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Cytec Industries, Inc. (NYSE:CYT)

Q1 2014 Earnings Call

April 23, 2014 11:00 am ET

Executives

Jodi Allen - IR

Shane Fleming - Chairman, President & CEO

Dave Drillock - VP & CFO

Analysts

Germaine Brown - Deutsche Bank

Robert Koort - Goldman Sachs

Yair Reiner - Oppenheimer

John McNulty - Credit Suisse

John Hirt - Citi

Gautam Khanna - Cowen & Company

Laurence Alexander - Jefferies

Mike Sison - KeyBanc

Mike Harrison - First Analysis

Richard O'Reilly - Revere Associates

Operator

Good day, and welcome to the Cytec Industries 2014 First Quarter Earnings Conference Call. Today's call is being recorded. For opening remarks and introductions, I would like to turn the conference over to Ms. Jodi Allen. Please go ahead.

Jodi Allen

Thank you, Shannon, 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 item 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 three 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 Fleming

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

Our first quarter results are inline with the forecast. We delivered top line growth in three of our four business segments resulting in total sales for the quarter of $489 million. We also delivered solid operating earnings performance with an 18% improvement profit versus the prior year period. Our sales growth coupled with favorable product mix, reduced operating expenses, the tax benefit and lower share count translated to 67% improvement in EPS versus the first quarter of 2013.

In Aerospace Materials, sales increased by 3% to $243 million which is primarily driven by selling price increases. Volume growth came primarily from large transport program including the 787 and 737 but this was mostly offset by demand declines in rotorcraft due to lower defense spending in the replacement blades and reduced demand related to the missile programs.

Aerospace operating earnings in the quarter were $37.9 million, down versus the prior year quarter due to a few specific items that I will now highlight. First, we had a fire in one of our legacy carbon fiber lines that impacted both our cost as well as our ability to supply our internal needs for carbon fiber. I'm pleased to say the incident resulted in no injuries and our operations have returned to normal. However, the total earnings impact was $3.3 million all reflected in our first quarter results.

In addition, we sold higher cost inventory as a result of our decision to slow production rates in the fourth quarter of last year to reduce inventory. This increased the fixed cost per unit produced in the fourth quarter and amounted to an additional $3 million unfavorable impact to earnings in the first quarter.

Finally, stranded costs at $3.8 million related to the sale of coating resins was allocated to the business in the quarter. In the prior year quarter these costs were incorporated and unallocated as was our practice until the sale of the coating resins business was finalized.

Please note that this is the last quarter where the previous year's spend to cost allocation was to corporate and unallocated. Therefore, the comparable impact of these costs at the business segment level will not be significant beginning next quarter.

Industrial Materials had a great first quarter growing sales by 15% after excluding the $11.6 million of sales in the first quarter of 2013 from the divested distribution product line. The growth came from a stronger than anticipated order pattern in the tooling sector. We forecast volume growth in this market to be more evenly spread throughout the year. So we expect subsequent quarters reflect more modest sales growth.

We also saw good growth in the high performance automotive sector. Processed Materials delivered strong sales growth and vacuum bagged consumables to the aerospace market offsetting lower sales to the wind energy market. Selling prices in exchange contributed 1% and 2% respectively in the quarter.

The Industrial Materials segment delivered operating earnings of $8.2 million which is significantly above the prior year period of $2.8 million as a result of the higher volumes, stronger order patterns at the start of the year and favorable product mix.

The improved earnings were partially offset by $1.1 million of stranded costs related to the sale of coating resins. I'm also pleased with the progress that business is making to improve earnings performance through the cost improvement initiatives that began last year.

The In Process Separation segment delivered excellent sales growth of 8% in the quarter, primarily due to higher demand for mining products for copper and other base metals as well as higher demand of phosphine chemicals. We are on track with penetration of new geographies and the first quarter results sales at two new but small mines in Africa. In addition, we have been awarded business at other projects that have planned startups over the next few quarters. So we are on track to deliver the new wins anticipated for the year.

Just to provide you with an update on the Freeport Indonesia situation, we are optimistic that the parties have reached agreement based on local press reporting but to-date Freeport is yet to resume operation of full production rates. We continue to monitor the situation closely and are hopeful full resolution will be announced in the near future. Our first quarter sales were negatively impacted by a few million dollars as a result of this production curtailment.

We also experienced higher demand in some of our non-mining markets for our phosphine chemicals including pharmaceutical applications and electronics. The sales growth and favorable product mix in the segment resulted in $19.2 million of earnings in the quarter, 8.5% higher than the prior year quarter.

Similar to aerospace materials, earnings growth was partially offset by the sale of high cost inventory due to planned actions to lower inventory levels in the fourth quarter of last year which resulted in lower production volume and a higher fixed cost per unit. This increased cost of sales by approximately $3 million in the quarter and the business was further impacted by $1.8 million of stranded costs related to the sale of coating resins. Despite these headwinds the business delivered solid earnings performance.

Additive Technologies sales decreased 3% versus the prior year period. This segment delivered strong sales performance in the last quarter of 2013 and we had, therefore, forecasted a softer start to the year in this segment. We experienced weaker demand for polymer additive products in North America which is due to both timing of customer orders as well as weather related delays. Operating earnings were $7.9 million in the quarter down from $8.9 million in the prior year period due to the lower sales as well as $1.2 million of stranded costs from the sale of coating resins.

To summarize, we began the year with overall sales growth inline with our forecast and despite some operational headwinds the company delivered results inline with our plans.

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

Dave Drillock

Thank you, Shane, and good morning, everyone. Special items for the quarter were a net pretax benefit of $6.2 million (inaudible) mark-to-market adjustment for our pension and other post employment benefit plans. Last quarter, we reported a benefit of $25 million and amount that was credited in the first quarter is the deferred portion of year-end mark-to-market adjustment that was allocated to our inventory and flowed through the income statement this quarter.

Now I will move on to our results of operation. As a reminder, all amounts I discuss will exclude special items unless specifically mentioned otherwise. Our gross margin percentage of 31.5% is a little over 1 percentage point higher than the prior year period. This was mostly attributable to higher selling volumes and improved product mix in the industrial materials segment due to increased sales of tooling material and in the in process separation segment resulting from increased sales of phosphine chemicals.

Shane already mentioned the impact of the fire in our carbon fiber units and the sale of higher cost inventory from the fourth quarter of 2013 in the aerospace materials and in process separation segments. Admittedly, we could have provided better color on our FIFO impact at last quarter's conference call but it is now behind us as the FIFO impact from 2013 has essentially all been reported in first quarter results.

We also had higher capital project expenses of about $1 million that did not qualify for capitalization as certain of our large capital projects start to move in to the qualification stage.

Our total operating expenses were down about $1.5 million from the prior year period. Our selling expenses in the industrial materials and in process separation segments were down as a result of prior restructurings and cost controls. And our administrative cost reflect as our spending for our single ERP initiative was offset by reduction in the stranded costs on the sale of coating resins last year.

Corporate and unallocated for the quarter is down about $12 million from the prior year period. This is mostly due to the stranded costs resulting from the sale of the coating resins business. About a third of $12 million lower cost has been eliminated and the balance has been allocated to our remaining businesses. In addition, we had higher spending of approximately $2.5 million on the afore-mentioned single ERP initiative offset by other cost reductions. As for the total 2014 corporate and unallocated expense we expect the spending for our single ERP initiative to ramp as we entered the development and test phase, so our guidance remains unchanged at a range of $24 million to $28 million.

Interest expense net is down $2.6 million mostly due to lower interest expense on our public debt as a result of refinancing in March of last year and capitalized interest on our major capital projects.

Our 2014 guidance for full year net interest expense remains at approximately $25 million as we are conservatively forecasting lower levels of capitalized interest as the year progresses and several of our large capital projects move to qualification and operations during the remainder of the year.

The overall underlying annual tax rate for the quarter was 31% versus the underlying annual tax rate at first quarter of 2013 of 31.5%. Included in income tax expense for the first quarter of 2014 is a tax benefit of $5.4 million or $0.15 per diluted share related to the reversal of tax reserves due to the settlement of tax audits and the expiration that statute of limitations in various jurisdictions.

While we explained about a third of this tax benefit of the prior guidance, our tax team did a great job in another audio that led to a favorable resolution sooner and better than we thought. Excluding these items and taking into account our projected mix of earnings by jurisdiction, we are changing slightly our 2014 tax rate guidance for a range of 30.5% to 32.5% from a prior range of 30% to 32%.

Our net working capital days at the end of the quarter were down 7 to 76 days compared to the end of the 2013. The improvement is due to an increase in days payable of 9 resulting from higher purchases of raw material inventory as our inventory control efforts for the prior quarter achieved our target. Our inventory days are up 2 to 280 and accounts receivable base of 48 were unchanged. Working capital days remain a key cash flow metric for us and we continually monitor our levels to stay within our targeted levels.

Our capital spending for the first quarter was $64 million. Almost all of this is related to our manufacturing capacity investments in the aerospace materials and in process separation segments. We have essentially completed the mechanical construction of our carbon fiber and phosphine manufacturing plants. So expect capital spending to trend down as the year progresses.

Our full year guidance for 2014 capital spending remains in the range of $180 million to $200 million.

So in spite of some headwinds, we had a good start to 2014. Our cash flow should continue to improve resulted from our earnings projections coupled with capital spending trending down and well-funded pension plans require minimal contributions. Our uses of cash remained the same which bears repeating here; capital to maintain our business, expansion capital to meet our growth projections, bolt on acquisitions if available, continue to improve our already strong balance sheet via debt reduction and rewarding shareholders further with stock buyback and dividends.

As we have commented on before we expect to provide a further update on our uses of cash at our second quarter earnings conference call.

So now let me turn the call back over to Shane who will provide a review on the remainder of 2014.

Shane Fleming

Thanks, Dave. I'd now like to review our outlook for the remainder of 2014. As we have shared before, most of the legacy aircraft programs we supply are running at or close to announced build rates. We, therefore, expect modest sales growth this year in line with a prior guidance.

We have begun work on a number of strategic productivity in this year that will guide margin improvement and we expect to deliver $20 million of savings in 2014 from these initiatives with most of this could be realized in the coming quarters.

Additionally, we continue to aggressively pursue new business opportunities to establish and position our next generation program that will contribute to growth beyond the five year horizon.

I'm pleased to say that we recently celebrated mechanical completion of our new carbon fiber plan in Greenville, South Carolina, and we will begin to produce material later this year for customer qualifications that will take approximately 18 months to complete. Our full year 2014 forecast for the aerospace materials business remains unchanged with sales estimated in a range between $970 million and $990 million and operating earnings in a range between $183 million and $195 million.

We continue to see consecutive quarters of demand improvement related to our industrial materials core markets. We originally projected this improvement to progress steadily through the course of the year. However, demand for the structural composites for aerospace tooling increased markedly in the first quarter as customer orders appear to be more heavily weighted toward the first half of the year. We do not expect this elevated pace to continue but do anticipate steady business in this market for the balance of the year. Given these factors we are maintaining a full year sales estimate in a range between $300 million and $320 million and operating earnings in a range between $22 million and $26 million.

We are, however, cautiously optimistic there are some upside to these numbers given demand remain strong in our core markets throughout the year. Growth in the in process separation segment is projected to remain in line with our expectations for the year as we remain confident in our ability to win our share of new mine starts and to commercialize the new product technologies we are bringing to market. We are also pleased with the growth of our phosphine business in non-mining markets particularly as we near completion of our new phosphine capacity expansion.

While we all experienced some headwinds related to startup costs for the new plant this has been factored into our forecast. Therefore, our full year estimate for in process separation are unchanged and we estimate sales to be in a range between $420 million and $445 million and operating earnings to be between $88 million and $97 million.

The Additive Technologies segment had a slower start to this year but we expect to benefit from continued demand improvement across multiple product lines, but mainly driven by sales of our differentiated polymer additives technologies. Our full year sales estimate remains in a range between $285 million and $295 million and operating earnings in a range between $40 million and $42 million.

Dave provided our guidance for corporate and unallocated interest expense and taxes. With our business segment guides unchanged our consolidated outlook for revenues remains at approximately $2 billion and our operating earnings also remains in a range between $309 million and $332 million for full year 2014.

Due to the tax benefit Dave referenced earlier our full year diluted EPS guidance range has been adjusted upward to a range of $5.60 to $6 versus our prior estimate between $5.50 and $5.90.

Again, I'm extremely pleased with the results from our transform portfolio as we position the company to deliver sustaining top-line and earnings growth. We are committed to executed our growth strategy and create significant future value for our shareholders.

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

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of David Begleiter of Deutsche Bank. Your line is now open.

Germaine Brown - Deutsche Bank

Hi, good morning. This is actually Germaine Brown sitting in for David Begleiter. Two questions. First, within industrial materials you've shown pretty good year-over-year growth in Q1 and you also showed pretty robust growth in Q4 of last year. What are you seeing in Europe in terms of demand trends?

Shane Fleming

Yeah, I think most of the growth that we are seeing started in the fourth quarter last year and first quarter this year is coming from some super car programs that had delayed. We expected couple of those programs to start deliver decent sales for us as early as first half of last year. They had some production problems, those delays resulted in those sales not really starting to come forward until Q4 and we are seeing that continue through Q1, and we do project good demand for that super car segment through the rest of this year.

Germaine Brown - Deutsche Bank

And within in process separation of the fix line startups what's the risk that it might be pushed out to 2015?

Shane Fleming

There is always some risk but we do try and look at the projections and weight them our sales similar to our approach in aerospace. There is a mix of new plans we may actually if you wanted to come forward and one or two slip, but I think in total we are still quite comfortable with the total revenue that we project on the startup, I think it's a solid number at this point.

Germaine Brown - Deutsche Bank

Got it. And finally, last quarter you mentioned that the timing of one substantial mine could move the needle. Is H1 startup still the case for that mine?

Shane Fleming

I think that could potentially slip into the second half. We are still very confident it's a 2014 event, but I would say we've got new mine starts in kind of three categories. The very large ones that really move the needle for us are north of $5 million. We have got a handful in the $2 million to $3 million category and then there is another handful in the sort of $1 million to $2 million category. The biggest one, the one that would move the needle the most is the late Q2 or probably likely first portion of the second half.

Germaine Brown - Deutsche Bank

Thank you very much.

Operator

Your next question comes from the line of Robert Koort of Goldman Sachs. Your line is now open.

Robert Koort - Goldman Sachs

Shane, just curious, as you looked over the horizon on some of the next wave of a large (inaudible) that would be coming out in the aerospace materials business and what's the timeframe we might hear of new business wins, is it this year, a year, two years, what do you sense?

Shane Fleming

I guess it's certainly not two years, I think the bigger ones to get into headlines right now with the Boeing 777X. And as you would expect we are very involved in development of products for that new plane. Just based on Boeing's entry in the service date I would expect that (inaudible) will probably be made sometimes towards into this year or early next year sort of in the 9 to 12 month time frame.

Robert Koort - Goldman Sachs

And I'm just curious your new relationship with C-CON in Germany, what does that give you that you didn't have before? Were there some customers maybe where you weren't as strong or does this facilitate a preferential treatment for your composite products we expect in as they do that engineering work? Can you give us some sense of what --

Shane Fleming

You know that, Bob, those are really the two primary benefits of that collaboration. C-CON is the current supplier of design work for all of the German OEM. So it gives us another avenue into Daimler and Audi, BW that that we have not had or at least strengthen that position. And then, secondly, they have a new technology for converting carbon fiber materials into automotive parts at quite high rates, and our collaboration with them should put us in position for them to use our materials as they develop that process and start to commercialize it.

Robert Koort - Goldman Sachs

And a last quick one if I might in relating to my first question, would the potential to win some business on the 787 Max the gauge factor on whether you do more share repurchase or less share repurchase in the second half?

Shane Fleming

Probably not. First of all, I don't think we are going to have timing. The timing won't work. I think it's really going to be more around our future view of our cash flow generation and based upon operating earnings performance as well as the capital spend. And I will just take an opportunity to put that talking point out there that we do expect to come back with some more clarification at the end of the second quarter on either a change in dividend policy or a buyback or both.

Operator

Your next question comes from the line of Yair Reiner of Oppenheimer. Your line is now open.

Yair Reiner - Oppenheimer

Great, thank you. So first question, the impact from the FIFO inventory from the fourth quarter was that already kind of contemplated in the guidance when you issue that originally for this year or is asking that really materialize and you recognize your last two months?

Shane Fleming

No, it's the former, Yair. We, and as Dave noted we probably could have done a little bit better job of signaling that. We had to build into our forecast (inaudible) planned, but it is the first quarter. And then if you look at the days of inventory that fit in most of our businesses we work this through now. So the good news is we won't see this through the rest of the year the other good news it was built into our forecast it wasn't a surprise.

Yair Reiner - Oppenheimer

Okay. Very good. In terms of defense, you mentioned that it was weak in the quarter with the rotor blade replacement. There appear to be a number of moving pieces in that end market and the C17 is going to line down a little bit earlier than expected and maybe to F18 as well. At this point, what is your level of visibility into that end market for the remainder of the year and kind of how confident are you in your forecast for that part of the business?

Shane Fleming

I think our visibility is actually quite good particularly on the big airframes. Maybe the one piece that doesn't move a little bit on as a little bit harder to track is the order pattern on replacement blades. It's a little bit dependent on how many plane or how many choppers are being flown. But I think our full year outlook for military is pretty solid and things don’t move that quickly. So I'm still pretty comfortable with the forecast we have for that full year.

Yair Reiner - Oppenheimer

Got it. And then just another follow up question on C-CON. I think in the past you talked about hoping to see composites working the way into more mainstream high end cars in I think the four or five year timeframe. Does the investment in C-CON signal that you think that could happen faster or does that investment just keep you on that curve that you saw previously?

Shane Fleming

Probably more the later, I'm not sure there is a real change in trajectory here. Well we are working on a number of programs. C-CON brings us into a couple of additional programs that we probably didn't have in our sights prior to that collaboration, but if you look at the rate at which the large OEMs particularly the German are adopting high levels of composite I think that's pretty much still in line with our projections. You are not going to start to see significant volume on these, what we call serial automotive applications until you get to the three to four, may be five year timeframe in some cases.

Operator

Your next question comes from the line of John McNulty of Credit Suisse. Your line is now open.

John McNulty - Credit Suisse

Good morning. Thanks for taking my question. So a question with regard -- or I guess a couple questions with regard to the aerospace materials business. Even if I adjust for the fire and the inventory issues in the first quarter, it looks like to hit even the low end of your target you are going to need a decent ramp up kind of as we go through Q2 through 4Q. So I guess what are some of the positives that can kind of really drive that ramp up again beyond just the inventory related issue, which I think is pretty clear at this point?

Shane Fleming

Yeah, we do expect revenues to strengthen little bit. And as a result, we are going to get leverage on earnings as well. So I think the primary reason we are going to see a ramp up in volumes is just our ability to meet demand going forward. We had some -- a couple plants struggled a little bit to deliver to forecast. So we have got some pent up demand in our plants. But if you look at our forecast in terms of the build rates and both the military and the commercial side, I do not think we are going to see any real surprises from an underlying customer demand standpoint, but just our ability to catch up and meet that demand is going to provide the extra revenue we need to get those earnings targets.

John McNulty - Credit Suisse

Great. And then, just with regard to the carbon fiber facility that you brought up, is there -- how should we think about any potential lumpiness around the qualifications around that plan. Like I know in the past there has been -- there have been points where it make the margin and another times it did not, so I guess how we should be thinking about that?

Shane Fleming

Yeah. And maybe, Dave, I can ask you to talk to the accounting treatment a little bit. But just to give you an idea of how we plan to operate, the bulk of material that we're producing in the new line will be for the Aerospace industry. As a result, it is -- as I said in my prepared comments about an 18 month qualification period. We plan to start producing fiber in the second half of this year. We'll run for weeks or may be a month to produce the high quality fiber we need to do that qualification. Then the plant is going to be shut down for an extended period of time. And as a result of that shutdown, we are not going to commercialize the plants. So we want to see that incremental depreciation until the qualification work is complete. So from now -- probably until two years from now you will not see the depreciation impact of new asset, but there probably will be some additional cost coming from, as I suggested, the work done to generate material for qualification. So maybe Dave, if I could just ask you to talk to the accounting treatment on that?

Dave Drillock

And John, that will be -- obviously, we are not -- this will be inventory of all inventories, so we will be expensing it. Just the raw material part of carbon fiber is relatively small. So we are not going to see million of dollars of lumpiness. I guess where you are heading it is there are hundreds of thousands and when we get to that point of producing some material.

Shane Fleming

And I think one of the good things we have been able to do is to train the existing workforce down there. So this line is setting in the same facility as to whether our productions lines. So we are not going to have to hire bunch of people to run the line, to make that qualification material. So there won't be a lot of incremental operating cost as a result.

John McNulty - Credit Suisse

Okay, great. And then just one last question which I think is -- and somewhat related to it. But the interest expense line where you are going from -- what looks to be about $3 million a quarter right now, you are still calling for $25 million in the year, and I understand there is some capitalization that's going to be tied into that interest expense. But can you walk us through how we should be thinking about the sequencing throughout the year of the interest expense line?

Dave Drillock

Yeah. John, that's why I tried to address it in my prepared remarks and say we conservatively forecasted lower level of capitalize interest and at the dropping of fairly quickly and now we are actually going through that, doing a deeper dive with the team on project by project when that occurs. So I do not have an answer for you right now. But obviously, interest expenses got to change through that fix but the capitalize interest would come down as these things gets turned over to operations and it is exactly when that is going to occur that will stop it. So we'll have more clarity for you next quarter, bit I'd say we conservatively forecasted like that drop off.

John McNulty - Credit Suisse

Okay, great. Thanks very much.

Operator

Your next question comes from the line of P.J. Juvekar of Citi. Your line is now open.

John Hirt - Citi

Good morning. This is John Hirt on for PJ today. You mentioned some unfavorable order timing related to weather effects in additive technologies. Can you just quantify what the impact was in the first quarter and then how much you expect to get back in the second quarter?

Shane Fleming

Yeah, we had appointed to that and just the order timing pattern -- order pattern is, as the two big impacts are. And I think in total, it was probably in the neighborhood of $3 million to $5 million. And we do expect to recover that over the next couple of quarters. I think the underlying demand has not changed, it is just a matter of getting product to customers or maybe some inventory adjustments that they had made over the course of the end of last year into the first quarter, but we stand by our full year forecast for the business and as a result we expect Q2 and Q3 revenues to be up versus Q1.

John Hirt - Citi

So this adds to be the $5 million on a profit basis, on a sales basis?

Shane Fleming

No, revenue basis.

John Hirt - Citi

Revenue basis. Okay. And then, taking a step back your portfolio has evolved considerably over the past few years, going back to the building block sale, coating sale, the purchase that you may go. As you look at additive technologies, is that a business that can stand on its own and does it belong in the Cytec portfolio long term?

Shane Fleming

It is question we ask ourselves regularly. It is not one of our growth platforms, so you do not hear us talk about the business the way we talk about our aerospace or industrial materials or IPS business. But it serves us purpose for Cytec; it's a nice gas generator, pretty consistent in terms of the revenue and earnings that generate, so we can count on the business. It does not take a lot of management time and it is a great business in terms of return on invested capital.

That all said, it is not a growth business. It is not a business that could -- that will continue to drive top line growth. So we look at it that way, understand it and operate it that way. We are not currently looking at divesting the business, we are not actively pursuing that strategy, but we will always be open to the right kind of offers, we have to do that to serve our shareholders. But we are not currently thinking about actively divesting the business.

Operator

Your next question comes from line of Gautam Khanna of Cowen & Company. Your line is now open.

Gautam Khanna - Cowen & Company

Yes, I was wondering -- a couple questions. First, at aerospace materials, I think you mentioned, you expected sales to accelerate as we move forward. Well, what is driving that, if at the end of these stocking on the defense side or is it just -- well, which programs are kind of moving on?

Shane Fleming

Yeah, I think it is a little bit to the question I answered earlier of around our ability to get product out the door. We had some challenges in the late part of first quarter meeting demand and we have got some kind of demand coming forward. But if you look at underlying demand for the programs and what we have forecast for the full year, I do not expect there to be big swings. I think we were able to call that pretty correctly. There are couple smaller programs that might move up or down a little bit. But if you -- you need to step back and think about, are we seeing major destocking or restocking, I mean in the program will be surprised by (inaudible) programs now. I think right now we feel like we have got the -- we got it all mapped and we do feel there is some revenue upside just because of some kind of demand because of our inability to get product out the door into the quarter.

Gautam Khanna - Cowen & Company

Okay. And was that the $3 million you referring to earlier or was it something else, how much was mixed shipment?

Shane Fleming

Oh, no. Sorry, that was -- I think that $3 million was in polymer additives, that was --

Gautam Khanna - Cowen & Company

The $3 million, okay, right.

Shane Fleming

Yeah. So I am speaking --

Gautam Khanna - Cowen & Company

(inaudible) and it can be quantified how large that might have been, the shipment? You should have done the (inaudible) --

Shane Fleming

Enough to get this back online to hit the high end of the guidance range on revenue.

Gautam Khanna - Cowen & Company

Okay.

Shane Fleming

I have not done the math. But we -- and obviously, in the quarter, we go back and look at our full year estimates and we do feel like we have got a pretty clear path to middle to upper end of that range that we provided.

Gautam Khanna - Cowen & Company

Okay. And you mentioned -- I want to make sure I understand the mine starts for that comment. So you delivered two and originally you were looking for six, is that right? That still does not (inaudible)?

Shane Fleming

No, two in the quarter, six is our full year number.

Gautam Khanna - Cowen & Company

Full year. That still effects for in the balance of the year?

Shane Fleming

Yes. Well, that six number I think is still solid. We had some wins that we haven't been able to go out publicly with hopefully in the next weeks or some by the end of this quarter. We can say some more about some of those headwinds that are substantial. But yeah, we still feel very good about our projection of six mines and the revenue that will come with that.

Gautam Khanna - Cowen & Company

And if one nuance question on the inventory you have on the books. It should be and not seeing you're going to be destocking of this, but can you talk about kind of the cost embedded within that, is it much higher than market within the $200 million to $300 million of inventory?

Shane Fleming

No, I think our -- the inventory now is valued as we would expect it to be to run our plants at the rates required to deliver our full year revenue. What happened in the fourth quarter was we saw inventories creeping up a little bit, part of it because demand was down and we pulled our inventory down. And when you do that, you are is still carrying a lot of the fixed cost, lower volumes of inventory. So what you put in the inventory has a higher unit fixed cost. Then we sell from that fix -- the higher fixed cost inventory in the first quarter. So the impact of that should have now all washed through given the date of inventory that we carry and this stated is effectively green going forward. We should not see a big FIFO impact now through the end of the year.

Operator

Your next question comes from line of Laurence Alexander of Jefferies. Your line is now open.

Laurence Alexander - Jefferies

Hi, guys. Just a very quick question and just a circle back to the question about the cadence of new rims on the industry material side. If -- when you look at to your five-year targets, when do you think the predominance of necessary award wins should be announced for you to feel that those five year targets are basically on track or in the pocket, I mean, depending on how you want to phrase as?

Shane Fleming

Well, I think we got those wins already in the pocket, if you look at the next five years. Most of the step that we are pursuing today would have very little impact on the five year planning horizon. Even the 777x that we are talking about, if you look at the entry in the service that's 2018 timeframe. So the program that will drive our earnings growth in '15, '16, '17, '18 are the things we have already won and the ramp up on things like Joint Strike Fighter and I think there is still some ramp up to come on the A7. But the Niel, the MAX, the COMAC planes, the Bombardier C Series, Learjet 85, which I am happy to note that flew for the first time this quarter. Those are the wins that I used to build our five year plan in the arising forecast.

Laurence Alexander - Jefferies

And then as you -- and then as the new wins for the out years, the next cycle start to come in, how much variability do you see in terms of qualification call, so is that pretty much sort a steady state kind of flow right now?

Shane Fleming

It's very different program, the program sort of something like a wide body transport plane would require much more so than say a business jet but we have got such a mix of program, there are so many programs that kind of the law of large numbers works in our favor. I think you don't see as much lumpiness in our quarter to quarter qualification now we don't call it out as often just because we are constantly extending on those investment for the future. So it just tends to be a flatter cost quarter to quarter than what you would have seen maybe two or three years ago when we were pursuing fewer programs.

Operator

Thank you. Your next question will come from the line of Mike Sison of KeyBanc. Your line is now open.

Mike Sison - KeyBanc

In terms of your partnership with Mitsubishi, how is that going and do you think that give you may be some little bit of an edge as you look to more primary structures going forward in the aircraft?

Shane Fleming

Mike, I hesitate to talk specifically about how the (inaudible) is going I think it's going forward and it is important part of our ability to win new program. So we are still pursuing opportunities in collaboration with Mitsubishi, but I don't think I want to say much more than that before the fact that it is an active partnership.

Mike Sison - KeyBanc

Then in terms of the 777X, any thoughts to maybe qualitatively how you are attacking maybe the primary structure of that business? You have done it seems in the last couple Boeing airbus big awards; you have been more in the secondary areas. Any thoughts on your ability to win some primary structures going forward?

Shane Fleming

Yeah, I'm quite confident as we will I think we are approaching this with the best technology we feel like we are as good as anybody out there in terms of our ability to deliver high performance materials. We're certainly viewed by the major OEMs the very credible supplier of 50 plus years experience in the industry. We are partnering with carbon fiber suppliers on the program that we are pursuing. We feel good about those partnerships as well. So I feel like we have got a good shot at winning some primary structure as well they can do a structure of that new plane.

Operator

Your next question comes from the line of Mike Harrison of First Analysis. Your line is now open.

Mike Harrison - First Analysis

I joined a little late, so apologize if I'm rehashing something but on the aerospace front, are you guys seeing any kind of impact? I know it's something you have talked about in the past from customers exerting pressure on their suppliers trying to reduce their costs and I guess maybe the question I'm trying to get at is are there ways that you can help your aerospace customers reduce costs without sacrificing price?

Shane Fleming

Yeah, the short answer to the second part of your question is absolutely. And there are a number of programs ongoing right now where the OEMs are pressuring suppliers to reduce the cost that they're offering. And our first response is to be responsive to those requirements but there are number of things that we can do to try and take cost out of the total supply chain that benefits both ourselves and the OEM.

So our first efforts are really focused around trying to simplify the product line, reduce the number of SKUs that allows us to make longer runs and take out fixed cost; we can pass that on. We can replace older legacy materials that are maybe only made once or twice a year for a customer and replace those with newer products that are more continuously produced and again reduce cost in that way and improve performance. So that's our first attempt is to try to cut complexity, reduce the number of products, improve performance and pass on cost saving. But it is an environment today where there is a lot of pressure on price and we have to willing to listen that as well.

Mike Harrison - First Analysis

And then within the industrial segments you made some really nice progress on the margin there but then didn't adjust the guidance at all. Are there reasons that the margin we saw this quarter is not sustainable going forward?

Shane Fleming

Yeah, I wouldn't say it that way necessarily. I think that this is a business where we've got a lot of available capacity in some of our plants and if we're able to run those plants at a higher occupancy that we get a lot of leverage on that increased revenue. And that was the case in Q1. So it's really our ability to deliver those levels of margin and really link directly to our ability deliver the stronger sales that we saw in the first quarter.

I did say in my comments that we are cautiously optimistic, there was some upside to those numbers but we saw some lumpiness in the first quarter; we saw sales in a couple of segments a bit beyond what we think the average number will be for the next quarters. There is some upside to that and if that happens if we do see some sales upside you're going to see revenue drive down higher earnings as well.

Mike Harrison - First Analysis

If I think about the aerospace tooling which was strong as well as high performance automotive are either of those markets particularly lumpy, more lumpy or more stable than the others?

Shane Fleming

Yeah, it's the former. Once the high performance auto gets running at speed meaning some of these new cars get up to signed production rates you don't tend to see a lot of lumpiness. The tooling market is a very lumpy business. You get one order sometimes maybe for a quarter or two quarters, you could have the larger orders that will run through full year, but these are materials that are used to make a set tools that may last for five years and the timing on those orders and the length of those orders does add lumpiness and that is as you know (inaudible) something we called out in the first quarter that led to the stronger revenues. Now we do expect to have strong tooling sales through the course of the year but I'd be a little bit surprised if we see another tooling quarter as strong as Q1.

Mike Harrison - First Analysis

And then the last one on IPS, with the new phosphines plant starting I believe still in Q2 can you give us maybe any guidance as to what the margin progression looks like for the rest of the year particularly if you can quantify startup costs and when they hit?

Shane Fleming

Yeah, I'm not going to be able to get real quantifiable and in terms of providing you those numbers so let me just add a little bit more color. The startup will be in two phases. We start at the back end of the plant, first the derivatives piece of the plant and that is in Q2 and then the gas piece starts in Q3. So we're going to see the incremental operating expense and the depreciation ramp up through the end of Q2 and through the end of Q3.

We will start to see revenue come from that expansion later in the year and into '15 and beyond. So initially it will have a negative impact on the margin for the phosphines business but that's all reflected in our guidance. So I'm probably not going to be able give you much more detail on that other than that we've built into our forecast the impact of those higher costs and the fact that when you first start a plant you're not going to be run it anywhere close to full. So you're going to have some negative impact on incremental margins initially.

Operator

Your final question today comes from the line of Richard O'Reilly of Revere Associates. Your line is now open.

Richard O'Reilly - Revere Associates

Mike just beat me through my one of my question. Second, I'm confused about the tax benefit in the first quarter and the guidance. It's $0.15 is in the $1.42 and your full year guidance but it is not in the tax rate that you've given?

Dave Drillock

Richard, we had assumed about a third of $0.05 and that guidance was in our prior guidance already. That's why we only rose it by $0.10.

Richard O'Reilly - Revere Associates

Okay. If we do the math, go through the math and use that tax rate we still have to then add in $0.10 or $0.15 to get your full year guidance?

Dave Drillock

Yes, correct, yes. That's (inaudible).

Richard O'Reilly - Revere Associates

Okay, fine. That's what confused me. Thank you guys.

Operator

There are no further questions on the phone lines. At this time, I would turn the call back to presenters.

Jodi Allen

Thank you to everyone participating in today's call and if you do have any follow up questions please contact me directly at (973) 357-3283. Thank you and have a nice day.

Operator

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

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