Cytec Industries Management Discusses Q3 2013 Results - Earnings Call Transcript

Oct.18.13 | About: Cytec Industries (CYT)

Cytec Industries (NYSE:CYT)

Q3 2013 Earnings Call

October 18, 2013 11:00 am ET

Executives

Jodi Allen

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

Raymond Heslin - Corporate Controller

Analysts

John Hirt

Yair Reiner - Oppenheimer & Co. Inc., Research Division

Michael J. Harrison - First Analysis Securities Corporation, Research Division

Robert Walker - Jefferies LLC, Research Division

John McNulty - Crédit Suisse AG, Research Division

Robert A. Koort - Goldman Sachs Group Inc., Research Division

David L. Begleiter - Deutsche Bank AG, Research Division

Gautam Khanna - Cowen and Company, LLC, Research Division

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

Operator

Good day, and welcome to the Cytec Industries' 2013 Third 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, Jasmine, 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 on an as-adjusted basis; Dave Drillock, Vice President and Chief Financial Officer, is attending a funeral for a family member today and will not participate in the call. In Dave's absence, Shane will review the financial results and special items in the quarter. He will then finish with some commentary on our outlook for the remainder of 2013. Our Corporate Controller, Ray Heslin, is also joining us this morning, and will be available to participate in the Q&A session at the end of our prepared remarks.

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 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 third quarter call.

We delivered great EPS growth in the third quarter despite some short-term headwinds. Revenues in the quarter were $464 million, slightly up versus $455 million in the prior year quarter mainly due to growth in Aerospace Materials. Operating earnings for the quarter were $49.4 million, up 6% versus $46.5 million in the third quarter 2012. And as a result of the lower share count combined with the earnings growth, we delivered EPS of $1.34 per diluted share, a 35% increase over prior period EPS of $0.99.

The Aerospace Materials segment delivered sales of $236 million, a 7% increase versus the prior year period, with 4% coming from volume growth which included acquisition-related volumes and 3% due to selling price increases. The volume growth was driven by higher build rates in the large commercial transport sector, as the 787 program continues to ramp up. Growth in large commercial transport was slightly offset by destocking within military, which as a sector is down this year versus last year. Operating earnings in the quarter were $40.7 million, slightly up versus the prior year quarter. Earnings were negatively impacted about $1.5 million in the quarter, by the start of a planned maintenance shutdown of our carbon fiber operation and expense work related to ongoing capital projects. In addition, earnings were impacted by $2.7 million of stranded costs related to the sale of the Coating Resins business.

The Industrial Materials segment delivered sales of $71 million in the quarter, about 1% above the prior year period. Included in the quarter is $15.5 million of additional sales related to the timing of the acquired Umeco business. Last year's results included $9 million of sales related to the distribution business that has now been sold. Excluding these 2 items, sales were down approximately $6 million. The decline versus last year was due mostly to the high performance automotive and motorsports markets, although there has been some sales growth on a sequential basis compared to the second quarter of this year. Sales for the tooling market, which tends to be lumpy, were also slightly down versus third quarter 2012.

The wind energy market, which utilizes our Process Materials, was also weaker than the prior period. The segment delivered $15.1 million in operating earnings for the quarter versus $6.2 million in the third quarter 2012, which excludes amortization of $4.5 million from the purchase accounting inventory step-up. The lower earnings are attributable mainly to the lower sales in the quarter and $900,000 of stranded cost increases related to the Coatings sale.

The In Process Separation business experienced a few short-term setbacks which led to sales of $91 million, a 7% decline in sales in the quarter. The biggest impact was some quality issue in the phosphine gas product which resulted in approximately $3 million of returned material. A compressor used in phosphine production experienced a mechanical failure leading to production material that met our sales specification, but it did not meet our customer's performance requirements. We are in the process of resolving the issue, but the event resulted in lower sales in the quarter due to both returned material credit and lost production dates.

On the Mining side, demand for base metals outside of aluminum remained solid, and we did enjoy growth in the copper market. Operating earnings in the quarter were $20.4 million versus $25.4 million last year, as a result of lower selling volumes, unfavorable product mix and $1.9 million of stranded costs in the Coatings Resins sale.

Additive Technologies delivered sales of $66 million, slightly below the prior year period. The decrease is related to a planned product rationalization in the specialty additives product line which began earlier this year, which more than offset sales growth in the polymer additives side of the business, where we continue to see good growth in Asia Pacific related to the automotive industry and more recently, have seen good sales growth in our Latin America markets.

Sales in Europe remain weak and we continue to see general demand improvement in the U.S.-related construction markets. The business delivered operating earnings of $9 million in the quarter, which is slightly below the prior year period due to the rationalized product and $1.5 million of stranded costs from the Coating sale.

Now I'll shift my comments to the financial results in the quarter. I'll start with a review of the major special items for the quarter. Included in Corporate and Unallocated, in administrative and general and in asset impairment charge are pretax charges of $4.5 million related to a cost reduction initiative announced this past July in our Industrial Materials business. This initiative is expected to deliver annual savings of approximately $5 million, with the majority to occur in 2014. While we're in the early stages, the plan is tracking well. As discussed last quarter, these savings will make a significant reduction to the additional stranded costs that will be incurred in 2014 due to the early termination of certain transition services provided to the divested Coatings business.

Now let me move on to our results for our continuing operations. As a reminder, all amounts I discuss will exclude special items, unless specifically mentioned otherwise. Our gross margin percentage of 32.5% is 1 percentage point higher compared with the prior year period, and this is mostly attributable to higher net selling volumes, net of acquisition-related volumes and net increases in selling prices that were only partially offset by higher manufacturing costs and capital project expenses that did not qualify for capitalization. Our total operating expenses are essentially flat with the prior year period, so with the higher sales from the year-ago period, we are seeing a bit more cost leverage.

Corporate and Unallocated for the quarter was down about $13 million from the prior year period due to the allocation of costs back to the business segments following the divestiture of the Coating Resins business. This is partially offset by spending of approximately $3.5 million on our single ERP initiative which began in the first half of this year. As for total 2013 Corporate and Unallocated expense, it remains estimated at approximately $34 million for the year, unchanged from our previous guidance.

Interest expense net is down about $3.5 million mostly due to higher capitalized interest on our major capital projects and lower interest expense on our public debt as a result of a refinancing in March of this year. Our total net interest expense estimate remains at approximately $17 million for the full year, again unchanged from our previous guidance. Included in income tax expense is a benefit of $3.7 million, primarily related to the revaluation of deferred tax assets and liabilities due to a rate change in an international jurisdiction along with a favorable resolution of a foreign tax audit. The overall underlying annual tax rate for the third quarter of 2013 was 30.6% versus the underlying annual tax rate in the third quarter of 2012 of 32.2%.

Our cash flow from continuing operations is $81 million for the quarter and $89 million year-to-date. As a reminder, the year-to-date amount includes approximately $7 million of pension contributions, and due to the fully funded status of our pension plans, minimal to no contributions are expected next year. As a reminder, operating cash flows used in discontinued operations related principally to the payment of taxes in the third quarter of 2013.

Our net working capital base at the end of the quarter were up 5 to 89 days compared to the end of the second quarter of 2013. The increase is all due to higher inventory levels spread across our businesses, mostly due to the sales orders that moved into the fourth quarter and inventory builds for the maintenance shutdowns we had at the end of the third quarter and have planned for the fourth quarter. We are managing this closely and expect levels to come down by year end.

Our capital spending for the third quarter was $91 million and year-to-date is $218 million, much of this is related to our previously announced investments in the Aerospace Materials and the In Process Separation segments. During the quarter, we repurchased $108 million or 1-point -- $108 million or 1.4 million shares of our stock, which completes our current authorization. Year-to-date, we have repurchased approximately 10.2 million shares for $750 million at an average price of $73.72 a share. Beginning in 2011, utilizing the net cash flow sweeps from the sale of Building Block Chemicals and Coating Resins, we have repurchased a little over 15.9 million of our shares for $1,046,000,000, for an average price of approximately $65.75 per share. We've also improved our balance sheet over that time period. Our cost of debt went from an average rate of 6.9% at the year end 2010, to 5.3% today. Our combined long-term debt and pension and OPEB liability during the same period is down over $100 million. These are some examples of the many ways we have strengthened Cytec since embarking on our portfolio transformation.

I would now like to update you on our outlook for the remainder of 2013 and a summary of this guidance is available on Slide 11. Growth in the Aerospace Materials business for the remainder of this year will continue to be driven by 787 rate increases, as Boeing approaches their year end target build rate. The business and regional jet market is expected to remain flat while we wait the entry of new programs that will support -- start to support growth next year. In the military sector, we believe the inventory destocking will continue, which impacts our sales to the Joint Strike Fighter. And we do not expect short-term improvements in the rotorcraft market. This factors into our full year sales estimate, which is now forecast to be between $955 million and $960 million, down from our prior forecast of $970 million to $980 million.

The scheduled maintenance shutdown of our carbon fiber plant will continue into the fourth quarter of this year, and this is reflected in our guidance. Operating earnings are now estimated to be in the range of $175 million to $180 million, down slightly from our earlier range of $179 million to $184 million. The Industrial Materials business continues to operate in a weak European economic environment, impacting all of our key industrial markets. Despite the flat year-on-year sales, we're starting to see modest sales improvement in the high-end automotive and motorsports markets. We are working on several new opportunities, some of which are now beginning to commercialize. This keeps us cautiously optimistic about the growth in the coming quarters, although it will be at a slow pace as most of this relates to new programs. We have not seen any improvement in our Process Materials sales for the wind energy market, and do not expect this part of the business to turn around in the short term.

Based on the improvements in automotive, we are raising our full year sales estimate to be between $275 million and $285 million, up from our prior estimate of $270 million to $285 million, and have increased our operating earnings to a range between $15 million and $17 million for the year, up from our prior range of $10 million to $12 million due to improved product mix from the higher sales of structure materials and the cost benefits from improvement actions.

Moving on to In Process Separation. Our full year forecast will be impacted by the issues related to phosphine chemicals, including the ongoing weak electronics demand, along with the quality issue I described earlier. In the Mining area, we have had good growth this year in copper and other base metals, and if you recall, we're expecting to ship fill orders for 2 more new mines with startups in the fourth quarter. However, our customers have recently informed us that due to delays with these projects, startups will now occur in the first half of 2014, pushing our deliveries into next year.

The total amount of sales moving from Q4 2013 into the first half of 2014 is approximately $7 million. It is very difficult to predict exact startup timing with these large complex projects, and as we get updated information from our customers, we will continue to share the details with you on timing. Our revised full year sales outlook for In Process Separation is now in a range between $385 million to $400 million, down from $405 million to $425 million. This also impacts our operating earnings which are now estimated to be in a range of $85 million to $90 million versus the prior range of $93 million to $97 million. We remain very positive about the future of this segment and the improved performance that our technology delivers to the mining industry, as ore quality declines.

In Additive Technologies, our view is largely unchanged for the remainder of the year. We estimate modest sales growth in the polymer additives products, which had mostly offset the sales shortfall from our planned product rationalization in specialty additives. In the past quarter, we saw improvements in Latin America and Asia Pacific results related to our polymer additives products, where we are still under significant pressure in our European markets. Our full year sales revenue forecast for the Additive segment is now in a range of $270 million to $280 million versus $275 million to $285 million. Guidance for operating earnings in the segment remains at a range of $39 million to $41 million.

I previously reviewed guidance for Corporate and Unallocated in the financial overview and we have provided this detail for you on Slide 11. Based on the latest outlook from each business, we are narrowing our guidance range for our full year of 2013 adjusted diluted earnings per share for continuing operations to be a range between $4.70 and $4.80 versus our previous range of $4.70 to $4.90 per share.

While I am certainly disappointed by the impact of some of the short-term headwinds I just discussed, I am very pleased with our ability to deliver 44% EPS growth in the first 9 months of 2013 versus the prior year period. This has been a great year for Cytec. We have significantly improved the quality of our portfolio, delivered excellent earnings growth, and we are well positioned to capture top line growth opportunities in our major markets. We look forward to sharing more with you on Cytec's growth strategy and expectations during our Investor Day presentations on November 22.

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

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of P.J. Juvekar.

John Hirt

This is actually John Hirt sitting in for P.J. this morning. Shane, if you just sort of look back at the Aerospace Materials growth and specifically, the Engineered Materials segment historically, I realize it's not a perfect comparison to the new segment, but Engineered Materials grew at solid double-digit rates for most of 2010, 2011, 2012. And you've got new commercial programs growing nicely, but legacy growth is slowing down and you've got softness in business and regional and destocking in military. So can you just sort of talk about when you see organic growth in the Aerospace Materials business getting back to the double-digit rate?

Shane D. Fleming

Yes, thanks, John, for the question. I'm not sure I'm going to be able to give you an exact date for when we see that happening, but let me just kind of give you the macro trends and you can kind of work it from there. The bulk of the growth that we've enjoyed from 2009 through '10, '11 up into '12, and as you noted that was double-digit as high as 15% growth, was driven mostly by build rate increases in the legacy planes. So as Boeing and Airbus increase rates on their -- both their single and their widebodies, we benefited from that. And layered on top of that also was growth of the new programs as the JSF started to ramp up, and the 787s started the ramp-ups. Most of that legacy build rate increase is now behind us. There's still some modest growth to come that will carry into '14, but the bulk of that is behind us. And as you noted, we're not seeing much growth right now in business and regional jets, nor are we seeing much help on the military side given our flat projections for growth over the next year or so from Lockheed on the Joint Strike Fighter. So what will spur growth for us back into that the higher single-digit up into the double-digit level will be some of the new programs that you talked about coming online. For us, it's things like the CSeries, Learjet 85, the HondaJet, the new China COMAC 919, our position on the LEAP engine which will be used on single-aisles as well as on the 919. But most of those programs don't start in earnest until 2015 or even in 2016. So as we've been saying over the last several quarters, we expect sales growth to moderate, volume growth to moderate over the next year or so, driven by the tail off on the legacy build rate increases, and then we'll start to see that pick up again in '15 and '16. But I'm not going to be able to give you an exact timing for a double-digit volume growth.

John Hirt

Okay. And then, recently, we saw one of your Japanese competitors move to increase their exposure to the U.S. and in effect, adding a little bit more exposure to the wind end market. Your end market exposure is a little bit different, but as a result of that, do you anticipate any change in the competitive dynamic in that particular end market?

Shane D. Fleming

Yes, I think you hit on the head with your last comment. We don't compete in wind right now. So I assume you're referencing the Toray acquisition of the Zoltek carbon fiber business, and that's a high tow carbon fiber. It's the type of fiber that's used for industrial applications. And today, by far, the largest end market for that is wind energy, an area where we don't compete. So I don't see that having a short-term impact on us. I do want to say, though, that in time, as we start to see growth in automotive and particularly into larger-scale serial automotive-type applications, that will require more of the higher tow type of carbon fiber. So that's something we've got to look at for the future, is securing a source of high tow carbon fiber, but that's more down the road than an immediate impact.

Operator

Your next question comes from the line of Yair Reiner.

Yair Reiner - Oppenheimer & Co. Inc., Research Division

So first, a question on the Industrial Materials. If I try to squeeze for the fourth quarter based on the your full year guidance, it looks like you're targeting a revenue of somewhere in the mid-30s, which would be a pretty substantial quarter-on-quarter decrease. Can you give us some color about how should we think about that?

Shane D. Fleming

Yes, I have -- I don't have that back into calculation right now. But what we're seeing in that business is continuing softening in the wind energy market, offset by continued strength, sequential growth in our automotive sector, in the high-performance auto and the motorsports area. The good news is, while we may see not a lot of growth on the top line, that drives a lot of improved mix, and you would have seen that in the third quarter of this year where we actually saw top line shrink a little bit but got good earnings growth. So again, I haven't -- I don't have that back into quarter number in front of me, but if it is falling versus Q3 sequentially, it's going to be because -- primarily because of the softening on the wind energy side and hopefully offset, to some degree, by growth in the high-performance auto sector.

Yair Reiner - Oppenheimer & Co. Inc., Research Division

Got it. And then on the F-35 destocking, can you give us a sense of how much you're shipping in below what you think Lockheed is using? In other words, kind of by how much are you undershooting actual production right now?

Shane D. Fleming

Yes, it's a really mixed story. So there's a whole slate of Tier 1 suppliers between ourselves as a material producer or the pre-flight producer and Lockheed. And in some cases, we understand that the Tier 1 may be as much as 50 ships that's ahead of where Lockheed is. In other cases, they're pretty balanced. So probably, the best way to say it is the impact that we saw in the quarter was $7 million dollars of lower shipment versus what the underlying demand says the take should have been. What we don't have a real good handle on is how many more weeks or months are ahead of us until those inventory levels get rebalanced. I think the reason we're seeing some of the Tier 1's take inventory levels down is because now that Lockheed is -- shared a little bit more about future build rates, nobody's expecting JSF build rates to jump up to 100-plus in the next year or 2, and as a result, the Tier 1's are comfortable operating at lower inventory levels.

Yair Reiner - Oppenheimer & Co. Inc., Research Division

Great. Just one more for me. In terms of the rotor blade weakness, can you give us a sense there, kind of on a year-on-year basis, how much that business has slowed down, and whether you expect continued deceleration in the fourth quarter?

Shane D. Fleming

Yes, I don't have a number in front of me on the year-to-year slowdown. It's mostly happened in the third quarter. I think it was holding up a little bit better through Q1 and Q2. There's kind of 3 sectors within rotor blades. One is civilian, which is actually doing pretty well. One is replacement blades for aircraft that are in duty right now, say flying in Afghanistan and Iraq as an example. And then the third piece is a retrofit of the existing fleet that -- where they're switching from aluminum blades to carbon fiber blades. And it's that last piece where that retrofit activity has slowed down a little bit as the fleet is more and more converted, that's led to the downturn. I do -- I don't expect to see a strengthening in the fourth quarter. I think it probably will continue to stay at the levels that now are softened slightly. As we look further forward, while I'm not going to give you exact guidance for 2014, we do see some of the civilian programs picking up, so hopefully that can offset some of the reduction in the retrofit area.

Operator

Your next question comes from the line of Mike Harrison.

Michael J. Harrison - First Analysis Securities Corporation, Research Division

Shane, I was hoping to dig in on this phosphines product quality issue. You mentioned the cause was related to a compressor failure and that the product did meet your selling spec, but it didn't meet the customer performance spec. So I guess maybe could we just get a little bit more detail on kind of the -- have you resolved this problem? Are we going to see the impact from this bleed into next quarter, whether it's lost sales or returned product, or any downtime related to this?

Shane D. Fleming

Yes, I'd be happy to give you some color on that, Mike. We make a product that is very high purity for this application. It's actually used in the production of red light for LED. We measure a number of -- we measure for a number of contaminants and we certify a product that leaves our plant at 6 9s purity, 99.9999% purity. We were meeting that spec. There is a component that we don't measure for that we've just learned in the last month as we've worked through this issue that impacts the performance of our product. This was brought to our attention by a customer. So once we knew that there was a -- and we're talking about very low levels of parts per billion of contamination here. We now understand the impact of this impurity. We're putting in our plant now some additional analysis capabilities that will allow us to measure that impurity. What I can say is that it looks like this problem is now behind us. The mechanical side with the compressor has been resolved. We no longer have -- it was, I think, oil coming from the compressor, finding its way into the process. That's been fixed. So this contaminant is not being generated any longer. We had to clean out our systems. We've done that, and I think just in the last few days or last week or so, we're at the point now where we're making product we're measuring for this impurity and were able to meet the customer's requirements. So there may be some carryover into Q4 just because we didn't get this cleaned up before the end of the quarter, but we believe we're in a position now to be able to ship product going forward. And we've learned a difficult lesson. We are now going to monitor in the future for this particular impurity and we can pick up a problem like this before a product leaves our plant.

Michael J. Harrison - First Analysis Securities Corporation, Research Division

Thanks for that additional color. In terms of the guidance for the IPS segment, it suggests that Q4 should be up from obviously a temporarily depressed Q3 level. Can you talk a little bit about the visibility and kind of how much confidence you have in IPS, particularly with some new mine fills...

Shane D. Fleming

Yes, and that's the toughest piece to predict. I mean, the bulk of the business, say the 80%, 85% level, we have lots of history of customer order pattern and we know in advance what that demand is going to look like. And the same holds true for most of our phosphine customers as well. The things that are difficult to time are things like new plant startups, where customers are building multibillion dollar plants in faraway parts of the world and invariably, they -- these things seem to run behind schedule. But we don't get a lot of information as they get close to startup commissioning and then unfortunately, as we noted, we had a couple of major fills, I think in total something like $7 million planned for the fourth quarter, that now we've been told will slip into the first half the year. So new startups -- new project startups are difficult for us to predict. The other thing, of course, that's almost impossible to predict is when you have problems like we did with this phosphines issue, where you have a mechanical failure that leads to product quality issues. So if you were to take those 2 issues out, I think our ability to predict IPS volumes are pretty good. So I feel good about our revenue and earnings guidance for the fourth quarter, given what we know about our order book right now. I think there's always things that can change but typically, I think we've been pretty good at projecting forward our future sales and earnings from IPS. We do, unfortunately, have exceptions and in Q3, we got hit with 2 of those exceptions.

Michael J. Harrison - First Analysis Securities Corporation, Research Division

Okay. And then last one for me and then I'll step aside is in IPS, the pricing was lower for the first time in a few years. Can you explain what's driving that, whether that pricing weakness should linger and kind of what you're seeing terms of raw material behavior in IPS?

Shane D. Fleming

Yes, I think -- let me just go to your second point first. We did see some softening in raw material costs, so that doesn't make it harder for us to push price when we are seeing our costs go down in certain areas. But that's not the big driver. The bigger driver was we've got some business in China that has been under competitive threat and we just took a decision that the pricing gap between where we were today and what the competition offered was too high to maintain our position, and we've had to concede on price. So it's pretty much contained to 1 product line, alumina, and to 1 part of the world in China, to hold that business. So I think that's the bulk of what you saw. Looking forward from the raw material cost standpoint, I don't think we expect anything too negative. I think our view right now is that raw materials should stay pretty flat for this business over the next couple of quarters.

Operator

Your next question comes from the line of Laurence Alexander.

Robert Walker - Jefferies LLC, Research Division

This is Rob Walker for Laurence. On Engineering Materials, given the large number of platform opportunities towards the end of the decade, should the qualification spending increase in '14 and '15 versus '13 levels, or going to be stable?

Shane D. Fleming

It's -- I wish I could give you a real direct answer here. This is a tough one to predict. The programs that we've talked about, things like the CSeries and LearJet 85, HondaJet that are getting close to production. Most of the qualification work for that has been done and the dollars had been spent. But we're still chasing new opportunities. You've heard Boeing and Airbus talk about new planes that are a ways out there in the future, but believe it or not, we're 3, 4, 5 years ahead of the launch on those planes with our development work. So there will be some qualification costs associated with that and then we'll also see some qualification costs associated with bringing new assets online, where we just -- once we complete the construction, we've got to make material and then go through a pretty rigorous qualification testing to approve that material. So I would say, at a high level, Rob, I would expect it to be pretty flat. It's going to be lumpy, like we've seen in the past. But it's not necessarily a bad thing when we do have high qualification costs. So that does mean that we're chasing a high-volume, high-value opportunity. And we will have some in 2014, I'm happy to say.

Robert Walker - Jefferies LLC, Research Division

Okay. Great. And then do you mind just updating us kind of on balance sheet and CapEx expectations for -- in terms of CapEx expectations for '14 and '15? And update on whether you're happy with the current net debt-to-EBITDA, and whether there could be prospects for more leverage for further buybacks?

Shane D. Fleming

Yes, let me get to the second part of your question first. I think we are pretty comfortable with where we're at right now from a leverage standpoint. So, our fundamental strategy around our balance sheet is making sure that we keep our credit metrics in line to allow us to maintain the low level investment-grade credit rating that we have today. So there may be a little bit of room to expand that leverage, but we're pretty comfortable with where that's at. On the CapEx side, while I'm not going to be able to give you guidance on CapEx for '14 and '15. Let me just say it this way. We announced a couple of years ago that we expect to spend about $1 billion in CapEx, with the bulk of that -- about half of that being spent in '12 and '13 and then the balance of 50 -- $500 million balance being spent in '14, '15 and '16. I suspect that number is going to come down a little bit. And the reason I say that is most of that CapEx spending outside of, say, $150 million of maintenance capital is related to expansion projects for Aerospace customers. And we will only spend the capital on those projects when those programs ramp up. So right now, JSF's running about $50 million per year. We can meet demand in that range for some time in the future with existing assets. Once JSF goes up to 100-plus, which it's expected to do, then we're going to have to spend that capital. So we know the projects we need to invest in. We know the capital associated with those projects. The hard part for us is to predict timing, and that's based on how quickly those programs ramp up. But just based on what's transpired over the last 12 to 18 months, I would say it's likely that some of that $500 million gets pushed out a little bit because we're just not seeing some of these programs ramp as quickly as we had hoped, like the Joint Strike Fighter and things like the COMAC 919.

Operator

Your next question comes from the line of John McNulty.

John McNulty - Crédit Suisse AG, Research Division

Yes, a couple of questions. So with regard to the weakness that you're seeing in the phosphine demand from the electronics industry, I guess, can you -- this comes -- it seems like at a relatively inopportune time, just considering you're adding a significant amount of capacity. So can you kind of walk us through how we should think about that capacity coming up and how -- I know you've said it will come up in stages, but is there even demand there for the capacity that you're bringing on, and how should we think about that?

Shane D. Fleming

Yes, let me get to that first specific question, John, around phosphines, electronics demand, and then I'll talk about the impact on the project. The phosphine that we're talking about, what we call our Cypure product, as I mentioned earlier, it's used in the production of LED lights. And we've enjoyed tremendous growth in that market over the last 6 or 7 years. We've been averaging well over 10%, as high as 15% growth over that period. So we've had to add capacity to meet that demand, distillation capacity. It's still, even though with that significant growth, a very small user of phosphine gas. It's less than 10% of our phosphine production. Most of our phosphine production gets derivatized into things like extractants used in mining or flotation reagents or biocides or reactivate intermediates used in the chemicals industry. Those are the large volume drivers for this product. So we are disappointed that we have seen a little bit of a slowdown, but that slowdown is not from 15% -- 10% to 15% down to a flat market. We're still expecting something like 5%-plus demand increase in Cypure. But because we've seen these huge demand swings pulled down a little bit, we are seeing customers pull back their inventory levels. So that's been more the impact in the short term on demand in phosphine, is just the fact that customers are going to carry lower inventory levels because that explosive growth that we're seeing over the last 5 or so years has now stepped down to slightly higher than GDP-type growth. But as far as impact for our phosphine expansion, as I said this is a modest piece of the total volume. The bigger piece is our -- related to our mining business, extractants and flotation reagents, biocides, et cetera. We still expect to see that volume come. We still expect to start this plant up in phases, as we discussed, over the course of next year, first and second quarter. It is going to take us several years to fill the plant up, but it's still a very attractive project with good returns, very high margin business with good growth prospects across a number of markets.

John McNulty - Crédit Suisse AG, Research Division

Okay. Great. No, that's very helpful. And then with regard to the IPS hit that you're -- or the adjustment in the numbers, it looks like you're pulling down the numbers in terms of earnings at least, guidance for the full year around $7 million or so. How much of that is tied to the product impurity issue and the pushing out of the 2 mine fills versus just weaker demand in general?

Shane D. Fleming

I'd say that's pretty much all of it. If you look at the impact in Q3, so we had a $3 million credit for a product that we had to bring back that had been shipped that has this contamination issue we talked about, plus because we were not able to run the plant. We think we missed something like another $3 million of orders of one of our highest margin products. So significant EBIT impact from that event in Q3. Now we, hopefully, we'll see some of that come back in Q4, but I think our customers are going to be running at lower inventory levels, so I doubt we're going to capture all of it, plus I'm not sure we have the capacity to make all that up. So big impact from the phosphine side. And then if you consider, as I mentioned earlier, we've got about $7 million of revenue of fill orders that tend to be very highly incrementally positive to our earnings. Moving out, that's most of the balance of that guide down.

John McNulty - Crédit Suisse AG, Research Division

Okay. And then in the Aerospace side, with regard to the rotorcraft business, how much is it down sequentially, say from kind of what you -- what was more of a normal run rate in 2Q down to kind of where we are in 3Q?

Shane D. Fleming

Yes, I don't have a number in front of me. If Jodi or Ray, if you don't have one in front of you, we can get that number to you, John. I think it's on the order of low single-digit millions, $1 million, $2 million, $3 million, in that ballpark. But we'll get an exact number to you.

John McNulty - Crédit Suisse AG, Research Division

Okay. And then just one last question. With regard to industrial, you had a very strong or relatively strong 2Q, guided down pretty significantly for 3 and 4Q, and then 3Q comes in solidly better. So I guess my question is what kind of visibility do you actually have in this business? It seemed like it was kind of a long cycle-type business where you'd have a lot, but it seems a little bit more volatile than we expected. So how I guess, how should we think about that visibility, and how you model it out going forward?

Shane D. Fleming

I certainly can see why you have that impression given the way we've moved the numbers around. I think the big swing that led to us taking the numbers down and then bringing them back up was really driven by just a couple of programs, and not existing supercar programs. But I'm not going to name names here, but you've got a couple of OEMs that had planned to launch new supercars this year in 2013, actually earlier in 2013, and that was part of our initial forecast. They had all kinds of issues that led to significant delays in those programs. And because we hadn't seen any real positive news, where we were still not getting any orders on the new programs as we move through the end of Q2. We just didn't feel like we could put forward optimistic forecast. And lo and behold, we got some positive news here. Both of those programs took a fair bit of material in the third quarter, and we're now somewhat confident given their take and their ability to actually use this material in their plants, that that's going to hold up through Q4. So that -- if you look at the rest of the business, so the motorsports business, you have the supercar programs that have been in production for some time. Wind energy, I think our ability to predict is not that different than our other businesses. But this lumpiness has really been driven by a couple of new programs that were first delayed and then kind of all of a sudden, came on pretty strong.

Operator

Your next question comes from the line of Robert Koort.

Robert A. Koort - Goldman Sachs Group Inc., Research Division

Shane, I was wondering if you could help us, just to clarify, in the Mining Chemicals business, did you indicate there was sequential and year-on-year growth for your copper, alumina and mineral products?

Shane D. Fleming

Yes, there was year-on-year growth -- sorry, there was sequential growth and year-on-year growth for our copper products which is the bulk of our Mining Chemicals business. So that would be our flotation reagents and our metals extractants. The piece that went backwards on us was alumina. So alumina is its own segment and that business did soften. It was more than offset by the growth that we saw within the flotation and the extractants part of copper. So overall, Mining was relatively flat -- up a little bit, but pretty decent growth in copper, offset by a negative downturn on the alumina side.

Robert A. Koort - Goldman Sachs Group Inc., Research Division

And the 2 mine fills you mentioned were pushed out. I think you also characterized these as multibillion-dollar customer investments. So I would assume your customers want to get those in production as quickly as possible. Was it some issue about getting their mines into production? Or do you think it was some view they have on the underlying market that is pushing that out?

Shane D. Fleming

Yes -- no, I don't think this was a deliberate attempt to slow down startups. This is either problems getting the final construction work completed, or just going through commissioning and getting the plants up and running. So we are very confident that given the investment here, and even given the short-term metals pricing movement in copper that they'll try and get these plants online as quickly as they can, which as we said earlier, we're projecting to be the first half of next year.

Robert A. Koort - Goldman Sachs Group Inc., Research Division

And I did note you specifically said first half. Is it not -- are you not able to define that into quarters? Again, I would think these guys are motivated to do it ASAP?

Shane D. Fleming

Yes, I well -- we, at times, think we can do this, with enough granularity to get it even to the month. But invariably, when these projects start up, there are problems, and it can be permitting, it can be logistics, getting products to site. It can be all kinds of startup-related issues. So all we can go on is what the customer tells us. That's what we're sharing with you. I think that it's not unusual at all to see 1 to 2 quarters delay. It would be pretty unusual if it goes beyond that, based on our experience over the last several years anyway. So I think we're quite highly confident we'll see these orders come in the first half of next year.

Robert A. Koort - Goldman Sachs Group Inc., Research Division

Okay. And my last one, you mentioned in phosphines the credit, and given the scale of that business, it seems like that was the -- or one of the most substantial customers you have. So is this a series of runs? I was surprised an order or a credit of that scale wouldn't have been discovered more quickly and maybe even a lower level than that?

Shane D. Fleming

It's not just 1 customer, it's actually a multiple number of customers. It was discovered -- what I was trying to say before, it was discovered by one customer. Once that was brought to our attention, we started testing and retained all of the material that we had shipped for a couple of months, or at least 6 or 8 weeks. And it was that material that formed the credit. So multiple customers -- luckily we caught it early enough that it didn't find its way into the production of the LED materials. We got it before it got to that point. But to not take any chances, we pulled back a number of weeks of production from multiple customers.

Operator

Your next question comes from the line of David Begleiter.

David L. Begleiter - Deutsche Bank AG, Research Division

Shane, now that the buyback program is done, what's your thinking or your thoughts on buybacks going forward?

Shane D. Fleming

Yes. I think we're -- well, first of all, let me just say that our priorities for use of cash hasn't changed and you know that well, so I won't restate those priorities. But that's the way we look at how we spend cash going forward. I think the one kind of unknown right now is related to my earlier response to the question about CapEx. So we feel like with pensions now fully funded and the potential that CapEx may drop off, there's probably going to be some additional free cash generated over the next couple of years. If that indeed is the case and we're not able or willing to spend money on bolt-on M&A opportunities for our growth platforms, then we would look at trying to return more cash to shareholders, either through a new buyback or even look at our dividend policy. But I think we want to sit and wait a little bit, get a couple of quarters under our belt of this higher cash flow and see -- get more clarity on our forward CapEx spend before we make that call.

David L. Begleiter - Deutsche Bank AG, Research Division

And just looking back at Q3, Shane, Aerospace Materials, sequentially sales fell $14 million and earnings fell $14 million. Why was that?

Shane D. Fleming

I think the sales side, we probably talked to. I think you're probably asking why earnings fell as much as sales. Most of it's related to higher expense, as we talked about. We had some shutdowns. We had some inventory builds that have led us to shut -- some shutdowns. And we had the expenses related to some capital projects that we weren't able to capitalize in and the biggest single item would be the shutdown of our carbon fiber assets that is related to the new GP3 expansion, and we had to take that down so we can do some tie-ins for the future. So it's really -- higher expenses are the first answer, and I think the second answer is probably a little bit unfavorable product mix.

David L. Begleiter - Deutsche Bank AG, Research Division

And just lastly, I know you don't want to give 2014 guidance, but given the lack of top -- double-digit top line growth in the segment in 2014, should this business also be growing EBIT in the mid single-digits as well in 2014?

Shane D. Fleming

Yes, I mean, that's our expectation. You hit it exactly. I think even if we're not able to deliver the level of top line growth that we have enjoyed over the last several years, we're still expecting the business to expand margins. This will give us a little bit of a breather in the production area where we've been running very hard over the last few years, adding people and bringing on new assets to meet demand. We haven't been able to spend as much time optimizing the operations of those assets, so we're going to put a real push on operations improvement activity, driving productivity. And our expectations are now that we see margin expansion even in light of lower top line growth.

David L. Begleiter - Deutsche Bank AG, Research Division

In terms of -- you're talking 100 basis points next year for margins here or something...

Shane D. Fleming

That's probably more like what you started with. More like half a percentage, 50 basis points.

Operator

Your next question comes from the line of Gautam Khanna.

Gautam Khanna - Cowen and Company, LLC, Research Division

I was wondering if you could just expand on how the new phosphine facility will flow through the P&L next year? Kind of the unabsorbed costs as it starts up? And what level of utilization do you need to kind of get to breakeven or eventually segment margin, and when you expect to get there?

Shane D. Fleming

Yes, let me -- I guess that's probably the easier way to answer or a more direct way to answer it is when we expect to get there. I think we were probably going to need a full 12-months of operation under our belt, and the utilization that will come with 12 months of operation to get to kind of that breakeven point. So this is going to be a drag next year. We expect to start the plant up in kind of 2 phases. We'll have, I think, the back end of the plant, the derivatives, operational towards the end of the first quarter, and then phosphine gas production more towards midyear. So we won't have the plant fully operational, all phases, until midyear, if you forward 12 months from there, you're probably talking about mid-12 15 -- I'm sorry, mid-2015, before we generate enough revenue from that expansion to cover the incremental depreciation.

Gautam Khanna - Cowen and Company, LLC, Research Division

And the depreciation, are we talking over 15 years, $150 million or so? So $10 million a year?

Raymond Heslin

Yes, it would be about 15 years of the $150 million or so.

Shane D. Fleming

[indiscernible]

Gautam Khanna - Cowen and Company, LLC, Research Division

So we could have $10 million of unabsorbed. And then to just jump ship to the rotorcraft commentary. Can you size for us again how big that business is? Isn't that around $25 million or so a year, so it's not that large?

Shane D. Fleming

Yes -- no. It's substantially bigger than that, I think. It's about -- well, the total military is about 20% of the, say, roughly $1 billion. There's $200 million. I think the rotorcraft piece is at least 1/4 of that. So it's at least $50 million. I think I'm even short there. I think it's bigger than $50 million. Gautam, if you would like, again, that's a number we could pull together for you if you -- and Jodi is following up on that right now. So we can give you...

Gautam Khanna - Cowen and Company, LLC, Research Division

And then lastly, in terms of your Aerospace Materials comments, we hear a lot of supply chain cost pressure down from Boeing. Are you feeling any of that? Is that -- are you expecting still about 3% net pricing next year, as you've enjoyed the last several?

Shane D. Fleming

Yes, I mean, we're not -- I'm not going to give you guidance on our net pricing increase, but we do expect to get some price next year. We don't expect it to go negative. I'm really reluctant to talk specifically about the discussions ongoing with Boeing in this forum. But, yes, we're feeling pressure like everyone else. They are really working hard to find cost downs, and we're trying to be creative and find other ways to create value for them without needing to pull our prices down. So it's an ongoing issue.

Gautam Khanna - Cowen and Company, LLC, Research Division

Okay, last question. Interest expense next year, you have some capitalized interest that slips through the P&L. Could you help frame what that likely will be next year, interest expense?

Shane D. Fleming

Yes, Ray, I don't know if you can give me just a rough idea. I don't suspect it's going to be hugely different than this year.

Raymond Heslin

It's not hugely different, but as -- obviously, as projects come into -- come online, we won't be capitalizing interest.

Shane D. Fleming

So we'll lose the phosphines project, but we'll still carry GP3, right, at least a chunk of it.

Raymond Heslin

A chunk of it.

Shane D. Fleming

Yes, so we're...

Gautam Khanna - Cowen and Company, LLC, Research Division

Does that get us about $25 million up from $17 million, is that a good guess?

Raymond Heslin

That would be a high-end guess. Yes, that's good.

Operator

Your next question comes from the line of Mike Sison.

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

In terms of Aerospace Materials next year, 787 and the big growth drivers, is there anything else that could drive some growth next year for you?

Shane D. Fleming

You mean in the -- just in the large commercial transport sector? Or more broadly than that?

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

Just broadly in the segment?

Shane D. Fleming

Yes, I think we do expect to see some growth from some of the new programs. It's just not going to be at the level that we've seen in the past from these big legacy users. But CSeries has now had first flight. They should start building more planes. I think they've got about 5 now built for test flight. They would probably build, I don't know, maybe twice that number next year, something like that. We should see the HondaJets start to kick in a little bit as well. JSF will ramp up a little bit. I think we're expecting about 10% growth there. Those are probably the bigger adds to what other sort of incremental growth we'll see from some of the legacy programs. Not all of the legacy programs are fully ramped up, so I think that you'll see some carryover. So those would be the main drivers. And there's probably some smaller opportunistic business that we pick up along the way as well that gets built in.

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

Okay. And then, I know the A350 is a very small win for you guys, or a small platform for you going forward. Is there anything you need to do on the R&D front in order to get bigger shares at Airbus longer-term?

Shane D. Fleming

Yes, I don't know that it's necessarily just on the R&D front. I think we feel pretty good about the performance of the material that we can compete heads-up with the other competitors. We're just -- we're not in this good a position from the supply chain standpoint as our competitor for this, and we didn't have the footprint in Europe. That doesn't mean there aren't opportunities going forward as there will be new insertion opportunities on the 350, and we're certainly chasing those. But I don't -- I wouldn't characterize the biggest challenge as product development or R&D-related. I'd say it's more around having the assets in the right place and the long-term relationships and the database on our materials to supply some of the Airbus requirements.

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

Okay. And then in terms of Industrial Materials, you're doing a little bit better now. Any thoughts on the profitability potential and timing of getting it to where you wanted to get to over time?

Shane D. Fleming

Yes, I'll talk to the first part of that, the potential. I still believe that very easily this business gets to 10%. The Structural Materials business, as it starts to grow, is going to improve our product mix which will give us higher margins. We've taken out some costs so -- and we've got a lot of capacity in that business. So I really believe that we don't need to do a lot more than to see a few quarters of decent growth, and you'll start to see that operating margin of this business trend up towards that 10% level. That's not necessarily where we want it to end. We're not going to be satisfied with that, but that's kind of our shorter-term goal, get it to 10%, and then we'll grow from there. The contribution margin in this business supports the level of SG&A spend we've got and will allow us to generate really good operating profit, but we just need to leverage our fixed costs better here. We just need more revenue.

Operator

There are no further audio questions. I'll turn the call back over to you.

Jodi Allen

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

Operator

Thank you. This concludes today's conference call. You may now disconnect.

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