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Cytec Industries (NYSE:CYT)

Q1 2013 Earnings Call

April 19, 2013 11:00 am ET

Executives

Jodi Allen

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

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

Analysts

John P. McNulty - Crédit Suisse AG, Research Division

David L. Begleiter - Deutsche Bank AG, Research Division

Neal Sangani - Goldman Sachs Group Inc., Research Division

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

Operator

Good day, and welcome to the Cytec Industries 2013 First 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, Stephanie, 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 and special items. Shane will then finish with some commentary on our outlook for 2013.

As a reminder, we have implemented a new segment reporting structure for the first quarter this year, and the financial results and commentary are reflective of the new structure. The details were provided in a press release issued yesterday, which can be found on our website.

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 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

Thanks, Jodi, and good morning, everyone. I appreciate you taking the time to join our first quarter earnings call.

As all of you are aware by now, I'm happy to confirm that the divestiture of the Coatings Resins business is now completed, marking the final major milestone in our portfolio transformation process.

As we emerge a new Cytec, I'm encouraged by the growth opportunities ahead of us, as we focus on our efforts on our remaining core platforms.

I'll turn to Slide 3. Results in the first quarter reflect a modest start to this year, with greater growth expected to occur in the quarters ahead. On a top line basis, we delivered our revenue targets in the quarter, achieving sales of $477 million. On an earnings basis, we faced higher manufacturing cost in both Aerospace and In Process Separation versus the prior-year period. Additionally, we had unfavorable product mix in both the Industrial Materials and In Process Separation business. All of this resulted in an earnings of $34.2 million or $0.75 per diluted share, $0.15 -- 15% above our first quarter of 2012 EPS.

Slide 4 displays results for the new Aerospace Materials segment, which delivered sales of $236 million, a 14% increase versus the prior-year period with 4% coming from volume growth, 3% due to selling price increases and 7% due to acquisition-related volumes. The volume growth was mainly driven by higher build rates in the large commercial transport sector, and is supported by growth in larger business jets, such as those built by Bombardier and Gulfstream, as well as new business jet programs, such as the Learjet 85 and the HondaJet. Also, keep in mind that the first quarter of 2012 included an unusually high number of orders, as customers were looking to secure deliveries ahead of increasing build rates.

As you recall, we took some proactive measures over the second half of last year to incrementally increase capacity on constrained production lines, which has better aligned our supply capabilities with demand requirements, resulting in smoother order patterns and reduced lead time for our customers. This also has allowed both us and our customers to carry reduced inventory levels.

Operating earnings in the quarter were $41.5 million, down from the prior-year quarter. We had very good operating performance in the first quarter of last year, and this has, combined with the strong order patterns, lead to a very challenging first quarter year-on-year comparison. In addition, we had a write-off of $1.4 million related to certain development technology that will no longer proceed in this quarter.

Moving onto Slide 5. Sales in the new Industrial Materials segment of $84 million were in line with our quarterly projections, mainly due to higher sales in the Process Materials products, offsetting lower sales in structural composites. We continue to see softer demand across the high-performance automotive and motorsports markets, impacting both sales and earnings. We were able to offset some of the soft demand by securing an additional wind business in Process Materials due to the extension of the U.S. production tax credit for wind energy. However, this resulted in a non-favorable product mix in the quarter, with operating earnings of $2.6 million for Industrial Materials. In addition, we incurred a one-time $800,000 costs associated with the termination of a distributor agreement.

We estimate improved sales and earnings in the quarters ahead, which I will discuss further when I share our full year outlook.

Slide 6 summarizes the In Process Separations business, which delivered sales of $89 million in the quarter, a 3% decrease versus Q1 2012. The main driver behind the softer sales versus the prior-year period is related to weaker demand in the alumina market. Several manufacturers in this sector had curtailed production and continue to operate at low rates in China and Eastern Europe. We do, however, expect demand to improve by the third quarter and have factored this into our full year guidance.

Demand in other base metals remain steady, although we experienced some imbalance of sales in the metal extractant products based on order pattern, which will resolve itself in the second quarter.

Operating earnings in the quarter were $16.7 million, down versus the first quarter last year due both to the reduced volume I just mentioned, as well as the in unfavorable product mix. With our second quarter order book in sight and our continued expansion into emerging geographies, I am confident this segment will deliver top line and earnings growth throughout the remainder of the year.

Moving onto Slide 7. Additive Technologies performed well in a challenging market environment, delivering sales of $69 million, about 1% higher than Q1 2012. The growth was from the Polymer Additives product line, driven largely by improvement in the agricultural film market in Europe. This was the only market showing improvement in Europe, but we also saw a general improvement across our markets in North America.

China showed some recovery in the automotive market, which supported some of the sales growth. Demand remain soft for our Specialty Additives product line, and this was largely felt in our Europe industrial markets. Operating earnings of $8 million were up versus $6.4 million in the prior-year quarter, driven by higher volumes in the value-added Polymer Additives products, resulting in favorable mix with added benefit from raw material costs.

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. As Shane highlighted the revenues and earnings by segment, let me provide some further insight into our consolidated financial statements for the quarter.

Just a reminder that all amounts and percentages I discuss will exclude any special items and discontinued operations, unless specifically mentioned otherwise. Our earnings press release discusses the special items for the quarter. A summary of the financial commentary is also shown on Slides 8 through 11 in the supporting materials.

Our gross margin percentage of 29% is 4 percentage points lower compared with the prior-year period.

Let we cover the few major items impacting our gross margin. We had lower selling volumes and a less favorable product mix in the In Process Separation and Industrial Materials segments. In Aerospace Materials, manufacturing cost was higher, as we staffed up for the higher production levels we expect as the year progressed. We also had a tough comp due to very high production levels in the first quarter of 2012. We produced a lot of inventory in the first quarter of 2012 to meet the increasing demand until our manufacturing improvements took hold later in the year.

As the year progressed in 2012, the Aerospace Materials segment made a significant number of productivity improvements, that Shane just mentioned, to the manufacturing processes, which enabled us to be ready for the increasing production levels for the remainder of this year.

We are starting to see the benefits of increasing cost leverage from the higher sales. Our total operating expenses are down 1% as a percent of sales, as commercial, R&D and administrative costs are all down as a percent of sales.

Let me add a quick note on Corporate and Unallocated expenses for the quarter. It includes the stranded costs from Coating Resins of $12 million versus $17 million from the prior-year period. The lower amount is the result of actions taken during the last 12 months to reduce the stranded costs. With the sale of Coating Resins completed on April 3, we will no longer classify stranded costs in Corporate and Unallocated, but we'll charge these costs to our operating segments.

We estimate the annual stranded costs to be approximately $25 million, and those costs are reflected in the segment earnings guidance we provided with the earnings release. These remaining stranded costs are being retained to support our businesses and their organic growth. Bottom line is we are on track for a 2/3 reduction in stranded costs within 90 days of closing and expect to increase this to 75% within 24 months of the close.

Interest expense is down about $2 million, almost all due to higher capitalized interest on our major capital projects. While on this subject, remember that, in March, we issued $400 million of 10-year 3.5% notes, recalled [ph] the remaining $135 million 4.6% notes due July of this year and completed a tender for $108 million of our 6% 2015 notes and $85 million of our 8.95% 2017 notes. The premium pay to retire the debt was $39 million before tax or $25 million after tax. After completing these transactions, we now forecast interest expense for the full year 2013 to be approximately $15 million, which is about half of the prior-year level.

That is higher by about $5 million or $0.08 per share than our original expectation, alluded to last quarter, mostly due to 2 reasons, both of which relate to our March financing transaction. The first is that we decided to take advantage of the favorable debt market, and we upsized our new issue by $100 million at a lower rate and purchased back more of our 2015 and 2017 notes than originally anticipated. This allowed us to achieve a lower overall effective interest rate, which leads to the second reason for the change in guidance and that being lower capitalized interest during 2013 and our major capital projects as a result of the lower overall effective interest rate on our debt. The takeaway from all of this is that we increased our debt by $100 million, improved our weighted average maturity of our long-term debt by 4.5 years and reduced annual interest expense by approximately $7 million. Included in income tax expense is a benefit of $2.7 million related to reinstated 2012 U.S. business tax incentives, such as the research and development tax credit. These are recorded in 2013, as they were not reinstated retroactively until January of this year.

Moving onto cash flow. We will need some additional time to prepare the statement of cash flows reflecting the Coating Resins segment as discontinued operations. The statement of cash flows will be available on our quarterly 10-Q filing, which is expected to be filed on or about May 6, 2013.

Our net working capital days at the end of the quarter were down 4 to 80 compared to the fourth quarter of 2012. At quarter end, the accounts receivable days of 51 and payable days of 53 were up 2 days and 7 days, respectively, compared to the fourth quarter of 2012.

Inventory days were up 1 to 82 days from the prior quarter end. The inventory days increased in the In Process Separation and Aerospace Materials segments for the expected higher sales levels for the rest of 2013 and was offset by decreased inventory days in the other segments. We continue to believe there is plenty of opportunity, particularly in our inventory days to improve these metrics in 2013 and beyond.

Our capital spending for the first quarter was $54 million. Approximately 30% of this spending is related to our In Process Separation segment, almost 60% related to Aerospace Materials and the difference split between Industrial Materials and Additive Technologies.

Our outlook for 2013's full year capital spending remains at $300 million, that's about 90% of the spending related to our announced investments in the Aerospace Materials and In Process Separation segments.

During the quarter, we repurchased $90 million or 1.2 million shares of our stock. This brings our total program to date to approximately $190 million or 2,676,000 shares. We have $460 million left on our current authorization, and we remain committed -- let me repeat, we remain committed to complete this program by mid-year 2013 mostly through open-market purchases, where we will consider other accelerated programs if necessary to meet the midyear deadline.

Finally, now that we have received cash proceeds from the sale of Coating Resins of about $1,020,000,000, let me remind you of our use of cash. First, it is maintenance of business capital and other spending like pension funding. We'll put $65 million of the coatings cash into our pension plans, which will bring them to almost fully-funded status. That means our required contributions going forward will be minimal to none. We also paid down the outstanding $140 million on our revolver.

Second, we will continue to invest in capital for the growth opportunities of the new Cytec, which I covered just a few moments ago. The other uses of cash include bolt-on acquisitions on our growth platforms; debt reduction when reasonable; and, finally, returning excess cash to shareholders via stock buyback or dividends. As I just mentioned, we'll use $460 million of the coatings proceeds for stock buyback. Once our current buyback is completed, we will revisit our forecast cash position, the global economic environment and our major growth projects to determine our next step on returning cash to shareholders.

That completes my prepared remarks. So I'll turn the call back over to Shane.

Shane D. Fleming

Thanks, Dave. I would now like to update you on our plans for 2013, and a summary of this guidance is available on Slide 12.

The outlook for the Aerospace Materials business remains solid with growth driven by new program rate increases in large commercial transport. In addition, we expect to see growth in large business jet programs, driven mostly by demand in emerging markets.

We have fully integrated the Aerospace product lines from the Umeco acquisition into our portfolio and remain well positioned to grow these products in the markets that we serve.

Following the re-segmentation, we have aligned our forecast accordingly, and we are projecting about 12% revenue growth this year with estimated annual sales in the range of $980 million to $990 million and operating earnings in the range between $170 million and $175 million.

The Industrial Materials market remains challenged by weak economic conditions in Europe, which represents approximately 65% of the revenues in this segment. This weakness is translated into soft demand most evident in the high-performance automotive and motorsports sectors. As we look forward, we are seeing improvement in near-term demand for Process Materials, driven by U.S. Aerospace build rates and South American wind blade demand.

In Structural Materials, aside from the normal cyclical uptick in Formula 1, new high-performance auto programs at Ferrari and other European OEMs keep us encouraged about the near-term demand and longer-term opportunities in the industrial sector.

Our full year sales estimates for the newly segmented Industrial Materials business is in the range of $300 million to $315 million, and full year operating earnings are estimated to be between $18 million and $22 million.

Please note this forecast does not include sales related to our distribution product line, which is in the process of being divested.

Before moving on, let me mention the prior $0.50 accretion target related to the previously reported Umeco segment. We are still on track to deliver this target with some improvement in Aerospace Materials, offsetting the soft demand in Industrial Materials. We do not plan to regularly report in this target given the re-segmentation of the product lines into the respective Aerospace and Industrial segments. But as I just mentioned, we are on track to deliver the incremental earnings, which are built into our full year forecast.

Moving onto In Process Separation. This segment is expected to show good growth in 2011 despite the slow start to the year. We are actively pursuing new business and estimate 4 new minefields this year. While it is difficult to predict the exact timing of the orders coming from these startups, we have sales more back-half weighted in our forecast. We also estimate our sales to the alumina market to increase in the second half of the year, as supply and demand becomes more balanced. Global demand for aluminum is still projected to grow 7% this year with approximately 10% growth projected in China and approximately 4% in the rest of the world. Given this view, we're able to confirm our prior guidance of delivering sales in the range of $410 million to $430 million and operating earnings in the range of $96 million to $100 million.

In Additive Technologies, we estimate modest sales growth to continue, with Polymer Additives products driving the growth. We are encouraged by demand improvement in certain markets, but remain cautious given the global economic uncertainty, which is creating headwinds in our Specialty Additives products. We believe the opportunities in Polymer Additives will continue to offset the weakness in the rest of the portfolio, and this allows us to maintain our forecast for 3% to 4% sales growth in 2013 or an estimated sales range of $275 million to $285 million. Guidance for operating earnings in this segment are in the range of $38 million to $40 million.

To conclude, I'm extremely pleased with the execution of our portfolio transformation over the past 1.5 years, and I want to thank all of the dedicated Cytec employees that have supported the activities to make this happen. I can now say to you for the first time that I believe we have one of the best portfolios of businesses in our industry. Although we have some challenges that remain with the global economic environment, we have now positioned ourselves as a market and technology leader in the primary markets we serve. And together with our global team of talented employees, I'm confident in our ability to deliver our 2013 goals. Most importantly, we're committed to executing our 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, Stephanie, so we can respond to your questions.

Question-and-Answer Session

Operator

[Operator Instructions] And your first question comes from the line of John McNulty with Crédit Suisse.

John P. McNulty - Crédit Suisse AG, Research Division

So with regard to the Industrial Materials segment, when I look at your full year guidance, you're looking for about $20 million, give or take a little bit. You just did $2.6 million. So you basically need to kind of run at double the rate that you just did in the last quarter in each of the next 3. So I guess how -- are you at those kind of run rates now, or is this a very back-end loaded type of year for you in that business? Like, how should we think about that, and the potential for you to reach those targets?

Shane D. Fleming

Yes. It's -- I wouldn't say it's extremely back-end loaded. But clearly, we do have to see some sales growth, which we do have some line of sight to. We -- as I noted in my prepared comments, we do see some uptick now and typically see an uptick in our Formula 1 business in the second half of the year. We also see some growth programs coming in the high-performance auto area, and then I also spoke about some growth we're seeing in the wind blade markets down in South America. So some of this was driven by top line growth. We also had some unfavorable one-timers in the first quarter. I talked about the $800,000 cost to exit a distribution agreement that goes away. So, yes, there is some growth through the last 3 quarters, but some of this is elimination of some of the unfavorable one-timers as well.

John P. McNulty - Crédit Suisse AG, Research Division

Okay. Fair enough. And then, in the ISP (sic) [IPS] business, in the release, you had mentioned that there were some manufacturing and commercial costs to get ready for an increased revenue growth that you expect to kind of progress as the year goes on. It seemed like you had a lot of capacity already in place just from -- last year, you obviously had a really strong year in that business. So I guess, what are you ramping up for? Like, what did you need to put in place that you didn't already have in place in that segment?

Shane D. Fleming

Yes, it's 2 things. It's now filling the full cost of the acquired assets in India. So we've got the MEP assets, and we've got a capital project ongoing there to get that site de-bottlenecked and producing. So it's a little bit on the capital side. But more of it, John, is related to commercial expenses. A lot of these startups that we've supported recently and the startups projected over the next couple of years are in far-flung places in Eastern Europe, Mongolia, parts of Africa. So it's really more around getting our commercial and marketing teams staffed up and adding some more R&D headcount as well to support future growth.

John P. McNulty - Crédit Suisse AG, Research Division

Great. And then, just one last question. On the share repurchase, it seems like you're pretty committed to putting the full 4 90 [ph] to work. If I'm doing my math right, that essentially means you have to buy back about 20% of every days' average trading volume, at least, based on the kind of past levels that we've seen in terms of your stock trading everyday. Are you comfortable doing that, or do you really need to do kind of an accelerated program at some point, whether it's a tender or what have you?

David M. Drillock

Yes. John, as I said, we're comfortable doing that, and we had done that for portions of our fourth quarter, even in the first quarter. And if we need to do an accelerated program to complete that towards the end, that's what we'll do.

Operator

Your next question comes from the line of David Begleiter with Deutsche Bank.

David L. Begleiter - Deutsche Bank AG, Research Division

Dave, just again on the buyback. Just to -- what's the downside of doing an accelerated share buyback -- buying back. You need to buy back 6.5 million shares. Why not do it next week as opposed to -- what's the downside in doing this?

David M. Drillock

Let me just clear it [indiscernible] is that -- so we committed to the year-end target, and we feel open-market purchases give us the most flexibility on pricing. And as we get closer to the end, we can always do an accelerated program. So I don't see any downside to doing that other than it puts us in more control of the shares and the price.

David L. Begleiter - Deutsche Bank AG, Research Division

Understood. And, Shane, just on the IPS business, what's the potential for delay in any of these 4 minefields you mentioned?

Shane D. Fleming

There's always some potential. We see -- we certainly see these startups slip quarter-to-quarter. They don't usually move much more than that. I guess, there's a little bit of risk here because we've got the bulk of these in the second half of the year. So, yes, there is some risk in maybe one of these moving, but I don't think it's much greater than that. I think that the things that need to happen for us to deliver the earnings target is to get the bulk of these startups, get these field orders in and to see some recovery in the alumina market. We're hardened by what we've heard recently. I think Alcoa came out with some positive news on their view of alumina picking up in the second half. So if we do indeed see that happen, I feel quite confident that we can hit the numbers.

David L. Begleiter - Deutsche Bank AG, Research Division

And just lastly, Shane, any impacts from the 787 delay in your numbers, either in Q1 or for the full year?

Shane D. Fleming

No. At this point, there hasn't been any impact on 787, and that's the way we've built our outlook that we're going to work our way through this battery issue, would not cut rate at any point in time and in fact would hit their year-end run rate of 10 per month. So that's the basis for our guidance. And at this point in time, I still think that's pretty solid.

Operator

Your next question comes from the line of Robert Koort with Goldman Sachs.

Neal Sangani - Goldman Sachs Group Inc., Research Division

This is actually Neal Sangani on for Bob. A question on Industrial Materials. The volume drop there seems to be fairly well correlated with the sales declines Ferrari and Maserati saw in Europe. Is that super high-end automotive indicator a good place where we should look for improvement? And is it going to be correlated going forward, or is there something more in Formula 1 that we should be paying attention to?

Shane D. Fleming

Yes. I wouldn't put too much weight on a single factor. While that is an important market for us, all the supercar producers in Europe are our customers at some level or another. There's also motorsports, which is Formula 1 and also the Le Mans Series. So I think, if you look at our automotive business in Europe, it's the combination of the Formula 1 grand -- or, sorry, Le Mans and the supercars.

Neal Sangani - Goldman Sachs Group Inc., Research Division

Okay. And on the bagging [ph] side. In the past, you've expected an improvement in that business, primarily from Europe and Asia. Is that U.S. production tax credit going to clear the way for some improvement in North America now too?

Shane D. Fleming

Yes. We saw some, I think we referenced that in our comments that we saw a little bit of an uptick, and I think there is some upside to that business in 2013 if we do see production pick up as a result of the extension of the PTC.

Operator

Your next question comes from the line of Mike Sison with KeyBanc.

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

I just wanted to get a feel for -- as you reduced the outlook for this year versus what your prior outlook in January, is it primarily all in that Industrial Materials side of the business?

Shane D. Fleming

Yes. I think there's 3 broad categories, and Dave talked to 1 of them in his comments, and that's the change in the interest expense. Our earlier guidance was $15 million. I think we dropped it to $7 million. So there was about a $0.07 or $0.08 impact coming from that. A big chunk of it is the Industrial Materials volume is down, as we've highlighted. And you also would have probably noted that we pulled the Aerospace revenues down a little bit. So while it's a lesser impact, there is some modest reduction on our Aerospace earnings as well. So those are the 3 big pieces.

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

Got it. And then, when I think about the guidance for Industrial Materials but sort of pinpoint operating margins for the full year at 6%, you started at 3%. So when you think about the trends for the year, you would need to get that up in, let's say, the high-single digits. Is that sort of the run rate, where we should expect that business heading into '14? And where do you think you can get the business longer term?

Shane D. Fleming

Yes. We certainly have an expectation that we'll get this business into the low-single digit area, the -- sorry, it's low-double digit area. I just about to make Dave have a heart attack. Into the low-double digit area, but I'm not going to be able to give you a specific timeline to do that. It's going to be driven by revenue growth. We see opportunities to get revenue growth. So we're going to see this margin expanding. You can see that reflected in our second half sales and earnings forecast. Longer term, we want this business to move into the teens. I mean, that's where we would expect a business like this to get. But it's going to take some time. We're going to have to see some revenue growth. And we'll continue to look at other drivers -- other levers we can pull to try and improve the profitability of the business. But the focus here is to position this business to deliver growth, to meet what we think is going to be significant demand. So we don't want to limit the businesses' ability to deliver that growth by using cost as a major driver to deliver earnings. So we want to use a balanced approach here. We're going to continue to drive and expect earnings expansion, but we hope and expect the bulk of that comes from top line growth.

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

Great. And then, final question. Could you give us an update on the A350s, a platform that you could potentially be on going forward?

Shane D. Fleming

Yes. I'm not going to be able to give you any content at this point. We have secured some business. We haven't even asked for permission to share that number with you, but all of that business has not been awarded either. So at this point in time, we don't have guidance on our content on the 350.

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

But you have content, and you have the potential to win more content?

Shane D. Fleming

Correct.

Operator

Your next question comes from the line of P.J. Juvekar with Citi.

Unknown Analyst

This is John Hertz [ph] sitting in for P.J. this morning. Shane, can you talk about your growth expectations as we move through 2013 in the Aerospace Materials business? I recall -- I think, last time you kind of talked about growth picking up throughout the course of the year, is that still the case?

Shane D. Fleming

Yes. I think we're projecting about 10% top line growth in that business. And if you look at the growth in the first quarter not being quite that, yes, I think the math says that we do expect it to pick up. It's driven by the things that I talked about in my prepared remarks, increased rates for new programs. So we expect to see some help in the second half of the year as Boeing increases the 87 [ph] rate. We've also got some other new programs, like the HondaJet, Learjet 85, Bombardier CSeries, that will continue to increase build rates through the course of the year. So those are the major programs that will drive our increase. But year-on-year, we're expecting about 10% top line growth in this business.

Unknown Analyst

Okay. And then, on, I guess, operating margins, is there something that's holding you back there? Is it just increased investment upfront as you prepare some for some of the build rate increases, or is there something else maybe holding you back a bit on the operating margin?

Shane D. Fleming

Well, there's a little bit of that. We are -- and I think Dave mentioned that in his comments as well, that we are investing right now to make sure we've got the capacity to meet that increasing demand. We're bringing on new capital projects that we've invested in over the last couple of years. So we've got some added [indiscernible] that comes from that. And there's also a little bit of margin dilution. It's not significant, but a little bit of margin dilution that's come from the Aerospace business and Umeco that was moved into our new Aerospace platform. But we're still expecting to see robust margins. I think we're still in the 17.5% to 18% range for 2013 in our guidance.

Unknown Analyst

Okay. And then, just quickly as a follow-up. As you look out into the second half on IPS, what gives you the confidence that you're going to see a pickup in the alumina side in the second half of the year?

Shane D. Fleming

Yes. What we're hearing from customers, and as I referenced to my earlier response, we have picked up some recent news from Alcoa stating the same. We've seen some reduction in alumina production going back to midyear last year. And it looks like supply and demand is starting to get a little bit more balanced. And while we're not expecting to see a significant turnaround, just a modest improvement there will help drive our results.

Operator

Your next question comes from the line of Laurence Alexander with Jefferies.

Unknown Analyst

This is Jeff on for Laurence. Going back to Aerospace for a morning -- for a moment, can you provide any visibility on the cadence of qualification costs? Do you expect there'll be a drag on margins?

Shane D. Fleming

I don't know if Dave's got any specific numbers on qualification costs or not. I -- do you have a quarter-to-quarter view on those, Dave, in our forecast?

David M. Drillock

Our forecast, no. There's not going to be lot of fluctuation quarter-to-quarter enough to even talk about, to be honest with you. It will be fairly steady.

Shane D. Fleming

Yes, that's my sense as well. I don't think we're going to see a significant difference '12 and '13 over the course of the year and even quarter-to-quarter.

David M. Drillock

Yes.

Unknown Analyst

And for Umeco, it looks like sales are about $80 million to $90 million. But what was the profit contribution in the quarter? And can you help us attribute the puts and takes in terms of volume and price mix shift?

Shane D. Fleming

Yes. I don't think I have a breakout of -- so if you're talking about legacy Umeco, which includes the Aerospace -- the legacy Aerospace business, Umeco and the industrial business, we -- since we've re-segmented, I don't have a -- I can't give you a breakout on that.

David M. Drillock

One other point. So that's why we just referenced that we're still on track for the $0.50, but there's a lot of puts and takes on allocations and movements between the businesses. And we have actually recited some products between plants. It's very difficult to do to give you something more, and that's why. But we do feel we're on track...

Shane D. Fleming

Yes. The only other color I'd give you is the Aerospace side of the business did quite well, the piece that's now in our Aerospace segment and we're a little disappointed on the industrial side as we've discussed.

Operator

And at this time, there are no further questions in the queue. Now I'd like to turn the call back over to the presenters for closing remarks.

Jodi Allen

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

Operator

Thank you. This does conclude today's teleconference. At this time, you may now disconnect.

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