Cytec Industries Inc. Q1 2009 Earnings Call Transcript

| About: Cytec Industries (CYT)

Cytec Industries Inc. (NYSE:CYT)

Q1 2009 Earnings Call

April 17, 2009, 11:00 am ET

Executives

Shane Fleming - Chairman, President & Chief Executive Officer

Dave Drillock - Vice President & Chief Financial Officer

Jodi Allen - Director of Investor Relations

Analysts

David Begleiter - Deutsche Bank

Mike Judd - Greenwich Consultants

Anthony Pettinari - Citi

Laurence Alexander - Jeffries

Mike Sison - Keybanc

Bob Koort - Goldman Sachs

Phil Friedman - PW Partners

John McNulty - Credit Suisse

Harry Mateer - Barclays Capital

Keith Wiley - Goldman Sachs

Richard O'Reilly - Standard & Poor's

Operator

Good day and welcome to the Cytec Industries Incorporated first quarter earnings announcement. 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 ma’am.

Jodi Allen

Thank you Chad 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 operations; and Dave Drillock, Vice President and Chief Financial Officer, will review the financial results and the special items noted in our press release. Shane will then finish with some commentary on our outlook for 2009.

This call is also being webcast in listen-only mode and it will be archived in audio format on our website for three 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 is 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 number two of our supporting materials or at the end of our news release for the statements in our quarterly and annual SEC filings.

In addition, our discussion includes certain non-GAAP financial measures 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 turnover the call to Shane.

Shane Fleming

Thank you Jodi and good morning everyone. Market conditions in the beginning of the quarter were similar to late last year, with low demand for products across the entire specialty chemicals segment. As you can see on the chart on slide three, total sales were down companywide versus the same period last year. Volume in our specialty chemicals businesses that supply the automotive, construction and general industrial markets, were most impacted by the weak demand environment.

In addition to the low demand, we also saw our customers continue the destocking actions that began in late 2008. We believe this activity is coming to an end as we begin to see some signs of demand improvement in March. The improvement while modest was evident broadly across our portfolio of businesses, and in particular we have seen more significant signs of improvement in Asia, likely related to the Chinese stimulus package.

The end result in the quarter was earnings per diluted share of $0.06, excluding the special items that Dave will cover shortly, compared with $1.08 earnings per diluted share in the same period in 2008.

While we are clearly not satisfied with these results, we have made good progress with implementation of the restructuring program previously announced, which will reduce our structural cost over the next few quarters. In addition, we are taking a number of measures to further reduce cost, which we’ll discuss in more detail. These combined actions will begin to have greater impact on our earnings as the year progresses.

Now, let me give you an overview of the results within each business segment, beginning with slide four. Sales volume in the Surface Specialties business were the most impacted by the global downturn, as we continue to see a negative impact in our major industrial markets.

The net result was segment sales of $243 million, which represents a 43% decline in selling volume, a 1% increase in selling prices and a 4% reduction from currency exchange, compared with the prior year quarter. Soft demand was seen across all of the Surface Specialties product lines.

We are however, pleased with our ability to maintain pricing in our eco-friendly coating resins products, despite the reduction in energy and propylene costs in the quarter. This segment an operating loss of $20.7 million in the quarter compared to operating earnings of $20 million in the same period last year.

We continue to make good progress with the restructuring actions announced in January and the benefits of these initiatives will start to be realized in the second quarter, as we discontinue production of certain low margin product lines in multiple facilities in Europe.

Slide five shows an overview of the performance chemical business results. This segment was also impacted by sharp demand declines, with overall sales of $132 million down 28% versus the same period last year. Selling volumes declined by 29%, selling prices increased sales by 5% and exchange rates contributed to a 4% decline.

Although demand was weak in all the product lines, the most significant volume declines were seen in additive technologies and Pressure Sensitive Adhesives, which are the product lines in this segment that are most exposed to the automotive and construction Markets.

Performance Chemicals did continue to show favorable pricing in the quarter, with the Mining Chemicals and phosphine product lines continuing to benefit from price increases and improved product mix driven by penetration of new technologies. This resulted in a good earnings performance in these two product lines despite the soft demand and helped offset some of the weaker performing lines.

Polymer additives also showed good margin improvement despite the significant volume decline, which is the result of the prior years portfolio rebalance. Overall, the segments operating earnings were $5.8 million in the quarter, down from earnings of $13.7 million in the same period last year.

Slide number six shows results for the Building Blocks Chemicals segment, which was also impacted by the weak global economy, with sales down 52% to $67 million in the first quarter. Selling volumes declined by 18% and selling prices decreased by 34% as a direct result of the sharp decline in raw material prices versus the first quarter of 2008.

Acrylic natural demand showed signs of improvement in Asia, which we believe is probably related to the Chinese stimulus package and also related to improvements in acrylic fiber economics versus polyester and natural fibers. Melamine demand however, continues to be extremely soft globally.

Building blocks operating earnings were $3.2 million in the quarter, down from $5.9 million in the first quarter of last year. This was due to reduced volumes, as well as planned maintenance outages for our melamine and sulfuric acid operations in the quarter, with melamine operating at 40% of capacity for the quarter.

Moving to slide seven; the Engineered Materials segment demonstrated solid performance in a challenging environment. Sales were $170 million, which represents a 15% decline versus the prior year.

Volume in this segment decreased by 15%, principally due to lower volumes from large commercial transport and business and regional jets versus the strong orders in the first quarter of 2008 in these sectors. We did show growth in the military segment, which should continue to offset some of the weaker sales into business and regional jets this year.

Selling prices increased sales by 2% and exchange rates reduced sales by 2%. The net result was operating earnings of $33.1 million versus $44.5 million in the first quarter last year, with the shortfall due primarily to the reduction in build rates just mentioned.

When looking at the quarter sequentially, operating earnings grew 8.5% versus the fourth quarter 2008. While there are concerns about reduced commercial transport build rates in the medium term, we continue to see other growth opportunities in this segment that will soften this impact.

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

Dave Drillock

Thank you Shane and good morning everyone. We have a lot of important actions to discuss with you today; so let me go right to the financials and then I’ll discuss our initiatives to increase cash flow and maintain our liquidity. I know you’re probably asking “why all this now?” and our simple answer is this. While we have a strong balance sheet today, we are proactively taking these steps now to stay that way going forward, so let’s get started.

Please refer to slide eight as I go through an overview of the financial results. Our gross margin after adjusting for the special items in both years, decreased about 1.7% from the prior year period. Our commercial team did a good job as we’re able to hold pricing in our Specialty Chemicals segments, despite a softening raw material environment as Shane just mentioned and the Building Block Chemicals to lower raw materials more than offset lower selling prices.

A greater adverse impact on gross margin however, was the lower specialty chemical production rates, due to very poor market demand. While our period manufacturing costs were down about 10%, our specialty chemical production units ran at about 50% of capacity. So in spite of some significant cost control efforts, our fixed cost per unit went up, which negatively impacted our gross margin.

Also unfavorably impacting manufacturing cost of sales was a charge of $4 million for recently updated environmental remediation estimates related to two operating sites in the U.S. We typically review our sites throughout the year and adjustments to these investments can be favorable as well as unfavorable. This was just larger than a typical adjustment, so we are pointing it out to you, so you have a better understanding of the quarter results.

You should note that environmental remediation cash expenditures are more long term in nature and our annual cash outlay for remediation work has been steady in a range of $6 million to $10 million per year, and this charge does not change that.

Also included in manufacturing cost of sales is a special item net restructuring charge of $2.1 million related to a number of initiatives in specialty chemicals as we right-size the business to the difficult demand environment we are in. We expect the full-year restructuring charges to total about $117 million, with about $32 million of that to be non-cash.

The split of the restructuring charges by quarter depends on the timing of certain actions and Shane will discuss this with you more in a moment. I’ll just add that all our actions are implemented or in-progress, so we feel good about achieving the benefits from these important initiatives.

Operating expenses are down about $13 million year-on-year, with our cost reduction efforts accounting for about 40% of this amount and changes in exchange rates, the remainder. Operating expenses also include approximately $3 million for consulting costs related to our working capital project. I’ll discuss this more shortly, but costs going forward will be nowhere near this amount.

Also included in operating expenses is a special item net restructuring charge of $1 million, primarily for employee severance as part of our broader initiatives to reduce cost in light of the weak demand.

Other expense for the quarter was net $3.2 million, compared to $0.2 million net income in the prior period. Included in this are, transaction exchange losses of $1.4 million, compare to a small gain to prior year. Our annual underlying income tax rate increased about 2% versus last year, principally due to an earnings mix towards higher tax jurisdictions, mostly the U.S., with our Engineered Materials segment continuing to be a larger position of our overall earnings.

Moving on to cash flow for the quarter, slide nine shows you the progress we are making concerning our working capital project. The graph is in days outstanding, which is how we’re monitoring progress of working capital, so let me now go to the cash flow. Our cash flow from operations was $63 million, up from the prior years $38 million. The increase is principally related to improvement in our networking capital, partially offset by the lower earnings.

Accounts Receivable generated about $53 million of cash, primarily due to days outstanding decreasing by eight versus year end. Our team has done a good job in going after late payers and being more proactive on collections.

Our inventory decreased $44 million reflecting lower raw material costs, while days on hand increased by nine since year end. The increase in days was the result of the severe drop-off in demand in January and February, which is when the increase in days occurred.

In March, we adjusted our production schedules further and we began to see a drop in inventory days. Our commercial, manufacturing and supply chain teams are taking additional actions to bring our days on hand down at least one turn, and we expect to see progress towards this goal by the end of the second quarter.

Accounts payable decreased $34 million due to reduced spending from the lower production levels and cost controls, which led to our reduction of spending, but even here we have initiated the number of steps to improve our days outstanding and accounts payable.

Our engagement level on this initiative is high throughout the company and as we have gone from the mobilization phase to the execution phase, we saw real movement towards working capital improvement in March. We have a lot to do yet, but I am confident we will deliver or exceed our goal of a one turn improvement in networking capital, which will show up in our future cash flows.

Moving on to slide 10, I’d like to share with you the additional measures we are taking related to cash and liquidity. Capital spending for the quarter was $64 million, up from $27 million in the same quarter of 2008, with almost all of the increase due to investing in our carbon fiber expansion project in the U.S., the composite prepreg manufacturing plant in China, and the scheduled maintenance capital turnaround at our Building Block manufacturing plant in Louisiana.

The maintenance capital work in Building Blocks is complete and the China plant is on target for completion in this current quarter. In regards to the carbon fiber plant, we have decided to delay the completion of this project for at least 12 months. What led us to this decision was our view of the overall demand profile for carbon fiber, which takes into account the combination of delays in new aircraft programs, plus legacy aircraft production slowing down.

We are also fortunate to be at a point where we can delay the program with minimal project risk and minimal extra cost. We will still have some spending in the next two quarters as we bring this project to a controlled and safe stop, but as a result of the change to the completion date for the carbon fiber plant, we are pushing an estimated $50 million to $60 million of capital expenditures from 2009 and 2010 to 2011. The net of all this is that we are reducing our full-year outlook for 2009 capital spending to $180 million, down from our previous estimate of $200 million.

Our overall debt decreased $15 million in the quarter. Our main credit revolver balance was $113 million at the end of the quarter and we expect, based on our forecast, that this balance will be zero at the end of this year. Concerning the revolver, one of the two financial covenants is a debt-to-EBITDA ratio of 3.25 and EBITDA is based on a rolling four quarters.

Included in the EBITDA is cash restructuring charges. We anticipate spending up to $100 million in 2009 for the first quarter of 2010. Based on the timing of the cash payments in 2009, we may be out of compliance with the debt to EBITDA covenant for a quarter or a very little borrowing capacity as we get close to the 3.25 limit.

We are working with the banks and our facility to amend the covenant, so we can continue forward with our structural cost take out initiatives and maintain adequate liquidity. We anticipate no problems in quickly completing the amendment.

Our goal during this difficult economic time is to be cash self sufficient and retain the flexibility to do the important things we need to do, to make sure we are a stronger company coming out of this economic recession. This amendment helps us achieve this. Our other covenant is the interest coverage ratio; we have no concerns with this covenant.

Since we are often asked this question, let me remind everyone that our next scheduled debt maturity is October 1, 2010 for $250 million of our 5.5% notes. While it is too early to tell you exactly what path we are going to take as a concern to taking out this debt, I will tell you that we do not want to push this issue to year end 2009 or into 2010, but want to take this liquidity risk out as early and cost effectively as possible. You should expect to hear more in our second quarter conference call.

Continuing the discussion on liquidity, our Board of Directors has approved a reduction on our dividend of $11.25 or 90%, which brings our dividend down to $1.25 per share and this is effective immediately. We believe this is a prudent decision given the uncertainty in this economic environment and over the next four quarters this will conserve approximately $21 million of cash. We understand the importance of the dividend to our shareholders and we will revisit the dividend pay out once the uncertainty about the global economic outlook improves.

We also plan to make up to $25 million in equivalent value of Cytec stock as a contribution to our U.S. pension master trust. The issuance of Cytec stock will be slightly dilutive in 2009, although increases in our stock will reduce our future cash contributions to the U.S. plans. We believe that our stock at the current valuation, combined with our long term view of Cytec is a good investment for the trust and a good cash conservation measure in 2009 for Cytec.

In closing, Shane and I hope to leave you today with the understanding, that we are not sitting still waiting for the global economy to recover. Our commercial faults remain very active with our customers and we’ll hear some good examples from Shane shortly.

We believe that the items I’ve just covered plus those you’ll hear from Shane in just a few moments are not only good precautionary actions taken in regards liquidity and financial flexibility, but our cost takeout action should go a long way to insure we have a strong future and accelerate an increase in shareholder value.

Thank you and now I’ll turnover the call to Shane.

Shane Fleming

Thank you Dave and now I’ll spend a few moments reviewing some of the additional cost actions we’ve implemented, which are shown on slide 11. Despite some early signs of improvement, we continue to have a limited view of future demand requirements and anticipate the year to remain in a recessionary environment. As a result, we have implemented additional short term measures to reduce cost.

These include a global salary freeze and incentive compensation limitations, except where prohibited by law or contracts, additional site and white collar furloughing and discretionary spending controls. We’ve also suspended the company matching contribution for the 401(k) savings program for all U.S. salaried employees effective May 1, 2009.

Although these were difficult decisions to take, given the impact on our employees, we believe these are the appropriate and necessary actions in this environment. These short term initiatives are expected to reduce costs by approximately $42 million in 2009 and when combined with the short term measures announced in January, bring the total savings in 2009 to $55 million.

We are also in the process of implementing additional structural actions to deliver sustainable cost reduction beyond the plans we announced in January. This includes additional headcount reductions, which will bring our total work source reduction to over 12% on a global basis in 2009.

The structural changes will add an additional $8 million in savings in 2009 to the $43 million projected from our January announcement, resulting in an approximate $50 million improvement this year, and bringing the full year recurring savings run rate to approximately $110 million by year end; although these measures, along with the important working capital initiative that they spoke about earlier are within our control to deliver and I have no question it will do so.

Now, I’ll spend a few moments addressing our outlook for 2009, which is summarized on slide 12. As I mentioned earlier, we did see some signs of demand improvement at the end of the first quarter in our Specialty Chemicals business, particularly in Asia and in Latin America.

We are expecting a modest run rate improvement in sales, in both our Surface Specialties and Performance Chemicals business over the rest of the year based on our view that destocking activity at our customers is largely behind us. In Engineered Materials and in Building Block Chemicals, we are estimating volume to remain essentially flat for the remainder of this year.

Based on these volume assumptions and the cost reduction initiatives I just discussed, our guidance for full-year segment operating earnings is as follows: We are estimating Surface Specialties to operate at a loss in a range of $25 million to $40 million. Performance Chemicals is projected to deliver operating earnings in a range of $50 million to $60 million.

Building Block Chemicals operating earnings are estimated to be $5 million to $10 million and Engineered Materials operating earnings are projected to be in a range from $125 million to $135 million. Corporate and Unallocated expenses are expected to be approximately $20 million in the year and net interest expense is forecast to be $26 million.

Our underlying annual tax rate for ongoing operations is estimated to be 34%. The net result of these estimates, including our cost reduction actions, leads to our full-year guidance for adjusted diluted earnings per share, to be in a range of $1.35 to $1.75 per share.

What is important during this challenging year that we remain focused on cost reduction and cash preservation is equally important that we remain focused on our customers. Cytec continues to offer innovative solutions to the markets we serve and even in these difficult times, we are able to demonstrate the strength of our technology.

For example, our Mining Chemicals team recently launched a product that enables our customers to increase production, run their processes with greater control and also save on energy consumption.

In Surface Specialties, the business just executed a new preferred supplier agreement with one of the largest global coating manufacturers. This partnership with a company that values Cytec’s eco-friendly resin systems and technology expertise, positions us to grow share and to conduct collaborative development work on new high performance coatings.

In our Engineered Materials segment, we just introduced a next-generation prepreg system that combines primary structure properties with automatically processing. This new technology, which was launched at the recent JEC Composite Show, enable the construction of large primary aircraft structures, using flexible manufacturing allowing our customers to realize savings from lower tooling cost in cure.

So while we’re taking the necessary cost reduction actions to keep the company strong through this challenging economic period, we are not losing sight of our core competency of creating value for our customers through our service and applications expertise and product innovation.

I remain extremely confident in the long term outlook for the company. We have leadership positions and attractive growth markets, a robust pipeline of new innovative products and a world class organization filled with people with the drive and the capabilities to deliver winning results.

In the short term, we remain vigilant in controlling expenses, matching our cost structure with the current demand environment and maintaining liquidity through the measures such as we’ve outlined today. As we do this, we will not lose sight of our goal of transforming Cytec into a growth company positioned to deliver outstanding return to our shareholders.

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

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from David Begleiter - Deutsche Bank.

David Begleiter - Deutsche Bank

Shane, just in first the Surface Specialties, do you expect to be able to maintain pricing as the year progresses?

Shane Fleming

Good morning David; thank you for the question. As you would expect, there are areas of the product line where our ability to maintain price will be somewhat limited and there are other areas where we will have I think quite a sticky price situation.

The difficulties are going to be in our powders line and in the solventborne part of our LCR line, but outside of those two areas if you look at our [legumers] and radiation-cure, our waterborne business and a large portion of aminos product line, I believe we will be able to hold price and we’ll continue to see improved margins.

David Begleiter - Deutsche Bank

Just on Engineered Materials, can you walk through the pieces of what’s up, what’s down this year? Obviously military up, large commercial down, can you give detail Boeing, Airbus, how much down?

Shane Fleming

I’m not going to be able to give it to you by Boeing and Airbus, but what I can do is just give you by sector. If you look at first quarter 2009 versus first quarter 2008, large commercial transport was down. We think that was to some degree a carryover from the fourth quarter strike, where people have just not ramped backup to pre-strike rates.

So, there’s an element of that, where we do think that some destocking is taking place in Q1 that will slowly move away as we move into the year. The business and regional jet piece was down. Military was up and some of the industrial business, particularly the high performance car side was down.

David Begleiter - Deutsche Bank

Just quantify how much down was large commercial? Was it down 25%, 30%?

Shane Fleming

Yes, about 15%.

David Begleiter - Deutsche Bank

Sales or volumes?

Shane Fleming

Sales.

Operator

Your next question comes from Mike Judd - Greenwich Consultants.

Mike Judd - Greenwich Consultants

With the targets that you have for the accounts receivable, days’ outstanding inventory, days outstanding, also the accounts payable, what’s the timeframe to achieving those targets?

Dave Drillock

Mike, our timeframe is to achieve that by the fourth quarter of this year.

Mike Judd - Greenwich Consultants

Okay and then thank you for your estimates by segment in terms of what you hope to achieve this year. Did you have a corporate number in mind? I realize that there was some puts and takes in the first quarter, so maybe just for the rest of the year on a quarterly basis is there sort of an ongoing run rate, because I guess in the past it's generally been a couple million in the quarter right?

Dave Drillock

It’s about the same.

Operator

Your next question comes from P.J. Juvekar - Citi.

Anthony Pettinari - Citi

This is Anthony Pettinari standing in for PJ. Can you discuss the impact of a potential cancellation of the F-22 on your earnings and are there any other major items from Secretary Gates budget that could impact demand for advanced materials, either positively or negatively?

Shane Fleming

Let me just address the first question on the F-22. We don’t see a major impact from the F-22. We have not had a lot of volume recently. We did not project a lot of F-22 volume going forward. So, we didn’t really see that as bad news, when that announcement came out.

On the other hand, the increased funding for the F-35 or Joint Strike Fighter was an improvement versus what we have in our forecast and while we won’t see a lot of that show up in 2009 as you look forward in ‘10 and ’11, we think we’ll see a significant balance if indeed the additional $10 billion plus spend does come through.

I think outside of that, there wasn’t really anything that was a major up or down versus what we had in our plans or what we expected. So, the big change was really the favorable impact from the Joint Strike Fighter.

Anthony Pettinari - Citi

You indicated that Surface Specialties operating rates were around 50% during the quarter. Given kind of the up tick in demand that you saw late in the quarter, have you raised those rates?

Shane Fleming

We’re doing weekly S&LP planning, so it’s literally week-to-week. I can’t tell you how we've done for the first couple weeks of April, but we’ll ramp up as necessary to meet demand and the up-tick that we talked about was modest, much more pronounced in Asia, Latin America. I think in those areas we are seeing increased rates.

Anthony Pettinari - Citi

Can you just say again your Surface Specialties volume forecast?

Shane Fleming

Do you have that handy Jodi? Basically what we said, I think the guidance that we gave is up slightly. We didn’t give more guidance on that versus the first quarter results.

Anthony Pettinari - Citi

For the year it’s up slightly?

Shane Fleming

Up slightly from the first quarter run rate, that’s correct.

Operator

Your next question comes from Laurence Alexander - Jeffries.

Laurence Alexander - Jeffries

I guess the first question on Surface Specialties, do you expect the segment to be back to profitability or breakeven by Q4?

Dave Drillock

Yes, in the second half of the year.

Laurence Alexander – Jefferies

And tell me how much of a tail win was raw materials in Q1 and how much are you expecting for the full year?

Shane Fleming

I think Jodi may have to get back to you with that. I can’t give you the number off the top of my head. I don’t know if you can, Dave.

Dave Drillock

Yes, it wasn’t in regards to selling prices. I mean obviously we had a benefit in price. It’s about a $5 million benefit cost to price.

Laurence Alexander – Jefferies

Okay, and then finally with the working capital targets, are these targets intended to be permanent or are they tactical?

Dave Drillock

No, we’re making the work in this to be sustainable going forward, so that the cash conversion efficiency improves and get some good improvement.

Shane Fleming

Yes, let me just add to that. We’re expecting one turn improvement, that’s what we’ve got in the plan, that’s what comprises the $200 million target you hear us talk about, but my expectations are I know Dave’s expectations as well as we work through this year and into 2010, is we go beyond that; we’re not going to be satisfied with just one turn.

Operator

Your next question comes from Mike Sison - KeyBanc.

Mike Sison – Keybanc

In terms of Engineered Materials, I think the comment was volumes could be flattish in ‘09 versus ‘08 and sort of why is earnings down then year-over-year?

Dave Drillock

I think what we’re saying is its flat through the rest of the year relative to the first quarter.

Mike Sison – Keybanc

Relative to first quarter, so volumes will be down for the full year?

Dave Drillock

I think our expectations are volumes will be down.

Mike Sison – Keybanc

Okay. Then in terms of Surface Specialties, can you help us understand the breakeven point? I mean you have a lot of cost savings coming in there; there are certain magical, maybe not magical, that’s a bad word, but sales number they need to hit to breakeven or operating rates?

Dave Drillock

Well as you just alluded we’ve been working hard to try and lower that breakeven point by taking out costs, both structurally and these short term cost reductions. So we’ll have a lower breakeven point in the second half of the year and we’ll have an even lower breakeven point as we move into 2010, but it’s got to be volumes that are above the 60% level that we saw in the first quarter and we’ve got to get closer to 70%, 75% volume of 2008 rates to be at a point where we’re making money.

Mike Sison – Keybanc

Okay. Then back to commercial aerospace, I guess is there an implied assumption that you can share in terms of the commercial build rate that you think could occur to allow you to hit the outlook. I mean for 2010, build rates tend to impact your second half ‘09 results if you will; anything you can share on that?

Dave Drillock

I wouldn’t say we’ve necessarily got an implied build rate. I think what we’ve tried to do is obviously talk to the primary manufacturers to the subs, the Tier 1 suppliers, the people that we’re selling to directly; understand what they are hearing and what their build rates are and build our forecast on that basis.

I think what I can say is that our expectations are that LCT build rates will be down modestly. I think we have a little bit of a tail wind because of the destocking issue I talked about in Q1. I think on the business regional jet side, that’s where we’re looking at a more significant fall off and I’m sure you’ve seen the numbers where some of the business jet guys are going down as low as 40% to 60% from 2008 peak rates.

Mike Sison – Keybanc

Okay, then one last one on Surface Specialty. So, if I think about the sort of the commentary on breakeven points, you did 1600 million in sales in 2007. If you’re sort of at 75% of that, that’s 1200. That will get you to breakeven if you will on an annualized basis and then for every dollar above that, what the incremental margins on that improvement would be about 30%, 40%, 50%?

Dave Drillock

In that range depending on which product line; if it’s in the radiation cure products, it’s more towards 50% side; if its patterns, it’s more towards 30% side.

Mike Sison – Keybanc

Right, so you could get back to ‘08 earnings at a much lower sales rate and if you actually get back to ’08, you would actually be well above, let’s say that $100 million at year end in ‘07?

Dave Drillock

Yes, we’ve taken out roughly $100 million of structural cost when we’re done here and the bulk of that is out of Surface Specialties, so that should have had a substantial impact on that breakeven point.

Operator

Your next question comes from Bob Koort - Goldman Sachs.

Bob Koort - Goldman Sachs

Shane, I guess one appeal of your Surface Specialties portfolio time was the diversity of it and having some businesses that maybe weren’t quite as cyclically exposed, but I guess the volume erosion seems to sort of violate that hope. Can you give us a little more granularity within that division; how things work by product type, so it’s a little more inspiring.

Then also I assume PCG is one of your customers, but they’ve got a big European business and when they report earnings earlier this week they gave some signs that maybe things were starting to improve as we went into April and I’m not sure you commented on what April looks like so far.

Shane Fleming

I haven’t commented on April, let me start with that. We did see some modest improvement towards into the first quarter in terms of total volume across Surface Specialties, but Europe was one area where we have not seen that yet and Europe is a big market for us; it represents 60% of Surface Specialties. It’s also a big market for us in terms of automotive and construction. Those markets are a large percentage of our sales there. So that volume, that automotive construction volume hits our LCR product line and our powders product lines.

Radcure is a different market with more specialty areas like graphics and electronics and those have held up, but when you do the math, when you see that we’re down 40% across Surface Specialty and volumes you can figure out since Radcure has done a fair bit better than that, that some of their markets like automotive and construction have been down well over 50%.

So really the volume in Q1 was dramatically off in the product lines that are more exposed to automotive and construction; offset to some degree by businesses like Radcure that are in different markets that aren’t impacted quite as badly.

Operator

Your next question comes from Phil Friedman - PW Partners.

Phil Friedman - PW Partners

Just again a follow-up on Engineered Materials; can you say, again remind me, what percent of that is business in regional and how much was that down in the first quarter?

Shane Fleming

Give me one second, I can give you that. Business and regional was down between 15% and 20% it looks like and of the total portfolio, it’s between 15% and 20%.

Phil Friedman - PW Partners

Okay and then just maybe some minutia, but on the discretionary spending cuts, can you talk in a little bit of granularity about the types of things you’re doing and could you talk specifically about what you’re doing with your travel budgets?

Shane Fleming

In chemicals which has been the hardest hit, where we seen volume drop-off and actual customer activity fall-off the most, that’s where we set the most aggressive targets. I think our T&L reduction, travel and living reduction in specialty chemicals is 50% year-over-year. So we’re not limiting travel to customers.

We’re limiting non-critical internal meetings, presence at shows and symposiums, things where we’re not impacting our touch with our customer. We want to still be able to take share, take our new technology to market so the level of R&D spend, the tech service travel to customers, the sales travel to customers is an area that we clearly carved out and said we do not want to see cost reduction here, because this is what drives revenue.

I’ll just give a little more color on discretionary spending as well. So the travel piece as I said in Specialty Chemicals was 50%, but we’ve gone to all areas, any contractors outsourced services, anything we do internally with consultants we’ve cut back. So there’s a whole long list of things and we’ve got our employees involved in and coming up with ideas and recommendations, which has been quite favorable and I’ve been impressed by the areas that we found opportunities to take out cost.

Operator

Your next question comes from John McNulty - Credit Suisse.

John McNulty - Credit Suisse

On the performance business, you did about a little bit under $6 million bucks of earnings for the quarter and yet you’re looking for $50 million to $60 million for the year. So can you kind of walk us through what’s giving you confidence you can get to that $15 million to $18 per quarter type run rate for the rest of the year?

Shane Fleming

Yes, I can do that. I think we are expecting to see volumes pick up in some of the areas that were down the most in Q1. Some of that business is a little bit seasonal and we’re already seeing some order pickup; things like polymer additives that go into agricultural film and that market is starting to grow for us.

So, we’re expecting to see as I said in the guidance volume improvement in Performance Chemicals and we know we’ve got nice orders coming in our mining business, orders that are already booked, that we’ll deliver later this year that should give significant balance as well and we’re also seeing some pickup in mining activity; although mining wasn’t hit as hard as some of the other areas.

Copper price, as you probably now know has gone back over $2. We’re seeing customers run pretty hard and probably most importantly, we’re seeing alumina production pick back up a little bit as well. We’re trying to basically shutdown for the last part of the fourth quarter and first part of the first quarter and we’re seeing signs that that’s picking up right now as well. So, we’re getting positive order signals there.

John McNulty - Credit Suisse

On some of the new heavy composite platforms of 787 and A380, can you give colors to what kind of pull you may have seen this quarter and what maybe your expectations are for incremental demand pull later on this year in that business?

Shane Fleming

I think 380; the run rate’s pretty well published. The business that we have right now is pretty much as per plan, not hugely impacted in 2009, but it’s growing steadily on the 380. On the 787, we don’t have much volume in. I don’t think until the fourth quarter, which will be the first 787 sales for about I think six quarters, because we saw it falloff in the first half of last year and we won’t see it pickup again coming into this year; but we’re not really expecting a significant impact from the 787 until you get into 2010.

Operator

Your next question comes from P.J. Juvekar - Citi.

Anthony Pettinari - Citi

This is just a quick follow-up on the debt side, maybe for Dave. Would you look at refinancing the $250 million you have due in October 2010? I mean do you have a rate that you would expect or a strategy around secured versus non-secured?

Dave Drillock

Well, our goal is to look at the refinancing alternatives this year and obviously, the rates that are out there for companies rated like us are much higher than they are than a 5.5%. So, I think you’re going to be looking anywhere between 9% and up to 12% depending on where it is at the moment. That’s why we want to be ready to go when it’s the most cost effective.

Operator

Your next question comes from Harry Mateer - Barclays Capital.

Harry Mateer - Barclays Capital

Just one more question on the debt side, if you can comment a little bit on your negotiations with the banks. In terms of the structure of the facility, do you want to maintain it as senior unsecured or would you consider putting an unsecured facility to lower your cost?

Dave Drillock

I think it’s a little early for me to say that, but I think we prefer to remain unsecured.

Operator

(Operator Instructions) Your next question comes from Keith Wiley - Goldman Sachs.

Keith Wiley - Goldman Sachs

Just one follow-up question on that; if you do go the secured route, how much do your bond covenants allow you to secure? Is it upwards of $300 million or $400 million?

Dave Drillock

At the top of my head, I’m drawing blank in that right now. So, we can get back to you on that.

Operator

Your next question comes from Richard O'Reilly - Standard & Poor's.

Richard O'Reilly - Standard & Poor's

I have a question on I guess slide 11 and it’s the benefits of the course action and the numbers are a little different from what the press release is using and I guess I just want to ask you to clarify what the chart is trying to tell us?

Shane Fleming

Richard, where particular do you see an inconsistent?

Richard O'Reilly - Standard & Poor's

Yes, like with the $42 million, the press release talks about a $55 million number and I guess I don’t…?

Shane Fleming

Yes, the $42 million is added; that’s incremental on top of initiatives that we already announced back in January. So there’s total $55 million or I know it’s greater than $50 million offer short term actions that have now been announced. The 42 plus are earlier January stuff and then the structural actions, that $8 million is an added benefit as well to what we’ve announced in 2008 and January 2009.

Richard O’Reilly - Standard & Poor’s

I thought the previous restructuring was a $90 million number, so okay. It’s now $110 million.

Dave Drillock

Right, the long term items, that’s why we segregate between the short term items and it will impact that line.

Operator

And with no further questions, I’d like to turn it over to our speakers.

Jodi Allen

Thank you very much for everyone’s participation in the call today and if you have any follow-up questions, please contact me directly at 973-357-3283. Thank you very much.

Operator

This does conclude our conference for today. We thank you so much for your participation and we hope that you have a great day.

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