Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Cytec Industries (NYSE:CYT)

Q4 2013 Earnings Call

January 31, 2014 11:00 am ET

Executives

Jodi Allen

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

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

Analysts

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

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

John Hirt

Jermaine R. Brown - Deutsche Bank AG, Research Division

Laurence Alexander - Jefferies LLC, Research Division

Gautam Khanna - Cowen and Company, LLC, Research Division

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

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

John P. McNulty - Crédit Suisse AG, Research Division

Stephen E. Levenson - Stifel, Nicolaus & Co., Inc., Research Division

Operator

Good day, and welcome to the Cytec Industries 2013 Fourth Quarter Earnings Conference Call. Today's call is being recorded. For opening remarks and introductions, I would like to turn the conference over to Ms. Jodi Allen. Please go ahead.

Jodi Allen

Thank you, Phyllis, 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, will review the financial results and special items in the quarter; Shane will then finish with some commentary on our outlook for 2014.

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 Events and Presentations, 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 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 the call over to Shane.

Shane D. Fleming

Thanks, Jodi, and good morning, everyone. I appreciate you taking the time to join our call. Let me start by saying how pleased I am with our overall performance in 2013. We delivered 39% EPS growth over 2012 and successfully executed our portfolio transformation strategy. I am proud of our accomplishments and equally excited about the growth opportunities ahead.

In the fourth quarter, we delivered sales of $480 million, a modest improvement over the prior year quarter, with earnings of $41.9 million and $1.15 of earnings per diluted share. This marks a 22% EPS improvement versus the fourth quarter of 2012 thanks to sales growth across all business segments, improved product mix and lower share count.

In Aerospace Materials, sales increased by 3% to $239 million, which was primarily a result of selling price increases. We did see volume growth in the large commercial transport sector related to the 787 and single-aisle build rate increases, but this was offset by volume declines in military related to rotorcraft blade replacements, lower B22 build rates and also inventory reductions associated with the Joint Strike Fighter program.

Aerospace operating earnings in the quarter were $37.2 million, down versus the prior year quarter. The decrease is due to higher fixed cost associated with the planned carbon fiber plant shutdown, which was approximately a $3.4 million impact, $1 million of higher expenses from ongoing capital projects and the impact of stranded costs associated with the sale of Coating Resins business of $3.6 million. We faced some operational challenges in this business last year, which we expect to be less of a factor in 2014 as we focus on delivering operational improvements.

Industrial Material grew sales by 8% in the fourth quarter when you exclude $11.7 million of sales in 2012 from the recently divested distribution business. The growth was primarily from increased sales of structure composites for the high-performance automotive market, and in the tubing sector, driven by new demand in the Aerospace market. We are now seeing improvement in our key structural composite markets which we expect to continue and drive future growth in this business.

Process Materials sales were a bit higher than the prior year period with the improvement coming from increased sales to the wind market. The Industrial Materials segment overall delivered operating earnings of $6 million, which is slightly higher than the prior year quarter, coming from volume increases I just noted as well as selling price increases and favorable product mix.

The In Process Separation segment delivered good volume growth of 4% in Mining Chemicals due to strong demand in base metals, including copper, but this was partially offset by lower sales to the alumina market, where we are still experiencing weak demand. Phosphine sales were slightly below prior year due to timing of an order to one large customer. The volume growth in mining was partially offset by decreased selling prices and exchange rates, each impacting sales unfavorably by 1%. This led to overall sales growth in the quarter of 2% and earnings of $20 million or 9% higher than the prior year quarter. The earnings growth was partially offset by planned actions to lower inventory levels, which resulted in lower production volumes and approximately $1 million of unfavorable manufacturing absorption. Also negatively impacting earnings was $1.7 million in stranded costs.

Additive Technologies performed very well in the fourth quarter with 10% higher sales than the prior year quarter. This was due to strong demand in North America and Asia Pacific for our polymer additive UV light stabilizers used in plastics. Both the automotive and construction markets have increased demand, which has supported sales growth in this product line. Sales are also up in specialty additives versus the prior year quarter despite rationalization of a low-margin product growth. Pricing was 2% unfavorable versus the prior year as a result of competitive activity in China and planned market share capture of a commodity specialty additives product. For the segment, operating earnings were $9.5 million, up 6% due to the volume increases and improved product mix in the quarter. This was partially offset by stranded costs of $1.2 million.

Overall, we ended the year with solid performance, in line with our expectations.

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

David M. Drillock

Thank you, Shane, and good morning, everyone. I'll start with the review of the major special items for the quarter. Included in Corporate and Unallocated, primarily in manufacturing cost of sales, is a net pretax benefit of $23.7 million, most all related to 2 items. The first is a net pretax benefit of $25.5 million from mark-to-market adjustments for our pension and other post-employment benefit plans. As you are aware, earlier this year, we changed our method of accounting to mark to market, which reflects changes in actuarial assumptions immediately in the P&L versus amortization. The net credit reflects the benefit of a higher discount rate due to higher interest rates versus the year-ago period, which reduces our liabilities. This was partially offset by a charge related to lower asset returns than anticipated due to the high percentage of bonds in our portfolio as part of our liability-driven investing strategy. The net result of this strategy is that a change in the liability is mostly offset by the change in asset returns, thus keeping our fully funded status essentially intact. The second item was a pretax charge of $1.8 million related to previously announced restructuring initiatives in Industrial Materials.

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 approximately 32% is 2 percentage points higher than the year-ago period. This was mostly attributable to higher selling volumes and net increases in selling prices that was only partially offset by reduced production levels for inventory control purposes in the chemical segments and the planned maintenance shutdown of our carbon fiber plant that started at the end of the third quarter and carried over into the fourth quarter.

We also had higher capital project expenses of about $1 million that did not qualify for capitalization, as certain of our large capital projects complete construction and start to move into the qualification stage. Our total operating expenses are up about $1.5 million from the prior year period but flat as a percent of sales. Corporate and Unallocated for the quarter is down about $14 million from the prior year period. This was all due to the stranded cost as a result of the sale of the Coating Resins business. About half of these costs have been reduced, and the balance has been allocated to our remaining businesses. This was partially offset by higher spending of approximately $4 million on our single ERP initiative. We have completed the design phase of this project, and in 2014, we are transitioning into the readiness, build and test phase in addition to analyzing various deployment scenarios. As for the total 2014 Corporate and Unallocated expense, our guidance remains unchanged at a range of $24 million to $28 million.

Interest expense net is down about $3 million, mostly due to higher capitalized interest in our major capital projects and lower interest expense in our public debt as a result of refinancing in March of this year. Our 2014 guidance for full year net interest expense remains at approximately $25 million, with the increase over 2013 due to lower levels of capitalized interest as several of our large capital projects moved to operations.

The overall underlying annual tax rate for the fourth quarter of 2013 was 31.8% versus the underlying annual tax rate in the fourth quarter of 2012 of 30%. This is also higher than the estimated full year rate of 30.6% at the end of the third quarter of 2013. As a result, the tax expense in the fourth quarter included approximately $2.5 million or $0.07 per diluted share attributable to a higher tax rate applicable to the first 9 months of 2013. In both cases, the increase in the rate was due to a shift in earnings to the U.S. from international jurisdictions. Our 2014 tax rate guidance remains unchanged in the range of 30% to 32%.

As for cash flows, our cash flow from continuing operations was $81.6 million for the fourth quarter, and full year was $154 million. As a reminder, the year-to-date amount includes approximately $70 million of pension contributions, and due to the fully funded status of the large majority of our pension plans, minimal contributions are expected this year. Our net working capital days at the end of the quarter were down 6 to 83 days compared to the end of the third quarter of 2013. The decrease is due to lower inventory levels spread across our businesses, mostly due to inventory control efforts in our chemical segments and sales that were expected in the third quarter that occurred in the fourth quarter. In addition, our accounts payable days were down 6 to 43 days compared to the third quarter of 2013, also in part due to our inventory control efforts. Accounts receivable days of 48 were unchanged. Working capital days is a key cash flow metric for us, and we continually monitor our levels to ensure we are staying within our targeted level.

Our capital spending for the fourth quarter was $85 million and year-to-date is $300 million. A whole [ph] of this is related to our manufacturing capacity investments in the Aerospace Materials and In Process Separation segments. Our full year guidance for 2014 capital spending is a range of $180 million to $200 million, which includes about $25 million of carryover spending from 2013.

Finally, while we had no share repurchases in our fourth quarter, our share repurchases for full year 2013 totaled 10.2 million shares or $750 million at an average price of $73.72 a share. We do not have a current authorization for further stock buybacks. As noted at our Investor Day this past November, we will operate the new portfolio for a few quarters, and in the second half of this year, we anticipate assessing a new authorization and its timing, consistent with our capital priorities, plus taking into account our expectations of and results to date of free cash flows.

As all of you know, 2013 was a busy year of successful transformation for Cytec. We enter 2014 with a strong balance sheet, improving cash flows, much improved margins and numerous growth in operational excellence opportunities to execute on.

So with that, let me turn the call over to Shane.

Shane D. Fleming

Thanks, Dave. I would now like to review our outlook for 2014, which we shared with you at our Investor Day in November. Given that the majority of legacy aircraft programs we supply are running at or close to announced peak build rates, our focus in Aerospace Materials will increasingly turn this year to delivering the additional operational efficiencies in our manufacturing operations. We have defined and started work on a number of productivity initiatives that will drive margin improvements starting this year. We'll also focus our attention on conducting qualifications for our new carbon fiber assets that we are well positioned to supply from our new plant to support current and new growth programs. Additionally, we will continue to pursue new business opportunities to establish positions on next-generation programs that will contribute to growth beyond the 5-year planning horizon.

For 2014, we're estimating sales to be in a range between $970 million and $990 million and operating earnings in a range between $183 million and $195 million.

As evidenced in our fourth quarter Industrial Material results, we are seeing general demand improvement in the core industrial markets, which will support sales growth in 2014. We expect steady improvement in structural composite sales throughout the year, mainly related to our key markets, including high-performance automotive and aerospace tooling. Our Process Material product line forecasts growth from consumables sold to the Aerospace market, but this will be offset by softer sales in the wind energy market. For the overall segment, we estimate 2014 sales to be in a range between $300 million and $320 million and operating earnings in a range between $22 million and $26 million. This marks a double-digit-plus increase in operating earnings versus 2013 and solid progress in expanding operating margins in this business.

We are estimating strong top line growth for In Process Separation this year, driven by new mine startups, improved demand for base metals and new product commercializations, which collectively comprise double-digit sales growth. We are working closely with our customers on the new mine fills. And as you know from our past experience, the exact timing of the first deliveries is difficult to predict based on the uncertainty of startup timing for these complex projects and the challenging supply logistics for many of these remote operations. We have risk-adjusted this opportunity and included 6 new mine fills in our 2014 forecast. These orders are comprised of a mix of large and smaller volume fills. Two of these fills were moved into this year based on startup delays from last year.

Outside of mining, we will continue to promote broader use of our phosphine specialties in adjacent market applications such as fumigation, gas frac-ing and electronics. As we have discussed previously, we are faced with startup costs this year from capital projects at 2 sites that are needed to support our 5-year growth plan. These include the new phosphine plant in Canada and the upgraded extracting plant in India. These costs, combined with related depreciation, will put pressure on our 2014 margins. We estimate sales in a range between $420 million and $445 million and operating earnings to be between $88 million and $97 million in 2014.

The Additive Technologies segment will benefit from continued demand improvement this year across multiple product lines but mainly driven by Polymer Additives, particularly sales of our new and differentiated technologies. Our sales estimate is in a range between $285 million and $295 million and operating earnings in a range between $40 million and $42 million in 2014.

Our guidance for Corporate and Unallocated interest expense and tax is included in the supporting materials on Slide 11. Our consolidated outlook for revenues is approximately $2 billion, and operating earnings are estimated in a range between $309 million and $332 million for full year 2014. This translates to adjusted diluted earnings per share in a range of $5.50 to $5.90 versus our full year of 2013 EPS of $4.80.

Again, I'm extremely pleased that the portfolio transformation work we embarked on 2 years ago has been successfully completed, and as a result, we have positioned the company to deliver sustained top line and earnings growth. We are committed and well-positioned to execute our growth strategy and create significant future value for our shareholders.

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

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Robert Koort with Goldman Sachs.

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

Shane, I was wondering if you could talk a little bit about the progress you've made in maybe cross-selling some of the Umeco business through your traditional Aerospace customer base?

Shane D. Fleming

Thanks for the question, Bob. It's actually been a quite positive story for us. I was able to attend a global sales meeting earlier this year for the industrial business where we had both process and structural folks together, and we actually celebrated a big win. I won't say the customer, but we were able to use the position we had with our Aerospace folks to bring our Process Materials people in and actually capture some business. So I think we've had 2 or 3 successes, probably in the neighborhood of maybe $5 million to $10 million at this point in time in terms of annual sales, but we're gaining progress, and I think it's going to be a very positive for us going forward.

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

And I know there's been a little more press around the BMW I3 composite car. Can you give us a sense where you stand? You've made some pretty optimistic long-term forecasts on what materials might do in the auto market. Do have any way to help us calibrate sort of recent news flow there, or is there any change in your perspective?

Shane D. Fleming

Yes, I'm a little hesitant to talk about specific OEM opportunities. But I am very pleased by the progress we're seeing. I had a chance to meet with one of the design companies that's working very closely with an OEM. We see a number of new programs coming out in the next couple of years in what I would call the luxury sports car market in the sort of 5,000 to 20,000 units per year. That's where I think you'll see us first penetrate, still [ph] automotive. And I do expect good growth to come there. I think it's going to be further down the road, more like 5 to 10 years before you see widespread adoption with cars produced at the 100,000 units per year. But I think we've got collaborations with the right players, the right OEMs in Europe and the right design firms to take advantage of this opportunity. And I do see significant growth coming, not just in the 5-year horizon, but as soon as 2 to 3 years as some of these newer programs start to ramp up.

Operator

Your next question comes from the line of Yair Reiner with Oppenheimer.

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

So a couple of questions on the Aero business. First, last quarter, just in 3Q, you saw some destocking, particularly in the defense business. I think, we've heard from a number of companies in the Aero supply chain that inventory dynamics in the quarter were a little bit difficult to gauge and a bit unusual. Kind of what have you seen on that front, both in defense and in commercial? And kind of how are things shaping up in 1Q? Do you think the inventory readjustment is done, or do you think there's still some incremental risk there near term?

Shane D. Fleming

I think -- thanks for the question. I do think there is still a little bit of downside from the inventory destocking. I think we saw some of that in Q4 that offset some of our growth. We also expect to see some more destocking in some of the large commercial transports programs, as well as in some of the military programs in 2014. That, of course, is built into our guidance, but that destocking is offsetting some of the volume growth that we're seeing. And I think what typically happens here is, as these programs reach sort of plateaued production rates, the Tier 1 suppliers don't feel the need to carry quite as much inventory as they do when those programs are ramping up. Once they hit that steady state and order patterns become more established, I think inventory decreases really throughout the entire value chain. And we've seen that and expect to see some of that. But despite that, we still think we've got enough growth coming that we can offset that and have effectively flat volume in 2014.

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

Great. And then just one more. The CSeries, Bombardier announced a 1 year delay. And I think that everyone was expecting a delay. Maybe the scope was a bit bigger than expected. I know that you derisked that in your long-term forecast. But is it a little bit more delayed than you expected? And is that going to impact kind of momentum into 2015, or is that already kind of figured into your plans?

Shane D. Fleming

I think it was mostly figured in. We take the public information in and do derisk, as you noted. And I think our view of the program is not that different than what this delay will likely eventually do.

Operator

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

John Hirt

This is actually John Hirt on for P.J. Can you talk about the operational improvements that you have planned for 2014 in Aerospace Materials? And how does that -- and what's the net effect of that given that you've got this $1 million of higher costs associated with some of the capital projects that you called out in the fourth quarter?

Shane D. Fleming

We expect to see fairly significant cost increases coming as we start to operate these new assets, these new investments, both from the expense as well as from the depreciation side. That said, our expectations from these productivity initiatives will more than offset those increases. So we're looking at substantial productivity improvements here, something even close to $20 million, I think, in total for 2014, and that's comprised of a number of different initiatives. Some of this is just getting increased output rates or lower unit costs out of existing assets, but a lot of it is from in-sourcing material that in the past we've outsourced, either selling more of our own fiber or -- we do a lot of weaving ourselves, but we also outsource a lot of weaving. We've made investments in the technology and have increased our output, so we're going to be able to take a fair bit of that weaving in-house. So it's a host of different initiatives, but in total, the impact is going to be quite substantial and, we feel, will offset the increased depreciation, operating expenses from our new assets and any inflationary increases we will see.

John Hirt

Okay. And then I know in the past you've talked about Cytec becoming a bigger player in large tow carbon fiber for autos and also a bigger player in intermediate modulus fiber for primary structures in Aerospace. Can you do both? How much capital might that require? And how long would that take?

Shane D. Fleming

All good questions. I think the short answer to can we do both is yes. The capital question is going to be dependent on just what form our involvement takes. And as you probably recall from our Investor Day meeting, we didn't say we needed to own all these assets, we just needed to put ourselves in a position where we had more control over the total value chain. So there are a host of different options here that we're exploring, some quite capital-intensive, some not. But we do feel like we can execute on both. It's going to take some time, but that's okay. We've got some time to get there. I think we're on a good path, and I don't see this having any type of a significant financial impact on our businesses over the next couple of years. And perhaps it won't have a -- we won't look at a big investment, even 3 or 4 or 5 years out, depending on what form our involvement ultimately takes.

Operator

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

Jermaine R. Brown - Deutsche Bank AG, Research Division

This is actually Jermaine Brown sitting in for David Begleiter. In terms of cost savings, are you still on track for the $22 million to $26 million within Industrial Materials that you mentioned last year for Q2 ramp-up?

Shane D. Fleming

Yes, I think that we had 2 different synergy targets that we established. The first was announced at the time of the acquisition, and then we came back again around midyear or into Q3, announced an additional $5 million. My view is, right now, we are on track to deliver that total initial synergy target plus the incremental $5 million. And we should be at a run rate to deliver that by sometime in the first half of this year.

Jermaine R. Brown - Deutsche Bank AG, Research Division

Good. And within Additive Technologies and In Process Separation, do you foresee any raw material pressure? And will you be able to push higher prices through in 2014 to offset that?

Shane D. Fleming

Yes, I don't think we expect a lot of price pressure in that business. We don't have a lot built into our forecast right now. And if we do see some, I think we've demonstrated our ability in the past in this business to pass that on to customers. But given the types of raw materials that we buy in this business and the outlook right now, we don't really see much of an impact coming in 2014.

Operator

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

Laurence Alexander - Jefferies LLC, Research Division

Two quick questions, a bit nitpicky. Are the sales headwind that you have of composites into the wind market, is that flatlining sequentially? And if so, when would you expect that to turn into a neutral to positive comp?

Shane D. Fleming

It's been awfully lumpy for us. Let me -- if you don't mind, I'll answer that one, and then you can go on to your second one. A lot of the quarter-to-quarter variance that we've seen in this business has not been driven so much by overriding market demand, it's been more one single large customer who has had production issues and then actually had some financial troubles. We saw that turn around a little bit in Q4 and bounce back up again. So we had strong Q4 sales relative to Q3. But as you heard me say in our '14 outlook, we expect that to turn back down again. I think we had some kind of demand that got satisfied, so we're not expecting to see much growth in '14 or probably not really any growth right now in our Process Materials for the wind market.

Laurence Alexander - Jefferies LLC, Research Division

But as a tailwind -- as a headwind for your comps, that should sort of basically flatten out. I mean, you'll have a tough comp, I guess, in Q4, but besides that, it should fade as an issue.

Shane D. Fleming

Exactly. We had quite weak Q2 and Q3, so I think, overall, you're right.

Laurence Alexander - Jefferies LLC, Research Division

And then on the Aerospace side, are there any significant chunks of cost being pulled into 2014 that will help the comparison into 2015?

Shane D. Fleming

I don't think so. No, there's nothing that jumps out right now. We're going to see the costs -- the expense associated with our carbon fiber startup hit us in '14, but we're going to see some of that in '15 as well. Dave, do you have anything you have in mind?

David M. Drillock

Yes, on some of the other projects, some of these capital project expense, Lawrence, there'll be $4 million or $5 million this year that probably won't reoccur on some of the other projects, not the carbon fiber plant that Shane mentioned, but on the other 8 lines that...

Shane D. Fleming

Yes, the new fiber line in Texas.

David M. Drillock

I'd say about that amount that won't happen in '15.

Shane D. Fleming

But we might -- just to give you one, we would probably see some other expense related with other capital projects come into '15, so I'm not sure it's going to lead to a favorable comp.

Operator

Your next question comes from the line of Gautam Khanna with Cowen and Company.

Gautam Khanna - Cowen and Company, LLC, Research Division

A couple of questions. First, I was wondering, on the fixed mine starts you're expecting this year, are they sort of evenly spread through the year, or are they concentrated in any one quarter that would skew kind of margin comparisons?

Shane D. Fleming

I think our ability to predict the timing of these things is such that I would hate to try and give you any real detailed view. I do know that we've got a couple that are going to be early in the year, and then I think they spread out through the rest of the year. And as I noted in my comments, one of these is quite substantial in size and the other ones are a little smaller. So actually, the timing of the largest one is probably going to be the one that really moves the needle for us.

Gautam Khanna - Cowen and Company, LLC, Research Division

And that's the one that's expect -- that's expected later in the year?

Shane D. Fleming

No, I think it's actually more in the first half of the year, expected. But I will emphasize the word expected.

Gautam Khanna - Cowen and Company, LLC, Research Division

With respect to the phosphine capacity that's coming online, I mean, today, could you -- how much of that facility could you fill? And if you could just comment on when you expect that facility to be at breakeven? And then if you could prognosticate on when do you think you could be at the segment-average margins?

Shane D. Fleming

Yes, the last piece of that is going to be a little harder to predict. I think we're basically expecting it's going to -- first year of full operation will -- it'll have a negative impact on our operating margins. I think as we get towards the end of the second year, we should start to see positive incremental margins for the business. We're going to be pretty aggressive in our view in terms of getting this thing filled up. But even then, you're talking about doubling the capacity for the business. So to be able to grow effectively, you have to grow the business at 20% a year for 5 years to fill that plant up, and that's probably a little bit more aggressive than our view. But again, by the end of year 2, we should have positive margins coming from the business as a result of the expansion. And it's allowing us to grow. We're reaching a point right now where we just are not able to grow without this capacity. And we do expect to get some significant volume on this plant as we start it up around midyear. So our plans are to start operating the plant in the second half of the year to meet the increased demand.

Gautam Khanna - Cowen and Company, LLC, Research Division

Okay. And just to be clear, though, when you say firstly you're negative to operating margin, that's still going to be positive to net EBIT, right? I mean, the plant will not be GAAP earnings dilutive.

Shane D. Fleming

Yes, I think you're correct. Yes. It's just going to be at a lower EBIT margin than the total business, so it's going to pull the average down.

Gautam Khanna - Cowen and Company, LLC, Research Division

Got it. Could you comment on -- we hear a number of suppliers to Boeing talk about Partnering for Success and pricedowns and what have you. I just wondered, where are you in those discussions? And how have you factored price into your 2014 and even 2015?

Shane D. Fleming

Yes, I'm a little hesitant to speak specifically about the details of those discussions. They are ongoing. They have been ongoing for some time. And there will be areas where we will make some price concessions in areas where we want. We're looking for other ways to add value to our relationship with Boeing, which they're happy for us to do. I don't think I can add much color beyond that at this point.

Gautam Khanna - Cowen and Company, LLC, Research Division

Can you add a little color on the 777X? I know you guys were excited, very excited at the Investor Day about some of the potential there. How well positioned are you for picking up share relative to the 777 legacy planes?

Shane D. Fleming

Yes, I think we're -- we have a very good shot at winning some business there. But I'm sure if you talk to our competitors, they would say the same thing. We're all in that process of competing for the business, doing a lot of the technical work right now to prove we've got the product performance required. And it's going to be some time before that award is made. But we feel good about our technology, we feel good about our relationships and time will tell.

Operator

Your next question comes from the line of Mike Harrison with First Analysis.

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

The weakness that you are seeing in rotorcraft, it's been a couple of quarters now. Is that probably something that's a secular drag as you run out of retrofitting opportunities for rotorcraft, or are there some programs that you're on or expecting to be on that could suggest we could see a pickup at some point?

Shane D. Fleming

No, I think your latter premise is correct. We have seen a couple of quarters of this business soften, and most of it has been due to blade replacement. There's also been some pressure from the V22 ramp-down. But there are some new programs coming, both civil and military programs, that we're actively pursuing. They're a little bit further out, but we feel like there's some chance, as you look down the road, to see some growth in this sector.

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

And then shifting over to IPS, you mentioned some fixed cost absorption issues related to the inventory takedown that you guys did. Are the inventory levels now kind of where you want them, or could we see some additional absorption issues bleed into Q1?

Shane D. Fleming

I don't think you're going to see them bleed into Q1. I think we got the inventories where we wanted them in Q4 for the year. But I do believe that there's still some opportunity for us to modestly reduce inventory over the course of the 2014. I don't know if it's going to be significant within a given quarter. We're trying to keep our average inventory at a fairly constant level. One of the things that we struggle with in this business is it's lumpy, we get large orders, and to try to manage our inventory around expected customer demand creates some challenges for us. And that's what happened in '13. We got inventories high through the end of Q3 and had to make some adjustments in Q4. But we'll do our best to stay close to our customers and try and manage those inventory levels at a more constant average for the course of the year.

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

And Shane, can you give us any update on the competitive environment in the alumina market in China? Are things improving at all? Do you guys -- are you guys progressing on maybe some new products or anything heading into that market that could help...

Shane D. Fleming

Yes, that's a good question and it's something that's got our attention right now. We have seen, as you noted, a fair bit of increased competitive activity in the alumina market, specifically in China, mostly in China, in fact. What we're doing right now is we recognize that some of the products that we developed for the global alumina industry aren't as appropriate for either the bauxite that's in China that's processed there or just the buying mentality in China. So we're looking at trying to put some products together now, some derivatives of our existing materials that will put us in a better competitive position in China. And that's ongoing work. It's probably not something that's going to impact the business too much in 2014 but hopefully position us to capture some new opportunities going forward, as well as hopefully potentially capture some share we've lost as well.

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

Right. Last one I had is on Industrial Materials. Just how much growth do you think there is in the tooling market? Is there an opportunity? It sounds like it's mostly Aerospace-driven right now. Is there an opportunity to kind of broaden that business into kind of the broader industrial and manufacturing market?

Shane D. Fleming

Yes, there is. And our business is not entirely Aerospace-related, our tooling business, but that's certainly the biggest piece of it. And in Aerospace, they want a high-quality tool that lasts a long time, so you're making these tools out of the same types of composite materials they're using to actually make the parts. Some of the tooling and other industrial markets is not made from the high-end composite materials. But that's not to say there isn't opportunity there, and we are looking at things like automotive to expand our tooling presence. I still think, going forward, though, automotive will be the largest piece of that. And in terms of growth, this business is lumpy, very lumpy, because what you tend to do is you build a set of new tools as airlines expand production or add a new line. So we saw some growth, as we referenced in Aerospace, in the fourth quarter, but that was due to some ramp-up work that Boeing's doing and additional tools they needed to meet the higher demand for the 787. So I think it is one business that, that nature of it is not going to change. It continues to be a lumpy business. And sometimes, it's a little bit difficult to predict because you don't know how far in advance of the expansions the OEMs will want the tools. We are well positioned, though, to be a leader in that market.

Operator

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

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

Shane, in terms of Industrial Materials, you ended the year with pretty good profitability. If you annualize that number, it looks like the outlook for there for this year could be conservative. Any thoughts on where the upside could come if things come in a little bit better?

Shane D. Fleming

We are -- we do get good leverage here on revenue growth. As you noted, we had good sell loadings [ph] in the fourth quarter. And I think we've projected pretty decent margin expansion in 2014 overall. So any volume growth is going to help the higher margin business for us in structure, so that's going to have a bigger impact in process side. And we've called out growth really in just a couple of areas within structure, with high-performance auto being the primary one. We've projected our budget motorsports business to be pretty flat. There's a lot of change going on right now, in Formula 1 particularly, where they've got new rules on engine design, and we're not exactly sure how that's going to impact demand for '14. So if there is an upside that comes to mind for me right now would be that motorsports area, which is high-margin business, and if we see some growth there, that's definitely going to help expand margins.

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

Okay. And then when you take a look at the Aerospace Materials in 2014, maybe on a quarterly basis, is there any lumpiness that we need to be aware of? Can you grow pretty consistently each quarter? Second quarter was really strong. So is there any sort of lumpiness as we model out the year?

David M. Drillock

No, I don't think so. When I look at where we're projecting growth to come from, it's just the continued ramp-up of a few of the legacy programs that still are ramping up and then an increased rate on the 87. Those are the major drivers. And I expect that to be relatively steady. So no, I don't think we should see big quarter-to-quarter variations in revenue in that segment.

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

Okay. And then last one on Additive Technologies, and that's a business that profitability has really improved for you over the years. But it's been tough to grow, I guess. Anything you need to do there to jumpstart the growth? Do you need to maybe get a little bit bigger, or is it just one that you want to run for cash and let it ride?

Shane D. Fleming

Yes, well, we would like to see the business grow a little bit faster, and we do have pretty good growth, aggressive growth, projected for '14, coming off a strong fourth quarter. But part of the reason we haven't seen growth there is we've continued to bottom-slice the business. As we've seen product start to commoditize a little bit, we've stepped away, and we called one out in 2013 that had a fairly significant impact on the business. So if you take away some of that product rationalization over the last couple of years, we'd probably be seeing another couple of percent growth. As we look forward right now, I don't see as much on the horizon in terms of product rationalization. And we're starting to see more growth in the more highly differentiated products within our Polymer Additives line. So I think we can grow a little bit more than probably GDP, given the opportunities for our RPA business in automotive and some of the recovering construction markets. Specialty additives is probably going to be more like GDP, but it is, as you noted, a business we run for cash. We're not going to invest a lot to drive growth in the business. We're more focused on maintaining good solid operating margins and delivering cash flow that we can count on year in and year out. But I do think there are some growth prospects for us as we look out over the next couple of years.

Operator

Your next question comes from the line of John McNulty with Crédit Suisse.

John P. McNulty - Crédit Suisse AG, Research Division

Two quick ones. With regard to the industrial business, when I look at the revenues, they clearly came in better than what we were looking for in the fourth quarter. I would say the earnings came in maybe a little less, or at least the margins came in a little bit less. So for a business that normally has a lot of operating leverage, I guess I'm a little surprised at what the margin level ended up being. So can you walk us through how to think about the operating leverage in that business as we look to 2014? And maybe what, if any, headwinds there might have been in the fourth quarter on that?

Shane D. Fleming

Yes, I'm not aware of any of the headwinds beyond what we called out. We did have the stranded cost impact from coatings. Dave, is there any one single thing you can think of?

David M. Drillock

There isn't any one single thing here, John. I think there's a little bit of mix in Process Materials versus structural but...

Shane D. Fleming

Yes, the wind bounce-back probably had some impact. But if you look forward, the operating leverage should be quite good. We don't have to add really anything in terms of capital to grow volumes significantly. We're sitting on a lot of latent capacity right now. The contribution margins in this business, particularly in structures, are very good, as good as some of our other growth product lines. So if we can continue to grow as we expect in the higher-margin structure side of this business, we should see good operating leverage. I think we're projecting about 1.2% '13 to '14, and any additional top line beyond what we have in our plan should lead to pretty significant improvement in operating margins.

John P. McNulty - Crédit Suisse AG, Research Division

Okay. Great. And then just one question on the CSeries. I know we've heard about the delays that are occurring at this point. But there's also normally a pretty decent inventory kind of channel fill that used to take place ahead of any ramp-up. So I guess, when we're looking to 2014, does the CSeries actually impact your revenue at all in terms of the growth that you're going to see from '13 to '14? And maybe if you can quantify how we should be thinking about that, that would be great.

Shane D. Fleming

Yes, it's pretty modest given where they're at in the program right now, still doing flight testing. The number of units that we've supplied to date is quite small, kind of on one hand, and I think a similar comment for the '14 expectation. So it's not going to be until '15, later half of '15 and into '16 before we start to see significant growth from that program.

Operator

[Operator Instructions] Your next question comes from the line of Steve Levenson with Stifel.

Stephen E. Levenson - Stifel, Nicolaus & Co., Inc., Research Division

Just going back to 777X. I'm wondering if you think your opportunities there lie more in -- simply from increased content because it's going to use so much more composites than the current version or if you think there's an opportunity to displace an incumbent?

Shane D. Fleming

I think both. I think we would look at increased usage in this very large plane given there's opportunity, significant opportunity over the current 777X design, but all -- I'd say the current 777 design. But also, as Boeing looks to use primary structure in at least the wing on this plane, there's a lot more opportunity that we're pursuing as well. So some of the secondary structure that we typically see should help us grow our position on the plane, but we're actively pursuing the primary structure opportunity as well.

Operator

At this time, there are no further questions.

Jodi Allen

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

Operator

This concludes today's conference. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Cytec Industries Management Discusses Q4 2013 Results - Earnings Call Transcript
This Transcript
All Transcripts