Cytec Industries Inc. Q4 2009 Earnings Call Transcript

Jan.29.10 | About: Cytec Industries (CYT)

Cytec Industries Inc. (NYSE:CYT)

Q4 2009 Earnings Call

January 29, 2010; 11:00 am ET


Shane Fleming - Chairman, President & Chief Executive Officer

Dave Drillock - Vice President & Chief Financial Officer

Jeffrey Fitzgerald - Director of Investor Relations


David Begleiter - Deutsche Bank

P.J. Juvekar - Citi

Laurence Alexander - Jefferies & Co.

Mike Sisson - KeyBanc

Amy Zhang - Goldman

John McNulty - Credit Suisse

Edward Marshall - Sidoti & Co.


Good day, and welcome to the Cytec Industries, Inc. fourth quarter earnings announcement. Today’s call is being recorded. For opening remarks and introductions, I would like to turn the conference over to Mr. Jeffrey Fitzgerald. Please go ahead, sir.

Jeffrey Fitzgerald

Thank you, Ryan. Good morning, everyone. We appreciate your participation in our conference call. For our call today, Shane Fleming, Chairman and President and Chief Executive Officer will provide an overview of operations and Dave Drillock, Vice President and Chief Financial Officer, will review the financial results and special items noted in our press release.

Shane will then finish with commentary on our outlook for 2010. This call’s being webcast in a listen-only mode and it will be archived in auto format on our website for three weeks. Throughout the call, we will reference supporting materials, which can be downloaded from our Investor Relations website under calendar of events or you may follow the slides accompanying today’s webcast, which is also available through our website.

During the course of this presentation, and in response to your questions, you will hear certain forward-looking statements. Our actual results may differ materially. Please read our commentary on forward-looking statements on slide number two of our supporting materials, or at the end of our news release, or the statements in our quarterly or annual SEC filings.

Our reported results for the fourth quarter of 2008 and 12 months ended December 31, 2008 and 2009 are a net loss. Accordingly, we compute EPS per basic share in accordance with GAAP since utilizing diluted shares for these periods would result in a loss per share that is lower, or anti-dilutive.

In addition, our discussions include 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, including basic to diluted earnings per share at the end of our press release. A copy of our press release is available on our website.

Now, let me turn the call over to Shane.

Shane Fleming

Thanks, Jeff, and good morning, everyone. I appreciate you taking the time to join our fourth quarter earnings conference call. I’m extremely pleased with the great work done by the company in 2009. First, in recognizing early on the need to take decisive action to reduce our cost base and improve liquidity and then to execute the plans that we develop to deliver these objectives.

These actions allowed us to translate the improved demand that we have seen over the last half of the year into much improved cash flow and operating earnings, as demonstrated in our fourth quarter results. Dave will provide details on our successful restructuring, working capital reduction liquidity improvement actions later in this presentation.

As you can see, in slide number three, sales in the quarter were up 8% versus the fourth quarter 2008 to $752 million. This was our strongest sales quarter for the year, despite the customary December holiday slowdown impacting the number of our industrial markets. The year-to-year sales increase was driven by stronger results in all segments with the exception of Engineered Materials.

We continued to see customer restocking and strong demand growth in Asia in our specialty chemical markets and while Engineering Materials sales for the quarter were down versus last year, sales were up versus the third quarter, signaling a slowing in the destocking activity that started in the second quarter of 2009, many of our manufacturing sites, the reduced rates in the quarter as we continued to make progress in the working capital initiative.

Cytec’s net earnings for the quarter were $34.4 million, or $0.70 per diluted share, excluding the special items that Dave will explain later. This compares with net earnings of $4.7 million, or $0.10 per diluted share in the fourth quarter 2008. Our much improved fourth quarter earnings results are due to improved margins across the company, as raw material costs were down significantly. Stronger demand in the chemicals business and the actions we have taken to lower our cost base.

I will now provide an overview of the business segment results, beginning with Coating Resins on slide four. This segment delivered sales for the quarter of $329 million, a 16% increase over the difficult fourth quarter of 2008. Versus the previous year 2009 selling volumes were up 21%, while lower selling prices reduced sales by 12% and exchange rates had a 7% favorable impact.

Raw material costs were down considerably year-on-year, leading to substantial margin improvement, despite the lower selling prices. Our structural cost reduction actions continued to positively impact segment earnings. However, our plans for reduced rates further reduced inventory levels. The net result of all of the above was operating earnings of $17.6 million in the quarter, up versus an operating loss of $17.8 million in the fourth quarter of 2008.

The chart on slide five displays the monthly sales trend in the segment, which shows strong sales in October and November relative to earlier in the year, and a fall off in December results due to the typical end of year holiday shutdown by many of our customers, particularly in Europe. We continue to see strengthening sales in Asia, led by recovery in the automotive, construction and electronic segments.

Slide six shows sales in Additive Technologies segment of $61 million, an increase of 3% versus the versus the fourth quarter 2008. Selling volumes were up 2%, selling prices decreased sales by 3% and exchange increased sales by 4%. This segment continues to see modest demand improvement in both the polymer and specialty product lines as a result of customer restocking activity and stronger sales in Asia, particularly polymer additive sales to the automotive, Spandex and electronic markets in Asia. Operating earnings for the additives segment were $4.2 million versus a loss of $300,000 in the fourth quarter 2008.

Slide seven highlights results for the In Process Separation segment, which delivered sales of $81 million in the fourth quarter, up 10% versus 2008 and 13% versus the previous quarter. Compared to last year, sales were up 13%, price was down 6%, and currency had a 3% favorable impact. Much of the decline in mining chemical selling price came from formula-based pricing linked to changes in raw material costs and exchange rates.

The year-to-year sales improvement in the segment was driven largely by increased sales over metals extractants products due to a large order in Asia and stronger base business demand in North America and Latin America. Additionally, we are seeing increased demand for a number of our fasting products using fumigation, biocide, and pharmaceutical applications.

Operating earnings in the segment were $15.2 million, effectively unchanged from the prior year period, as the increased sales volume was offset by lower selling prices, higher raw material costs, and lower plant operating rates.

Slide eight shows a summary of results in the Engineered Materials segment, with sales of $178 million, a 5% decrease versus the fourth quarter of 2008, driven by 6% lower selling volumes. The demand for business regional gas remains weak and inventory destocking continued apart suppliers commercial transport sector although at a slower pace. We also saw a decline in demand in the formula one and high end automotive sports car markets.

Selling prices were flat and favorable exchange rates added 1% to sales versus the prior year period. As part of our working capital initiative, our plans ran on reduced rates in the quarter, which negatively impacted earnings. In summary, Engineered Materials operating earnings were $22.8 million, down from $29.9 million in the fourth quarter 2008.

Building block chemical results are shown in slide nine. Sales in the fourth quarter were up by 10% versus 2008 to $104 million driven by stronger global demand for acrylonitrile and melamine compared to a weak fourth quarter last year. Selling volumes were up 38% and the large selling price decline of 28% was primarily the result of lower ammonia and sulphur prices versus the prior year period. Operating earnings for the quarter of 300,000 compared favorably to an operating loss of $6.4 million last year, coming from weak fourth quarter sales and lower raw material costs in 2009.

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

Dave Drillock

Thank you, Shane, and good morning, everyone. Let’s go right to slide 10. With the previous quarters of 2009, we continued to advance our improvement initiatives and incurred some additional special item charges. Let me start by review in the special items were recorded in the quarter. Back in the third quarter, we announced a shutdown of one of our manufacturing sites in Spain.

In connection with that, the fourth quarter improves a pretax non-cash charge of $24 million, of which about $4 million is related to an asset impairment charge and the rest is mostly due to the accelerated depreciation of the plant assets in Spain. Production has ceased and we’re preparing the Spain property for sale. Any proceeds from the future sale of this asset are expected to be immaterial.

We also recorded an additional pretax charge of $6.7 million related to our previously announced restructuring initiatives across our businesses and corporate functions. Approximately $5.2 million of this amount is recorded in general and administrative expenses on the income statement and the remainder principally in manufacturing cost of sales.

Included in other income expense is a pretax non-cash charge of $12.2 million related to a pension settlement in an international jurisdiction. This was the result of our decision to move to a more cost effective plan for the company, providing similar benefits for our employees. This charge reflects losses associated with the previous plan that would have been recorded as expense in future periods.

Also included in other income expense is a pretax gain of $6.2 million related to a certain legal settlement. The cash associated with this will receive in the first quarter of 2010. Included in the income tax provision for the quarter is a tax benefit of $4 million, related to an audit settlement in an international jurisdiction. We were pleased to come to a very reasonable settlement with the local authorities.

That covers the 2009 special items for the quarter. So now I’ll move on to the operating results. Our gross margin percentage of almost 22% after adjusting for special items in both years is up over 4% compared to the prior year period. A few drivers around the gross profit improvement are the favorable impact from overall higher selling volumes that changes by segment we discussed a few moments ago, plus lower raw material costs net of selling price declines, and these are mostly in the Coating Resins and Building Block Chemicals segment.

Partially offsetting these items was continued low fixed cost absorption as a result of low production rates. These lower production rates were primarily related to achieving our inventory targets as part of our successful working capital initiative. The bulk of the working capital initiative is done, so we should be back to a more consistent production level, better aligned with demand. I’ll discuss more about our working capital initiative shortly.

So summing up the gross margin discussion, our sales people continued to do a good job in limiting the selling price decreases in light of the lower raw material costs. Our cost take at actions remain on track and selling volumes in specialty chemicals continued to improve as a global economy recovers and our material selling were impacted by lower build rates, mostly in the business and regional sector, while customer destocking was a factor in the quarter, although less so than in the third quarter.

Operating expenses excluding special items in both years are up about $8 million year-on-year, virtually all which relates to higher incentive compensation costs. In the fourth quarter of 2008, we reversed our long term incentive accruals by over $2 million, as performance targets were not going to be achieved. In the fourth quarter of 2009, our annual incentive compensation accruals were over $5 million higher than the prior year period, primarily due to increases related to the success of our working capital initiative.

Also in fourth quarter of 2009, we incurred higher consulting costs of about $2 million related to our working capital and other improvement initiatives. Excluding these items, operating expenses are down about $2 million with our cost saving initiatives and lower spending reducing costs of about $8 million, and changes in exchange rates increasing costs about $6 million.

Let me point out that our overall cost reduction actions in manufacturing and operating expenses continued to be at a run rate savings of $120 million in 2010, with approximately $50 million included in our 2009 full year results. As a reminder, in addition to the structural cost reduction efforts, we had initiated several temporary cost saving initiatives such as furloughs, increased cancellations, incentive compensation payout reductions to name a few.

These initiatives reduced expenses by about $75 million for full year 2009, although forecast most of these short-term reductions to be returned to normal state in 2010. If demand were to drop significantly again, we could reinstate several of these actions to offset some of that impact.

Our annual underlying income tax break of approximately 31% decreased about one percentage point versus last year, and is down from the 34% rate I noted in the third quarter. The rate decrease versus last year is principally due to a favorable change in the earnings mix by jurisdiction.

Most international jurisdictions were the company operators have a lower tax rate than the U.S. and the gross margin improvements noted earlier result in getting much better full year earnings mix compared to our third quarter estimate. As a reminder, the income tax provision in the quarter was reduced by $1.5 million or $0.03 per diluted share by the impact of the lower tax rates on a prior nine months earnings, which were recorded at the 34% rate.

Moving onto cash flow for the quarter, we had another great quarter and our cash flow from operations was $169 million, significantly up from the prior year’s $58 million. For the full year, our cash flow from operations was $564 million. This is well above the prior year amount of $229 million, with the increase mostly related to the improvement in our networking capital.

Slide 11 will give you a good view of our performance in reducing networking capital base outstanding, which I said before is how we are monitoring our progress. Let me point out a few items on the slide. Trade accounts receivable days and payable days outstanding, essentially offset each other at 45 days, a very nice achievement over the 2008 year end days of 63 for receivables and 45 for payables.

For inventories, days on hand increased by 6 days to 62 days outstanding versus the third quarter of 2009, a significant improvement from 2008 year end days outstanding of 96. Our working capital initiative has exceeded our maximum goal of two turns in networking capital and very importantly, we had the process and incentives in place to both sustain and improve on these gains.

Moving on to Slide 12, capital spending for the quarter was $35 million, down from $80 million in the same quarter of 2008. Remember that in the fourth quarter of last year, we had significant expenditures related to the carbon fiber plant, which is on hold and also our completed preprint plant in China. Full year 2009 capital spending was $194 million, and for 2010, we forecast capital spending to be in a range of $140 million to $160 million.

Looking at the balance sheet for the year end 2009, our cash balance is $262 million, up significantly from the prior year end amount of %55 million. We are again pleased to say that our debt decreased by $20 million in the quarter and for the year, we have reduced our debt by $173 million, bringing our total gross debt down to $686 million.

Our global pension plans and other post retirement liabilities decreased a little over $50 million from the prior year end, but most of this due to an improved funded status. While I’m on this topic, our forecast for pension expense in 2010 is essentially flat with 2009 levels.

With our improved cash balances, let me go over our expected uses of cash. First, it is a typical maintenance of business CapEx, pension contributions, and remediation projects, to name a few. This is followed by expansion, cost reduction capital, and our growth product lines, and fast payback margin improvement capital in our cash product lines. In addition to available and reasonable price, we would like to add both on technology acquisitions to our growth product lines.

We will also continue with debt reductions when available and at a reasonable price. On a global economy shows a consistent recovery, we will revisit our dividend level and lastly, one should expect no stock buybacks in 2010. In closing, we enter 2010 a much improved company with a stronger balance sheet, a lower cost and breakeven point, with our three growth platforms primed to deliver significant growth and better returns as the economy improves.

Thank you, and now I’ll turn the call back over to Shane.

Shane Fleming

Thank you, Dave, and now I would like to review our 2010 sales and operating earnings outlook by business segment, which we have summarized on Slide 13. The positive secular trend to environmentally friendly coatings continues and the driver of this change is creating short term opportunities to grow eco-friendly technologies, even in the current challenging environment.

The Coating Resins segment delivered sequential volume improvement over the course of 2009 from the low point in the beginning of the year. This growth was driven to a large degree by customer restocking following unprecedented levels of destocking in late 2008 and early 2009.

While it is still too early in the recovery to project sustained global demand improvement, we are projecting 2010 sales volume to approximate the run rate in the second half of 2009, leading to a 7% year-on-year increase. Included in this increase is an expectation for continued demand growth in Asia and new business with our eco-friendly products in Europe and North America.

We are forecasting higher raw material costs in this segment in 2010. Considering all of these factors, sales are projected to be in a range of $1.25 billion to $1.4 billion and operating earnings are expected to range from $45 million to $60 million, up significantly from the prior year period operating loss of $3 million.

The additive technology segment had a similar demand profile of Coating Resins over the course of 2009, driven by the same factors in broadly common end markets. As a result, the basis for our 2010 volume growth assumptions in this segment paralleled those in Coating Resins with a full year 2010 volume expected to be comparable to second half 2009 run rates.

We also expect growth in this segment to be bolstered by continued market penetration, with our technologically differentiated products, particularly in the automotive sector in Asia. Overall, our expectations are for selling volumes to improve over 2009 by approximately 3%, excluding the impact of the product line divestitures last year. As a result, sales are projected to be in a range of $200 million to $230 million, and operating earnings in a range of $15 million to $20 million, up from the prior year operating earnings of $11 million.

Our In-Process segment will continue to benefit from the long term trend of increasing global metals demand to support infrastructure development and industrialization in the emerging economies and we expect several new mine starts and expansions to positively impact the business this year. Additionally, our new product applications technologies in this segment create real value for our customers and will continue to be a significant contributor to sales and earnings growth.

As we look to 2010, there remains some uncertainty around the sustainability of the current improved metal demand levels. Of particular concern is China’s ability to sustain the recent high level demand for copper and aluminum created by their extensive stimulus driven infrastructure projects. Given all of these factors, we are projecting sales for this segment to be in a range of $280 million to $310 million, and full year operating earnings to range from $40 million to $50 million, up from $35 million in 2009.

The trend to higher levels of composite and ease of usage in the aerospace and other high performance industrial applications continues unabated and will drive significant growth in demand for these materials over the coming years. Cytec is well positioned to capitalize on this growth as we strengthen relationship with key customers based on our superior technology, expand our global footprint, and extend our presence in the high performance industrial materials market.

Clear evidence of our progress is the long term supply agreement that we recently announced with Boeing and an announcement that we’ll make in the next day or two on the award of long term supply contracts with Bombardier for the new C series and Learjet 85 Aircraft Programs.

Despite the positive secular trends and recent commercial and technology successes, our outlook for 2010 is for sales to decline versus 2009. This is driven primarily by our expectation of modest declines in selling volume to the business and regional jet and large commercial transport sectors.

We saw stronger demand in these segments in the first half of 2009 than the second and expect build rates to be flat to slightly down versus the second half run rates over the course of 2010. Additionally, we expect sales volume in the military sector to also be slightly lower, as the F-22 program winds down ahead of the Joint Strike Fighter ramp up.

As a result, we project 2010 sales to range from $650 million to $680 million versus 2009 sales of $718 million. Operating earnings are projected to range from $80 million to $90 million, down from 2009 earnings of $96 million. Building Block Chemicals, selling prices are anticipated to be higher due to increasing raw material costs, with selling volumes essentially flat.

We project modest demand improvement for acrylonitrile, but anticipate weak demand for melamine in the large building and construction markets. Taking all of this into account, full year sales are projected to be approximately $400 million and operating earnings are expected to range from $7 million to $10 million compared to earnings of $10 million in 2009.

Slide 14 summarizes our full year earnings guidance for the corporation. Our improved results over the second half of 2009 reflect the excellent progress we’ve made with the cost reduction and working capital initiatives, coupled with customer restocking, modest demand improvement in the industrial segments and improved margins, as we benefited from lower raw material costs.

Importantly, we delivered the cost savings, cash flow improvement benefits without losing focus on our customers and as a result, we have captured new business and continued to bring new high performance products to market. While this progress gives us positive momentum coming into 2010, we remain cautious about the economic recovery over the next 12 months. There remain a number of significant risks and uncertainties in the global economy that will make further demand improvements slow, uneven, and difficult to project.

We expect Q1 raw material prices to be up and volatile through 2010 based on higher average oil and natural gas costs and the uneven recovery in the economy. We need to remain nimble in adjusting selling prices to make sure we cover sudden increases in raw material costs, while maintaining share, and as a result, we forecast some erosion in gross margin versus 2009.

We expect corporate and unallocated operating expense of approximately $18 million for the year. We forecast other expense to be approximately $1 million and net interest expense is expected to be between $32 million and $34 million. The underlying annual tax rate for ongoing operations is expected to be in a range of 31% to 34%. This range reflects the uncertainty of a possible reinstatement of various favorable U.S. tax provisions that expire in 2009.

As I discussed earlier, we are forecasting 2010 demand levels in Specialty Chemicals to be comparable with the second half 2009 in North America and Europe with some growth in Asia and with new products. While Engineered Materials demand 2010 is expected to be down slightly from full year 2009 levels.

Taking all of these factors into account, our guidance for 2010 adjusted diluted earnings per share is a range of $1.90 to $2.40. The relatively wide range reflects uncertainty in the global economy, but it is a significant improvement over 2009 results. So much had happened in 2009 was unprecedented in our life times. I am proud that we took the necessary actions to make Cytec a learner and nimbler company with a strong balance sheet.

As a result, we are poised to deal with the challenges and the opportunities that will come as the market begins to improve. Looking forward, we remain focused on implementing Cytec’s long term growth strategy by investing in growth platforms and delivering high performance technologies that create real value for our customers and will bring greater return for our shareholders.

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

Question-and-Answer Session


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

David Begleiter - Deutsche Bank

Shane, in Coating Resins, you made almost $40 million in the back half of 2009 on $80 million run rate. What’s preventing you from getting back that number 2010 as a just higher loss?

Shane Fleming

Margin reduction because of loss has probably the single biggest factor, Dave. I think you know we used FIFO accounting and we had quite favorable raw material in Q4, despite the fact that selling prices were down. We saw significant margin improvement. Raw material costs have actually been trending up.

We hope to be able to recover some of that, but particularly in our commodity product lines, I don’t expect us to be able to maintain margin and we do expect some gross margin reduction. That’s probably the single biggest factor driving the inability to maintain that run rate through the full year 2010.

David Begleiter - Deutsche Bank

Shane, what do you need to see or have happen to raise prices in Coating Resins and that give up further margin, given how low your margins are right now?

Shane Fleming

It’s got to be the entire supply base being willing to move with us. It’s less an issue always in our differentiated products, but if you look at certain elements of our liquid Coating Resins line, say our solid based products, some of our aminos, our powder coatings line, if we move price because raw materials are moving up and competition doesn’t lift price, given all the excess capacity that’s out there today, we see loss in share. That’s been, the case of this market for sometime, particularly in powder coatings. It’s only gotten worse as demand has dropped over the last 12 months. So we have to walk that line between maintaining margin and not losing too much share.

David Begleiter - Deutsche Bank

Dave, just on working capital, will that be a source, or use of cash 2010?

Dave Drillock

I think it’s going to be a use of cash similar, because you’re going to have higher sales. If we had the higher sales going forward, we just hold the dates or just see a buildup in AR for that. That should be offset by payables, so I think you might see a little bit, days are hold in inventory, but just due to higher volumes, might have a few more dollars in there, but I think we can hold the days.

David Begleiter - Deutsche Bank

Shane, just lastly, Q1 versus Q4, how do you see some of the major trends progressing? Do you see much improvement at all in your businesses in January?

Shane Fleming

I would characterize it, Dave, as being kind of up and down. We’ve seen continued strength in Asia and I expect that trend to continue through 2010, but the markets are funny right now. You see improvement for a couple of months and then you see things turn down a little bit.

So there’s still I think some sorting outgoing on in terms of getting the right inventory levels established, some customers took shutdowns in December, have extended those a little. So it’s kind of early to give you an absolute trend, but I think it’s going to be mixed, but I would characterize Q1 as being flat with Q4.


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

P.J. Juvekar - Citi

On coatings, you mentioned that there’s some customer restocking going on in coatings. Lot of your coatings end up in industrial end markets, which industrial is actually quite weak compared to other areas, so just trying to understand, who’s doing all of this restocking?

Shane Fleming

I don’t think the restocking is necessarily driven by the fact that markets are getting a lot stronger. I think it’s more driven by the fact that, inventory levels are just at unsustainably low levels. We’ve had more stock outs, emergency shipments, air freight shipments, those kinds of things over the last half of the year than I’ve seen probably ever in my career and that’s because, like Cytec, a lot of customers were trying to reduce inventory, reduce working capital and they just went too far.

If you’re asking me, do I see a long, sustained demand improvement today in many of our industrial markets? No, I don’t and I think that’s why we’ve said 2010 volumes are effectively flat with 2009 second half run rates.

P.J. Juvekar - Citi

Just because inventories got too low.

Shane Fleming

More than anything else.

P.J. Juvekar - Citi

In aerospace, Shane, can you update us on supply/demand, we had lot of capacity start up in last couple of years and so, just tell us where utilization rates are?

Shane Fleming

I’m not going to be able to give you any insight on the carbon fiber side, because there’s a number of a supplier around the world and I just don’t have a good fix whether plus as you know, there’s been a lot of capacity brought online. I think from a composite standpoint, the volumes are off a little bit versus the peak. I can’t tell you where our competition is, but I think if you just looked at peak volumes, say, in the first half of 2009 or early 2009 versus where we’re at right now, volumes are down 5% to 10%. We could probably get capacity from that.

P.J. Juvekar - Citi

Can you tell us what your carbon fiber utilization rate was?

Shane Fleming

I can’t give an exact number. I can tell you that we were furloughed for a few months last year, so we were running short of full capacity.

P.J. Juvekar - Citi

One final question for Dave, just sort of a housekeeping question; Dave, you’ve taken lot of choices last 18 months, and I understand, you are not the only company taking charges, but it’s hard to figure out what’s permanent cost deduction, what’s one-time. I mean, are we done, we’re taking charges and restructurings?

Dave Drillock

All the initiatives that we put forward are essentially done. So there may be some charges in the first quarter that are related to GAAP. You have to take certain charges, when certain occur, but all the big charges are essentially behind us.


Your next question comes from Laurence Alexander - Jefferies & Co.

Laurence Alexander - Jefferies & Co.

I guess, Shane, a question about the longer term outlook for Cytec. What would you need to see in the environment to feel that larger acquisitions would be warranted or justified?

Shane Fleming

I think that first step would be, just some more visibility around a base demand that we can count on. Right now, as I said, we’re kind of bumping around and see in a month or two of positive movement, and then we’ll see a month or two of things turning the other away. We need a few quarters behind us where we feel like we’ve got the restocking.

Destocking initiates sort of that and understands that we’ve got again, solid based demand at a level that allows us to generate the earnings and the return that we need to make further investment. Part of it is just getting things showed up again the base line that we can count on.

Secondly, I think it’s unlikely you will see us do any type of a large transformational type of acquisition. I think what you will see is, more likely to our bolt-ons, or technology acquisitions we can bring new products or new markets into our core growth platforms. I think you could see some of that activity relatively soon, depending on the size.

As Dave noted, we’re sitting on a fair bit of cash right now. We’ve got a balance sheet in good shape. So we’re looking actively, but I don’t think you’re going to see us do anything transformational and I would carry that out even through 2011, even if we do see some improvement in the market.

Laurence Alexander - Jefferies & Co.

Then just in very short term, what are you seeing in terms of early January, February order trends for the different sub segments Additive Technologies?

Shane Fleming

A little bit early to say right now. It kind of a bit like my response to PJ, we’re seeing certain areas where there are some strength. I think Asia for the automotive industry, which is a segment that has been a nice growth story for us looks like that’s going to continue. Probably outside of that, I’m not sure I can give you a lot of insight.


Your next question comes from Mike Sisson - KeyBanc.

Mike Sisson - KeyBanc

In terms of raw materials, is the impact on Coating Resins that you’re sort of thinking sort of like the $20 million, $30 million range, I guess is it sort of a negative hit?

Shane Fleming

Yes, I think that’s probably not a bad ballpark number. That’s based on our view of oil and natural gas, which may be wrong. I hope it is, and if so, the impact would be less, but when you look at the year-to-year impact again, I keep talking about FIFO accounting.

Even though raw material costs have been ramping up in the fourth quarter, we haven’t seen that in the income statement yet, and we’re not going to see the impact of those higher raw material cost until the first quarter of 2010. So we’ve already seen some increase. It just hasn’t found its way through the P&L.

Mike Sisson - KeyBanc

Then in terms of Engineered Materials, could you just sort of give us your, sort of what’s underpinning that outlook in terms of build rates, impacts from the 787 potentially, and maybe some comments on the regional jet markets, which appears to remain pretty sluggish here.

Shane Fleming

Yes, I’ll be happy to do that. Let me just start with the 787. I think our outlook on the 787, you will start to see the build rates pick up through the second half of the year and the volumes that we’ll get, the revenues that will generate the 2010, which will be mostly second half loaded, will effectively offset the sales we had in the first half of 2009.

So we don’t really expect much of a 787 impact, because we did have a fair bit of sales in the first half of 2009. I think in large commercial transport, we are still seeing some destocking in the parts supplier area. I think that slowed a little bit in the fourth quarter versus what we saw in Q2 and Q3, but we’re not expecting demand to improve in LCT in 2010.

I mean, a lot of people are speculating that both Boeing and Airbus will announce modest rate cuts. We’ve not heard anything about that. They’ve certainly not said anything publicly about that, but there is an expectation out there that there may be some modest cuts. Lastly, on the regional business jet side, I think the regional jet market maybe close to bottom. There is probably less risk there than there is on the business side.

I think if you look at what most of the producers are saying in the business jet area, sales have continued to decline. They’re not seeing any type of a short term turnaround there, and some people are predicting you’re not going to see those markets pick back up for several years. So, we’re a little bit pessimistic on our outlook for the business in regional side.

Mike Sisson - KeyBanc

The longer term, when you think about ‘11, 2012 for Engineered Materials, given the backlog for commercial jets and 787 improving. What type of earnings power or profitability do you think that business could get back to?

Shane Fleming

It should get back to the peaks. I think it could happen fairly quickly, because we’ve got some really positive trends coming. We are going to start to benefit from the 787 as it ramps up in later 2010 and through 2011 and ‘12. Also, you’re seeing the positive announcement from Boeing on the 747-8. That’s an important program for us, so we should see some positive benefit there.

I talked a little bit earlier about the new contracts we’ve got with the Bombardier on the Learjet and their new C-Series regional jet, that’s going to help us out. So there is some good growth programs coming and then, if you can bolster that with this underlying build rates picking back up, as passenger revenue miles picks back-up. I think we’ve got good growth and excellent opportunity to leverage that growth into higher earnings. So my expectations are, if you look out in ‘11 and ‘12 for Engineered Materials are very positive.


Your next question comes from Amy Zhang - Goldman.

Amy Zhang - Goldman

I have a question related to your pricing power. Obviously, we have heard a lot of chatters about some pretty meaningful raw materials increase for the intermediate producers like the Coating Resins and historically, Cytec that’s actually show sufficient of pricing power and some of the periods in the past years to offset that kind of pressure. So what’s your confidence level going forward in 2010? You can get the enough pricing to offset the raw materials inflation for most of augments.

Shane Fleming

Yes, it’s going to be a mix story, as you know, Amy, we talked a little bit about coatings. I’ll back over there. Let me just go maybe to mining and Additives first. I think in mining, we’ll be able to offset. There are leads and lags sometimes, but for the most part I feel good about our ability to offset raw material cost impact in mining and those are high margin products. So it’s not as big an impact on our total profitability anyway in that segment.

I would say in Additives Technology, polymer additives have pretty good pricing power as well. Again, higher margin products less so on the specialty additives side and some of the more commodity products, but those two segments in general additives mining, pretty good pricing power and I don’t think you’re going to see a significant impact on margin because of higher raw material costs that we project in 2010.

Though we get to Coating Resins and its mix there, depended on the product line. Our specialty products, my expectations are that we can cover raw material costs. Again, it may take 30 to 60 days to ramp up sometimes, but we’ll be able to cover some of our specialty waterborne products, I would put in the same category, but if you talk about solid borne, polyesters alkynes our powder coatings resins products, pricing power is not as strong.

Our ability to cover raw material costs as they ramp up to some degree will be based on our competitors’ willingness to move price and in an environment where we’re at today, where volumes are down 20%, 25%, 30%, people are sitting on a lot of underutilized capacity. So pricing power becomes even less. As I’ve responded to earlier questions, that is probably one of the biggest concerns and one of the biggest reasons we haven’t taken the second half earnings run rate for coatings are multiply it by two, because we do think that we are going to have to give some gross margin to hold on to volumes.

Amy Zhang - Goldman

My second question is, in your guidance that you have the Coating Resins on a segment profit margins around 5% for 2010. I understand before you guys, always talk about at 10% target. I’m wondering, how quickly I mean is that still a target we can expect over the next few years? I understand, maybe not 2010, not 2011, or you’re thinking about taking some strategic actions to maybe pursue more divestures to address that margin problem with our segment.

Shane Fleming

I would say yes and yes. Yes to the fact that, or to the point that we do ultimately have an objective of getting this segment up to 10%. We do for all of our businesses that we want to be in for the long term. Our ability to get there is driven by a number of factors and I think the biggest single factor is our ability to leverage our volumes. So we have taken a lot of costs out of our Coating Resins business. We’ve significantly reduced our breakeven point.

We’re not going to have to get back to the levels we were at 2007 to get up to high single digit or even double digit margins. So that’s positive. We do have dilution coming from certain product lines. We’ve been trying to scale back, shutdown capacity for our low margin products and as, if you look at where we took out capacity in 2009, it was in powder coatings, it was in solventborne.

We’re going to improve mix going forward as we continue to convert, whether we need to divest something over the next year or two to help us get to that 10% target, I guess time will tell. It’s certainly something we would consider, but we don’t have plans to do anything definitive at this point in time.

Amy Zhang - Goldman

My last question is on the Coating Resins, with this five percentage type of margins, I’m wondering the return on capitals in this business, can I estimate it to below cost of a capital?

Shane Fleming

Yes, that would be a fair assumption.

Amy Zhang - Goldman

Going forward, when shall we expect some improvement?

Shane Fleming

I hope you’ll see improvement over the course of 2010. I certainly, expect to see improvement in the next year or two, 2011, 2012. We can’t do it organically through volume growth then we’re going to have to take some of those other actions we talked about.


Your next question comes from John McNulty - Credit Suisse.

John McNulty - Credit Suisse

Just a few questions you would talk about in a couple of your divisions, because of the destocking of your own inventories that your margin took a hit. Can you give us some color as to what hit was in Resin Coatings there and what it was in the Engineered Materials segment?

Shane Fleming

Its total for the company, I’d say around $10 million or so. I’d say, if you took four and four for the two segments it’s for where they are.

John McNulty - Credit Suisse

In the Resin Coatings area, I know you’ve closed in a decent amount of capacity and it’s my understanding the rest of the industry has been doing that as well. Can you give us kind of an update as to how kind of the overall supply/demand balance is starting to look at this point? Is it better than it’s been in the past, or kind of where we were in the past or is it kind of worse just because the demand is so weak?

Shane Fleming

Yes, I would probably characterize it at a high level as pretty similar. We’ve took capacity out permanently in the powder and solventborne area and we’ve not seen too much powder capacity come offline globally. Some of the Asian suppliers just kind of go up and down sort of like mushrooms after rainfall. So I don’t know if there’s been any permanent restructuring there.

On the solventborne side there has been some volume taken out, but there’s also been a fair bit of demand destruction. So I don’t think I would characterize it that balance today being that different than, say, where it was at the beginning of last year, going back further into 2008.

John McNulty - Credit Suisse

What are some of the closures you’ve had? It’s my understanding you’ve shutdown a couple of lines and facilities. Can you give us a breakdown now of what the mix is in your coatings segment? How much of this powder and solvent, which maybe on the lower margin side? How much of it’s maybe on the higher value side?

Shane Fleming

I’m not sure, I’ve got that numbers. We can get that back to you and then you probably recall, boarding the past in liquid Coating Resins, we were one third, water, I mean in solventborne. I would say, solventborne peace has probably comedown because we’ve taken quite a bit of capacity out.

Then the other area we’ve taken capacity out is in powder coatings. That revenue as a percentage of the total for Coating Resins is going to be down as well, but we need to update those slides, given the full year results, so we’ll do that.

John McNulty - Credit Suisse

Then just two questions. In the In-Process segment, at least the implied margins in your guidance are somewhere in the 14% to 16% range. Yet in the last two quarters, you’ve been in the 18% area. What should be driving those down, or is that just being conservative?

Shane Fleming

There maybe a little bit of conservatism, but I think some of its mix as well. We had strong metal extractant sales, which are high margin and very strong fasting sales in the fourth quarter. We’ve seen some good growth with our Fumigant’s. Electronics have been very strong Q2 and Q3. If fasting sales continue strong, that will probably bolster those margins a little bit, but we probably weren’t real aggressive in terms of projecting that forward, but I would say its mix more than anything else driving those margins.

John McNulty - Credit Suisse

Then just the last question, I know prior to the downturn, it looked like there were some assets that maybe were viewed as non-core and just because the valuations dropped off and the earnings dropped off, those were kind of put on hold. Can you talk about kind of your thought for divestitures for Cytec looking out over the next 12 months?

Shane Fleming

I don’t think our core strategy that we shared early in 2009 has changed that at all. We’ve identified the growth platforms, that’s really one invest for the future and where we will continue to invest and where we’ve seen good results over the last 12 months. So the areas in that cash category are the businesses that are less core to us and you hit it right on the head, the reason we haven’t been more aggressive in trying to look at potentially divesting some of that, there just wasn’t a market.

So going forward, we will continue to look at the possibility of improving the portfolio through divestiture, some of those cash product lines if we’re not getting performance. Our ability to do so I think will, to a large degree be dependent on the market for some of those product areas, and if we’re not getting sufficient performance, meaning we’re not getting positive cash generation from the business and we can’t sell them, we would probably look to either further reduce the size of those businesses or shut them down.

You saw us do that with some real minor product lines earlier in 2009. So yes, we would still like to move forward and restructure the portfolio, improve the mix going forward, but our ability to do so is going to be somewhat dependent on the market and we’re not going just go sell things to sell them if they are not value destroyers.


Your final question comes from Edward Marshall - Sidoti & Co.

Edward Marshall - Sidoti & Co.

My question was on the Engineering Materials segment. With Secretary Gates directive on the Joint Strike Fighter to kind of reduce the overall plan by about 25% in 2015, if the White House directive budget proposal comes out on Monday and starts to show that reduction in the content, what kind of effect would that have on the industry? How it’s prepared? Then also what kind of change, if any would your plans to the expansion within that segment would be?

Shane Fleming

I’m not sure I’m going to be that well prepared to speak to how this is going to impact the industry. I could speak to how it impacts us and what our industry was. There are a number of projections out there on JSF build rates. We have our own projection. We’ve got a projection that Lockheed’s made public and then we’ve got the recent update that Secretary Gates provided.

The way we’ve looked at our 2010, 2011, 2012, even if the adjustments that you referenced were made, they’re still inline with where we’re at. As you well know, a lot of you military programs coming out a lot slower than anticipate, and ramp up slowly and that’s kind of the way we build our projections.

The JSF is an important platform for us, sooner that goes forward, the better. I think the important point, and I think you recognize this, there’s no directive to reduce the total number of planes built. This is really around the build rate in 2015. If you look at the total program, there’s still roughly 1800 planes over the next 10 years, but ramping up a little slower than what Lockheed had hoped to be able to do.

Edward Marshall - Sidoti & Co.

Then that ramp up, I mean as far as capacity, do you think that would push out your capacity expansion even further here, or…?

Shane Fleming

We’re taking measured steps to expand capacity with the JSF. There will be some, as they get build rates up to 100 plus planes a year. We are going to have to put more capital in, but this is not going to be a major $100 million plus type of capital investment. These are single lines at existing facilities. We’ve already got some of those planned. Some of that work has been done already. It’s behind us, but we’ll just stay close to the build rates and we’ll add capacity, as the build rate demands.


It appears we have no further questions at this time. I’d like to turn the conference back over to Jeff Fitzgerald for any additional or closing remarks.

Jeff Fitzgerald

Thank you, everyone for your participation in today’s call. Have a great weekend. Thanks.


That does conclude today’s conference. We thank you for your participation.

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