly $0.50 per share accretion coming from the Umeco business in 2013, which is built into our full year guidance. We expect continued strength in the In Process Separation business, driven by industrialization in emerging markets. We estimate demand in the copper and base metal mining industry to remain solid, with production volumes estimated to increase by 3%.

Similar to last year, we continue to penetrate new geographies with our advanced technologies, which will support good growth in 2013. Alumina demand has remained soft and we do not anticipate much improvement in this area, but we are exploring new opportunities in the industrial mineral sector driven by our new product technologies. Overall, we estimate revenue growth of approximately 10% for the In Process Separation segment, with sales estimated in the range of $410 million to $430 million this year. We're also pleased to be part of the new Critical Materials Institute research initiative, chartered with developing solutions for the domestic shortage of rare earth metals. We believe this consortium, which is funded by the U.S. Department of Energy, has the potential to develop significant long-term growth opportunities in domestic rare earth production.

In Additive Technologies, although the economy continues to be a headwind for this business, we expect to see modest sales improvement in the Specialty Additives product line, primarily related to opportunities in the Asia-Pacific region. In Polymer Additives, we are encouraged by growth opportunities within agricultural film and the automotive markets, which have shown some signs of recent improvement. This leads to 3% to 4% sales growth for 2013, or an estimated sales range of $275 million to $285 million.

Following the close of the Coating Resins transaction, we'll be prepared to provide additional guidance on operating earnings by business segment. Our overall guidance for Cytec's 2013 full year adjusted diluted earnings per share for continuing operations is in the range of $4.70 to $4.95, on sales from continuing operations of approximately $2 billion. This assumes the March 31 close of Coating Resins.

To conclude, I'm extremely pleased with our performance in 2012, and I'm confident in our ability to deliver our 2013 guidance under the assumptions provided. We are committed to executing a long-term growth strategy with our improved portfolio of businesses, which will continue to create significant value for our shareholders.

Now let me turn the call over to our moderator, Keisha, so we can respond to your questions.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from Mike Sison with KeyBanc.

Michael J. Sison - KeyBanc Capital Markets Inc., Research Division

In terms of the weakness you saw in Umeco, is that primarily in the businesses that you're looking to -- looking for strategic options? And can you sort of maybe talk about, a little bit more specific, where those businesses are going into?

Shane D. Fleming

Yes, I'd be happy to do that, Mike. No, I think the short answer is that's not the case. The softness that we saw, relative to expectations, was primarily in Europe, and mostly in the, as I said, motorsport sectors, so that's Formula 1 and Le Mans Series, and in the high-end automotive, where we saw some orders push into 2013. So I would say, from a revenue standpoint, that's where the biggest gap came. The business that I talked about, considering strategic options for, which is the distribution business is kind of a remnant of the supply chain business that Umeco had divested prior to the Cytec acquisition. So this is a small business, roughly $50 million, self-contained and is effectively a distribution, a resale business. We knew going into the acquisition, that was a business that we would likely not want to retain.

Michael J. Sison - KeyBanc Capital Markets Inc., Research Division

Okay. And then in terms of the integration synergy for Umeco, it sounds like everything is going fairly well. Any potential upside, or can you just sort of give us a feel for what's been accomplished thus far?

Shane D. Fleming

Yes, you're right. I'd characterize it as going well. I think we're at or above schedule in terms of delivering the cost savings, pretty much across-the-board. So we feel good about what we've done to date. There are some additional cost-saving opportunities, I referenced a little bit in my speech. I'm not going to be able to quantify those for you right now, but we do expect to be able to get some additional cost savings as we further the integration process. But we really want to turn our focus in that business to growth now. And we -- despite some of the challenges we talked about, we still believe they're a lot of exciting growth opportunities and we don't want to limit the ability of the business to capture that growth.

Michael J. Sison - KeyBanc Capital Markets Inc., Research Division

Okay, and last question. If you do close Coating Resins or the sale of Coating Resins toward the end of the quarter, if you think about sort of resuming the stock buyback, will that be more heavily in the second and the third quarter, and finish it up this year? And then, I guess the stranded cost reductions would probably start closer to the second quarter as well?

Shane D. Fleming

Yes, let me give you a little bit more clarity there. Well, if you assume the end of Q1 close for Coatings, we're saying we'll have the buyback appreciably complete by the end of the first half of the year, so we expect to get most of that done in the 90 days following the close. As far as the reduction in costs, I would say a similar sort of schedule. We've targeted to take out about 2/3 of that $66 million that Dave referenced earlier, and we expect to have that complete within 90 to 120 days of the close. So we should be in pretty good shape by mid-year, with hitting that stranded cost.

Operator

And our next question comes from P.J. Juvekar with Citi.

P.J. Juvekar - Citigroup Inc, Research Division

Shane, if I look at your volume growth in Engineered Materials in the fourth quarter, it slowed down to 5%, and your sales growth expectation for 2013 at 10%. It seems to be sort of at the low end of what you've talked about in the past. I think you've mentioned at least double-digit growth. So are you just being a little bit cautious there, given some of the challenges you're seeing in some of those markets? Or are you seeing some of this inventory adjustment continue into 2013?

Shane D. Fleming

No, I don't think I would say that I expect to see anymore inventory adjustment moving into '13. And at least for the last, oh I would say, 12 months or so, I think I've been pretty consistent in talking about double-digit growth, 10% growth. So the trajectory right now for growth going forward is pretty much what we have planned. There's always puts and takes with some programs moving a little faster than others. But I feel -- as I look forward over 2013 right now, I feel pretty much as positive and optimistic as I did 12 months ago, when I looked at the business. It's going to be a solid year for us.

P.J. Juvekar - Citigroup Inc, Research Division

Okay. So is it fair to say that you sort of think volume growth begins to pick up as we move into 2013, is that correct to assume?

Shane D. Fleming

Yes, there's clearly some ramp-up, and as programs ramp up now, there are some new programs in here as well, and I'm not going to get into a bunch of detail on the 787 at this point in time, but plans with that program are to increase build rates. And if those rates are achieved, that's going to pick up volume in the second half of the year versus first half of the year. And another big question mark for us, and then we're probably playing it a little bit conservative, is what's going on in the defense sector. There are still some real questions about funding levels for some major programs and that could have an impact on us as well in 2013. And I think we've taken a reasonable position there, maybe a slightly conservative position on the defense side.

P.J. Juvekar - Citigroup Inc, Research Division

Okay. And if I look at IPS margins, it took a big step down in the fourth quarter and you explained some of the puts and takes there. Can you just quantify for us the impact of the phosphine plant turnaround and as well as the inventory reductions, as it relates to that segment?

Shane D. Fleming

Yes, I don't know. Dave, if you've got that much granularity?

David M. Drillock

Yes, I think in terms of margin, we would have been in the low 20s, had those events not occurred in the quarter.

Shane D. Fleming

Maybe just to provide a little bit of context, the business ended the year at 24%, which was significantly higher than we'd targeted, and as I said in my comments, also a record. Yes, I don't see this business as being a 24%, 25% operating profit business. I do see it as being a 22%, 23% operating profit business, and that's -- it's going to be made up of quarters at 17% and 18% and other quarters at 24% and 25%, depending on volume and other issues. So the level of lumpiness we saw in the fourth quarter, not really that surprising, although we did take a pretty big hit from the phosphine turnaround, as Dave just referenced.

P.J. Juvekar - Citigroup Inc, Research Division

Okay, and is that turnaround complete at this point?

Shane D. Fleming

Yes, it is.

Operator

And our next question comes from Laurence Alexander with Jefferies.

Laurence Alexander - Jefferies & Company, Inc., Research Division

Laurence. In terms of CapEx, what are the big incremental items? And could you potentially break it down by segment? And do you expect the $300 million run rate to be for the next several years, or just 2013 specific?

Shane D. Fleming

Yes, let me answer the second half of your question, then I might ask Dave to comment on the first piece, so we can get a little more granular. I'd say the $300 million run rate is high. I think it could be that high in a particular year, but what we're saying is roughly on average, $200 million to $250 million over the next 3 to 4 years. So I mean, we could have a year at $300 million but I don't think that's the run rate. And Dave, maybe if you can talk to some of the [indiscernible] pieces?

David M. Drillock

Yes, I'm going to give -- I'll give you a little more color on what we're working on. So we've announced the doubling of our capacity in the phosphine plant in Welland, and then the completion of the carbon fiber plant in South Carolina. Those are the 2 biggest ones. But we've also got a tapeline we're expanding in Texas. We've got -- expanding our structural adhesives capability in Maryland and also a polymer plant in Michigan. So those are the big 5 projects that are contributing to that capital and account for the majority of that spending.

Shane D. Fleming

And let me just add one more piece of color on the longer-term view, and that is -- so we're saying somewhere in the $200 million to $250 million range over the next 4 years, but that's going to depend on the ramp-up rates for -- in particular, our large commercial transport and defense customers. We will make those investments as we need to, when we need to, as these programs ramp up. But if they're going to run slower than what is being publicly projected right now, we'll ramp those back down. So we'll work closely with the customers, trying to understand when they're going to need the materials and then time our investments so that we're ready when they need it, but not too much in advance of that.

Operator

And our next question comes from John McNulty with Crédit Suisse.

John P. McNulty - Crédit Suisse AG, Research Division

Just a few questions. With regard to the inventory destocking that nicked the Engineered Materials and In Process business, I think you said it was $0.10 in total. Can you break it out by segment as to what the hit was?

David M. Drillock

Yes, John, I'd say, just splitting up between the 2 segments, 70% CM and 30% In Process.

John P. McNulty - Crédit Suisse AG, Research Division

Okay, so the EM margins would have been something in the 19% to 20% range in terms of the operating margins, if you have that...

Shane D. Fleming

Yes, yes.

David M. Drillock

Yes, that sounds about right.

Shane D. Fleming

Yes, that's about right.

John P. McNulty - Crédit Suisse AG, Research Division

Okay, and then on the Umeco synergies that you -- or excuse me, the accretion that you were calling for, I believe originally, you were looking for about $0.65 of EPS accretion, and now it's, I think, if I heard you right, you've dropped it to about $0.50. So what's driving that? It is just volume difference? Is it the sale of the distribution business? Is it -- I guess, what are the drivers behind it?

Shane D. Fleming

Yes, by far the largest driver is volume, and as we've noted, primarily in the structural business and primarily in Europe. And I'll come back to that in a second, but the second piece is the potential sale of the distribution business. Although that is quite a low margin business and it's secondary to the volume. The volume is the real driver. But while I'm talking about volume in that business, I don't want to paint too negative a picture here. We did see some sales move out of the year, and we have seen some softness in certain of the automotive programs, but it's important to note that we're still seeing good growth opportunities in the automotive sector. So it's not all bad there. Some of the major motorsports teams have backed out, so we took a little bit of a hit there. But that's still a solid business for us. And we're seeing a lot of interest, there's a lot of collaboration still going on on the high-end automotive side. So still very bullish about where that business is going to go over the next couple of years, but it clearly impacted our second half 2012 results and will have some carryover into 2013 until we can get some new programs going.

John P. McNulty - Crédit Suisse AG, Research Division

Okay, fair enough. And then just also on Umeco. I mean, the margins certainly came in a bit light in the first half of the year, and lighter than what we were looking for, ranging between 4% and 4.5% or so. I guess when you think about the synergies that you should be getting in and distribution being out, which is a lower margin business, on the revenue guidance that you gave, how should we be thinking about the margins and realistically where they're going to come out? Are we in the high single-digits? Are we in the double-digits? Like what's -- what are you thinking in terms of rough kind of estimate on that?

Shane D. Fleming

Yes, I think we're in the higher single-digit area, 7%, sort of a midpoint for us right now.

Operator

[Operator Instructions] And we do have a question from Robert Koort with Goldman Sachs.

Unknown Analyst

Johnny [ph] on for Bob. I just wanted to get a sense on the CapEx outlook for IPS and what portion of growth, of the 10% growth, is being driven from that versus just end-market improvement?

Shane D. Fleming

Yes, for the next year, 12 months or so, all of that growth is coming from demand in the end markets and our ability to supply that with our existing asset base. So the new capacity and all the capital spend in IPS is really focused in this phosphines expansion, which will drive growth both in phosphines as well as in our mining business. But that capacity won't be online until Q1 of next year. Outside of that, as we look forward into '15 and '16, I don't see this business needing a lot of expansion capital. As you probably know, we made an acquisition in India of a plant that produces our metal extractors products, so that's going to add a fair bit of capacity to that piece of the business. And we've got some incremental capacity we can bring into our flotations business from our plant down in Mexico. So the businesses well said to have continued significant growth rates without requiring a lot of capital over the next couple of years. So as Dave talked to the capital plans, looking forward, you probably recognize that 4 of those 5 projects were in Engineered Materials, and that's where I expect the bulk of the capital to go.

Unknown Analyst

Okay. And you mentioned your long-term positive outlook on the wind energy market. Is there any improvement anticipated in that market for 2013 on the vacuum bagging side?

Shane D. Fleming

Yes, I think the outlook in North America is not very strong. The delay on getting the PTC [ph] reapproved with the fiscal legislation, really kind of brought any development work in the U.S. to a halt. And I don't think it's going to pick up fast enough to offset the fact that it slowed way down. So we see the U.S. business being down. But at the same time, we do see growth picking up a little bit in Asia and in Europe as they start to build these large wind farms, the North Sea area, with these super large turbines. So I think there's going to be some pick-up in Asia and in Europe that will offset some of the softness in North America. But we'll probably be out in the '14 and '15 before we start to see that market return to significant overall global growth rates.

Operator

And at this time, there are no further questions. I would now like to turn the call back over to Ms. Jodi for any closing remarks.

Jodi Allen

Thank you to everyone's participation in today's call. And if you have any follow-up questions, please call me directly at (973) 357-3283. Thanks, and have a great day.

Operator

And this does conclude today's conference call. Thanks for your participation. You may now disconnect.

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