Cytec Industries' CEO Discusses Q4 2010 Results - Earnings Call Transcript

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 |  About: Cytec Industries Inc. (CYT)
by: SA Transcripts

Cytec Industries (NYSE:CYT)

Q4 2010 Earnings Call

January 28, 2011 11:00 am ET

Executives

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

Shane Fleming - Chairman, Chief Executive Officer and President

Jodi Allen - Investor Relations

Analysts

Michael Sison - KeyBanc Capital Markets Inc.

David Begleiter - Deutsche Bank AG

Peter Grondin - OSS Capital

Robert Koort - Goldman Sachs Group Inc.

John McNulty - Crédit Suisse AG

Laurence Alexander - Jefferies & Company, Inc.

P.J. Juvekar - Citigroup Inc

Operator

Good day, and welcome to the Cytec Industries Inc. Fourth Quarter Earnings Announcement. [Operator Instructions] For opening remarks and introductions, I would like to turn the conference over to Ms. Jodi Allen. Please go ahead.

Jodi Allen

Thank you, Yvonne, 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 operations; and Dave Drillock, Vice President and Chief Financial Officer, will review the financial results and the special items noted in our press release. Shane will then finish with some commentary on our outlook for 2011.

[Operator Instructions] Throughout the call, we will be referencing the supporting materials which can be downloaded from our Investor Relations website under Calendar of Events or you may follow the slides accompanying today's webcast, which are also available through our website.

During the course of this presentation and in responses to your questions, you will hear certain forward-looking statements. Our actual results may differ materially. Please read our commentary on forward-looking statements in Slide #2 of our supporting materials or at the end of our news release or the statements in our quarterly and annual SEC filings. In addition, our discussion includes certain non-GAAP financial measurements as defined under SEC rules. We have provided a reconciliation of those non-GAAP financial measures to the most directly comparable GAAP measure at the end of our press release. A copy of our press release is available on our Investor Relations website.

Before I turn the call over to Shane, let me remind everyone that in addition to announcing our fourth quarter earnings, we committed to a plan to divest the Building Block Chemicals business. Accordingly, we have classified the revenues and expenses as discontinued operations. Any allocated continuing costs were reclassified to corporate and unallocated, and the assets and liabilities to be sold were re-classed on the balance sheet to the held for sale category. To aid in your analysis, we have also provided restated 2009 and 2010 results by quarter, reflecting Building Block Chemicals as a discontinued business in the appendix of our supporting materials which can be downloaded from our website.

One other final reminder is that our 2011 guidance is on continuing operations. So stating the obvious, that excludes any results relating to Building Block Chemicals.

With that, I'll turn over the call to Shane.

Shane Fleming

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

Let me begin by saying that I'm extremely pleased with our 2010 full year results, as each of our businesses delivered significant year-over-year earnings growth due to the improved demand environment, our lower cost structure and excellent execution of our strategic plans and key initiatives. This has enabled us to deliver earnings per share growth for the full year of 170% versus 2009 results.

I will now discuss our results for the fourth quarter, beginning on Slide 3. Overall, sales in the fourth quarter were $700 million, an 8% increase over the prior-year quarter. Keep in mind that our fourth quarter 2009 sales performance was one of the strongest quarters in the year. The year-on-year fourth quarter sales growth was driven primarily by the volume increase in our Engineered Materials business, where we continue to experience strengthening demand across the commercial aerospace sectors.

Fourth quarter net earnings were $42 million or $0.83 per diluted share excluding the special items that Dave will explain shortly. This is a 20% increase versus $34 million or $0.70 per diluted share in the fourth quarter 2009. The earnings improvement in the quarter was primarily related to sales-driven earnings growth in the Engineered Materials business and margin expansion in our Additive Technologies segment. Raw material pressures were much more significant this quarter versus the prior-year quarter, and we were unable to fully recover the cost increases in the Coating Resins business, which I will discuss in more detail as I go into the business segment results.

Beginning on Slide 4. Coating Resins delivered sales of $348 million, a 6% increase versus the fourth quarter of 2009. Selling volumes are flat versus the prior-year quarter as we experienced anticipated seasonal destocking across the industrial coatings markets. Europe was most significantly impacted from customer destocking versus the prior-year period. As you may recall, this region showed the strongest growth in the fourth quarter of 2009.

Selling prices increased by 9% versus the same period last year as we implemented price increases broadly in reaction to the higher raw material cost. The impact of exchange rates decreased sales by 3%. The chart on Slide 5 displays sales revenue for this segment, which shows sales down slightly versus the third quarter 2010 as a result of year-end inventory management actions by our customers including holiday shutdowns.

Coating Resins experienced margin pressure due to the rapidly rising raw material cost related to propylene derivatives. This led to approximately $40 million in increased cost in the fourth quarter that we were not able to fully offset with approximately $30 million in price increases. Operating earnings for the quarter were $3.9 million, down significantly versus operating earnings of $17.6 million in the fourth quarter of 2009.

We continue to act as market leaders in this segment, raising prices in response to rising raw material costs. However, the high level of raw material volatility, the competitive marketplace and our desire to maintain volume load in our plants makes it challenging to fully offset these higher costs on a continuous basis.

Moving to Additive Technologies. Slide 6 shows sales in the segment of $65 million, an increase of 7% versus the fourth quarter 2009. Selling volumes were up 6% as we continue to gain market acceptance of our value-added technologies. Selling prices increased 2%, partially offset by exchange rates which decreased sales by 1%. The overall result in the Additive segment was operating earnings of $8.8 million, a significant improvement versus earnings of $4.2 million in the prior-year period. The growth is primarily due to the higher selling volumes, particularly in North America, as well as some benefit from our improved manufacturing capacity utilization. This business has been able to continuously demonstrate margin improvement as a result of past cost reduction initiatives combined with our customer-focused efforts to provide technical solutions that add value in the markets they serve.

Slide 7 highlights results for the In Process Separation segment, which delivered sales of $81.1 million in the fourth quarter, a slight increase of 1% versus the fourth quarter 2009. Selling prices increased by 2%, but sales volumes were down by 1%, with essentially no impact from exchange. This resulted in operating earnings of $13.3 million in the fourth quarter versus operating earnings of $15.2 million in the prior-year quarter, the reduction coming mainly from a less favorable product mix in the quarter.

Slide 8 shows a summary of results in the Engineered Materials segment, with sales of $206 million, an increase of 15% versus the fourth quarter 2009. Selling volumes are up 15%, due primarily to increased demand in large commercial transport from new programs such as the Boeing 787 and the 747-8 aircrafts. The only sector that showed a year-over-year decline was military, as the F-22 and the C-17 rate reductions continue. Selling prices increased 1%, which were offset by exchange rate decreases of 1% in the quarter. Operating earnings were $28.2 million, up 24% from earnings of $22.8 million in the same quarter 2009.

As I mentioned to you in past conference calls, we've increased our investment in operating expenses in the segment to get ahead of current and future demand growth in the aerospace market, which has started to occur. We're beginning to see the positive impact of leverage on our margin improvement associated with the higher production volumes, and we expect this to continue over the medium and long term.

We also continue to make progress with our strategy to increase orientation of our portfolio towards our specialty growth platforms that offer more value-added technology to our customers and support our double-digit growth targets. In line with this approach, we committed to a plan to divest the Building Block Chemicals business. This transaction, once completed, will allow us to increase our focus and investment in our core growth platforms of Engineered Materials, In Process Separation and Waterborne and Radcure Coating Resins, including both organic growth opportunities, as well as bolt-on acquisitions.

Additionally, removing the sales cyclicality of the capital-intensive commodity Building Blocks business from our portfolio is expected to reduce earnings volatility. We believe this is the right time to divest the Building Block Chemicals business following the strong performance in 2010. As a result of this plan, the segment financials are reported as discontinued operations, and Dave will cover the fourth quarter results for you.

We are in advanced discussions with the buyer and expect to complete this transaction before the end of the first quarter 2011, if not sooner, subject to normal closing conditions. We've also announced our plans to resume the company's previously approved stock buyback program and approval of the new stock buyback authorization. In addition, we've announced an increase in our quarterly dividend back to pre-recession levels. These decisions provide clear indication of our executive management and the board of directors' confidence in our future and our commitment to increase shareholder value. Dave will show additional details on each of these announcements in his comments.

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

David Drillock

Thank you, Shane, and good morning, everyone. Let's go right to Slide #10.

During the quarter, we had the following special item charges: Included in corporate and unallocated is a net special item charge of $1.1 million pretax, mostly related to additional consolidation of Coating Resins production facilities in Europe. This is expected to be completed in the second quarter of this year. Next, included in other income/expense is a special item charge of $4.7 million related to an increase in environment liabilities at two inactive locations for a change in estimate for operating and maintenance costs, and this came about as part of our annual remediation liability review process. Lastly, we recorded an income tax benefit of $9.7 million due to the reversal of deferred tax valuation allowances related to an improved profit outlook at two international subsidiaries and the future recovery of deferred tax benefits.

I will now review the as adjusted operating results for the quarter. As a reminder, and repeating what Jodi just mentioned, is that all the analysis I will provide will exclude Building Block Chemicals as it is now recorded as a discontinued operation. I'll provide details on that operation separately, and as Jodi noted, we have provided restated P&Ls by quarter for 2010 and 2009 on our website.

Our gross margin percentage after adjusting for special items in both years is down about 1½% to about 23%. Overall, selling volumes were up 4%, with most of that coming from Engineered Materials, while the remaining segments were flat to slightly down. Selling prices were up 5% or about $36 million, which was short of the higher raw material cost of $44 million. As Shane just covered moments ago, Coating Resins did not completely cover the raw materials by about $10 million. The remainder of our segment's selling price to cost ratio was essentially flat to slightly up.

Concerning the higher raw material costs in the fourth quarter, it is primarily propylene and its derivatives which had the largest and most immediate impact on our Coating Resins segment. At our last conference call, we were hoping that raw materials had peaked, but that is not the case, as U.S. propylene chemical-grade is now at $0.72 per pound. At the end of quarter three, it was $0.59 per pound. Propylene is a key raw material that goes into many of the raw materials we purchase on our Coating Resins segment, so we see its impact fairly quickly.

Before moving on, let me cover the Building Block Chemicals segment sales and earnings on the basis prior to classifying as a discontinued operation. During the quarter, sales to external customers were $151 million, and operating earnings were $9 million. This compares favorably to the prior-year quarter sales of $104 million and flat operating earnings.

For the full year, sales to external customers were $600 million, and operating earnings were $38 million. Once we classify Building Block Chemicals as a discontinued operation, accounting rules require us to move the Building Block operating results to discontinued operations less any continuing costs that will remain as part of Cytec. For the three and 12 months ended December 31, 2010, continuing cost previously allocated to Building Block Chemicals but now restated as part of corporate and unallocated were $1.5 million and $6.3 million, respectively.

As an additional point of reference, for the three and 12 months ended December 31, 2009, continuing costs previously allocated to Building Block Chemicals but now restated as part of corporate and unallocated were $1.4 million and $5.3 million, respectively. While I'm discussing corporate and unallocated, the fourth quarter expenses excluding the special items in both years is down versus the year-ago period and sequentially, as much of the consulting work on our improvement projects winds down.

Moving on to operating expenses, they were up 3% year-on-year, and that's excluding special items in both years and a favorable impact of $2 million due to changes in exchange rates. This increase reflects the benefit in 2009 from short-term cost saving initiatives, which were reinstated in 2010; and higher incentive compensation accruals, partially offset by the reduction in consulting fees that I mentioned just moments ago. Included in other income/expense is a $2.4 million benefit related to a favorable settlement on a certain legal matter.

Interest expense net is up about $3 million, but the majority of this due to a reduction in capitalized interest versus the year-ago period.

Excluding the tax benefit of the aforementioned special items, as adjusted income tax expense related to continuing operations for the fourth quarter of 2010 was $4.8 million compared to tax expense of $11.4 million in the fourth quarter of 2009.

Included in the fourth quarter of 2010 income tax expense are discrete tax benefits of $3.5 million or $0.07 per diluted share, mostly related to the favorable resolution of prior-year international tax matters and improved utilization of certain net operating losses spread over several tax jurisdictions. In addition, the fourth quarter results reflect a tax benefit of approximately $2 million or $0.04 per diluted share related to the cumulative tax catch-up on the first nine months of 2010 resulting from the reinstatement of U.S. R&D tax credit and certain other U.S. tax credit relating to overseas income. So that adds up to $0.11 of discrete tax benefit in the quarter.

Our cash flow from operations for the quarter was excellent at $97 million and $279 million for the full year. This compares to last year's $169 million for the quarter and $565 million for the full year when we had a significant generation of cash from the outstanding results of our working capital initiative. Speaking of working capital, we improved upon the great net days outstanding position from 2009's fourth quarter average. Slide 11 will give you a good view of our net working capital base performance, which shows a seven-day improvement over the fourth quarter of 2009's 73 days in net working capital. This excludes Building Block Chemicals.

We believed our efforts were sustainable, and 2010 is proof of that. During the quarter, we contributed another $24 million to our pension plans, and our full year contributions were $82 million. With our continuing strong cash flow, we made the decision early in 2010 to increase funding to our pension plans, which improves our funding and liquidity profile as we view our pension funding similar to debt payment.

Moving on to Slide 12. Capital spending for the quarter was $45 million, up from $35 million in the same quarter of 2009. Approximately 1/3 of the spending was in the Engineered Materials segment as we have a number of expansion projects that are now underway. About half was in the Specialty Chemicals segment, which includes expansion work begun in the phosphine product line, and the remainder of the spending in Building Block Chemicals. Total capital spending in the Building Block Chemicals segment in 2010 was approximately $18 million.

Our cash balance increased to $383 million, up from year-end 2009 to $262 million. We paid down $18 million of our debt in the fourth quarter, and our debt at year end was down to $648 million. As a reminder, on October 1, we paid down the remainder of $15 million of our 5.5% notes. And for the full year 2010, we reduced our overall debt $39 million.

As Shane just mentioned, we also announced the resumption of our stock buyback program, which has $44 million remaining on that authorization, and announced a follow-on stock buyback authorization of $150 million. In addition, we announced that our board of directors approved and increased the dividend level to $0.125 per quarter, up from the penny and a half that we have today, and this is effective with the first payment in February 2011. We are pleased to be back to our pre-crisis dividend level.

In closing, we finished the year with good momentum and are ready to tackle the challenges of 2011. Our balance sheet is in great shape, and our cash flow generation continues to improve. Our recent actions are a clear indication of our commitment to increasing the value of Cytec to our shareholders now while we continue to invest in our businesses and people for an even better future.

Thank you. And now I'll turn the call back over to Shane.

Shane Fleming

Thank you, Dave. And now I'd like to review our outlook for 2011, which is summarized on Slides 13 and 14.

We expect the improved demand environment that we have seen in 2010 to continue into 2011 at a slow and steady pace. We also expect additional volatility around material cost to continue due to both petrochemical feedstock pricing and availability of certain key raw materials. We will continue to aggressively seek price increases to mitigate the impact of the higher cost across our Specialty Chemical product lines, but expect the environment in some of our markets to remain highly competitive.

With the pending sale of Building Block Chemicals anticipated to be completed this quarter, our adjusted diluted earnings per share guidance will be compared to the continuing operations' diluted earnings per share amounts in 2010. Our guidance for 2011 full year adjusted diluted earnings per share is a range of $3.15 to $3.50 on sales of $2.9 billion to $3 billion, which compares to 2010 sales of $2.7 billion and adjusted diluted earnings per share from continuing operations of $2.99.

Based on the projected demand improvement in the global industrial markets, our full year sales forecast for Coating Resins is estimated to be in the range of $1.5 billion to $1.52 billion, which compares to $1.4 billion for 2010. We expect the highest growth to be in the Asia Pacific region, and overall volume growth in the global coatings markets is estimated to be a 5% improvement over 2010. Once again, we are assuming that significant raw material pressures will continue to challenge this business; but again, we will take a market leader approach to mitigate the impact of expected higher cost.

Given this scenario, we estimate operating earnings for Coating Resins to be in a range of $70 million to $80 million, up from the prior year's operating earnings of $69 million. We review the profitability of this segment on an ongoing basis and will continue to take necessary actions to match our manufacturing footprint and our cost base to market demand, revenue and margin generation. Our commitment remains to deliver year-over-year earnings growth in this segment as we return the business to an acceptable level of profitability.

In Additive Technologies, we are faced with a different set of challenges. While we do expect demand for our Polymer Additive Technologies to improve this year, we are close to operating at full capacity in our plants servicing this global product line. Therefore, our full year sales forecast is in a range of $260 million to $280 million, which compares to $260 million in 2010.

Operating earnings are projected in a range of $37 million to $40 million, up modestly versus 2010 results. We are increasing our capacity later this year to handle the demand increases which will allow further volume growth in 2012 and beyond. Demand for In Process Separation technologies is expected to remain strong in emerging markets. We continue to penetrate the mining market with our innovative technologies that are bringing value to copper and alumina, and our newly targeted industrial minerals markets. We estimate sales for In Process Separation to be in a range of $320 million to $330 million, which compares to $290 million last year. Operating earnings are estimated to be in a range of $60 million to $70 million versus operating earnings of $56 million in 2010. Our innovation pipeline in this business remains strong, and we expect to continue to grow organically as we investigate new business development opportunities to further expand our market presence.

In Engineered Materials, demand for high-performing composite technology continues in the aerospace market, and we're experiencing good sequential growth related to both legacy and new program build rates in the commercial aerospace sector. We have factored into our estimates the latest information related to the 787 and F-35 programs, and we estimate that in the military sector, the F-22 program will be winding down. We estimate this business to deliver total sales in 2011 in a range of $825 million to $845 million, which compares to $770 million in 2010. Operating earnings in this segment are estimated to be in a range of $130 million to $140 million, up from 2010 operating earnings of $116 million.

We will also continue to see margin improvement, as we leverage the higher production volumes, as build rates for both legacy and new aircraft programs ramp up. Our guidance for corporate and unallocated is forecasted to be an operating expense of approximately $16 million to $18 million for the year. Our forecast for other expense net is approximately $4 million, and the forecast for interest expense net is in a range of $37 million to $39 million. The forecast for the underlying annual tax rate for ongoing operations is in a range of 30.5% to 32.5%.

I'm very pleased with Cytec's 2010 full year performance, achieving EPS of $3.60 per diluted share versus $1.32 per diluted share in 2009. This is an outstanding performance that highlights our concentrated efforts to grow the top line with our more value-added and higher performing technologies. We're also making progress reshaping the portfolio to achieve a greater portion of our sales and earnings from our strategic growth platforms, as we drive organic growth in these platforms and proceed with the divestiture of one of our cash businesses.

I remain confident in our ability to deliver our long-term growth strategy, which will create value for our customers and for our shareholders.

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

Question-and-Answer Session

Operator

[Operator Instructions] We'll take our first question from Laurence Alexander with Jefferies.

Laurence Alexander - Jefferies & Company, Inc.

I guess first question is can you briefly recap how exiting Building Blocks will affect your raw material exposure?

Shane Fleming

It will certainly have a significant impact on our exposure in terms of the amount of revenue that will be driven by things like propylene and derivatives, but because of the way we operated the Building Blocks business where we had a pass-through on most of those key raw materials, I don't really think it's going to have a significant margin impact.

Laurence Alexander - Jefferies & Company, Inc.

So you won't see any increase in volatility from any integration you had with that segment?

Shane Fleming

I don't know that you're going to see -- you might see the impact on a lead lag standpoint moderate just a bit. But if you look at our pricing versus raw material costs in Building Blocks over the last eight or 12 quarters, we do a really good job of offsetting. It's really very much a pass-through, even with some true-up mechanisms. So we'll have less top line impact, but I don't think you're going to see as much margin. That's what I think. Let me just add one other point though, the one place you will maybe see a little bit more of an impact is on the internals, where we were selling raw materials from the Building Blocks business into primarily our Coating Resins business, a little bit into our carbon fiber business, with the internal pass-through being -- our internal pricing not at market, you're likely to see a little bit of volatility increase.

Laurence Alexander - Jefferies & Company, Inc.

And then just lastly on coatings, can you discuss any shifts from the competitor behavior since the last quarterly call? And in particular, do you think the lag that you're seeing versus raw materials that you will be able to catch up, or do you need the raw material pressures to stabilize for you to close the gap?

Shane Fleming

Well, we get ahead and behind on the movement. So volatility makes it challenging. As raw materials are moving up, we chase them up. As they move back down again, we can hold on and take advantage of the lag. So right now, if you see what's happened with propylene, with the November, December increases, I expect we're still chasing higher raw material cost as higher propylene works its way through the value chain. So we're going to be -- I would expect we're going to be chasing raw materials up through the first quarter. In terms of competitor behavior, I'm not sure that we've seen a lot of difference. We've been able, in certain cases, to get some share back in some of the commodity product lines, and we've done that, giving up a little bit of margin to get our plants full, and that's a result of competition attempting to take share. I'm not sure that I would characterize it as becoming more aggressive than what we've discussed in the third quarter. I would say probably similar.

Operator

We'll take our next question from P.J. Juvekar with Citi.

P.J. Juvekar - Citigroup Inc

You've taken a good step here in divesting Building Block Chemicals. Are there products in your Coatings segment that could potentially be divested?

Shane Fleming

I would certainly not ever say no. We continue to look at that portfolio, and there are pieces of it that we like very much where we've got market leadership and technology leadership. But there are elements, more commodity products that we're not actively marketing right now. But if the right offer came along, we would certainly consider divesting. Maybe I'll take advantage of this opportunity just to talk a little bit more about how we're looking at the Coatings business going into the year. I think I mentioned in my prepared comments that we monitor this business very carefully, and our view is that our business will continue to grow, continue to drive earnings growth. If we see either demand softening in certain markets or commoditization of product lines to the point that it does not make sense for us to continue to operate with the current cost base, we're going to be aggressive in terms of taking decisions. That could be shutting down product lines, it could be shutting down plants, it certainly could be taking cost out in various areas, but it also could include potential divestiture of some of these commodity lines.

P.J. Juvekar - Citigroup Inc

And then a couple of times you mentioned about leveraging the Carbon Fiber business as operating rates go up. Can you just tell us where operating rates are, and where they could go and just quantify what that leverage means to you?

Shane Fleming

I'm not sure I'm going to be able to give you exact occupancy levels because it's so mixed depending on what products you're talking about and which plants you're talking about. But we are continuing to go to a more continuous operations going from 5/16 [5 days a week, 16 hours a day] to 7/24 [7 days a week, 24 hours a day] in some of our sites. So I think we've still got some still capacity where we can add shifts. So we're certainly not full, but we're reaching a point where we're more comfortable with a leverage going forward. As new sales come on, you will see expansion in margins. And you'll see that if you look at our guidance versus our 2010 results. As we bring new volume on, as the build rates start to ramp up, we will see a good return on that additional volume, that incremental volume, and I would say that the leverage should be similar to what you've seen in the past. I wouldn't expect the mix to be any different than what we've seen in the past in terms of that operating leverage.

P.J. Juvekar - Citigroup Inc

I know you have different plants and different products, but is there like a generic operating rate that you can give us, maybe it's like 80% or 85%?

Shane Fleming

It's probably north of 80%, P.J., and some sites would be quite a bit higher than that, and some would be lower.

Operator

We'll take our next question from David Begleiter with Deutsche Bank.

David Begleiter - Deutsche Bank AG

Shane, just on Engineered Materials, can you break down the 8% volume growth in 2011 between the aerospace, commercial aerospace and military? How much military is down, how much commercial will be up.

Shane Fleming

I'm not going to be able to give you an exact breakup but can probably frame it for you. Military will be down, but it's going to be pretty modestly. So most of the delta you're going to see in 2010 to 2011 is going to be the increase in commercial. There will be a slight impact down from military but not significant.

David Begleiter - Deutsche Bank AG

And just in Engineered materials, what's the CapEx level in 2011 versus 2010?

Shane Fleming

Dave, you have an exact number there?

David Drillock

We'll get that for you.

Shane Fleming

I don't think it's greatly different, Dave. I'm guessing it's in the $50 million range, but I don't have an exact number. I know we've guided out for the full year.

David Begleiter - Deutsche Bank AG

Yes, you guided for the full year. That's probably a good enough number.

Shane Fleming

Dave, we'll get back to you with an exact number.

David Begleiter - Deutsche Bank AG

And just lastly, in terms of use of cash from the Building Block sale, what would the pace of buybacks be? Perhaps the best way of...

Shane Fleming

I'm going to let David respond to that because we've given that obviously quite a lot of thought, and that's going to depend to some degree on our results going forward. So, Dave, why don't you respond.

David Drillock

Dave, I think I would think of using that money sort of evenly throughout the year. And if we think we're undervalued, we could step it up a bit. We'd slow it down if we came on a bolt-on acquisition opportunity. So I think in terms of the pace of it, I think it would be measured and even throughout the year, and we tend to think in terms of returning cash to shareholders through dividends and share buyback. And so I think a pace to model in would be sort of a $50 million to $60 million share buyback for the year. Could be a little bit higher than that, could be a little bit less.

David Begleiter - Deutsche Bank AG

Shane, the delta in between Resins and raws of $10 million in Q4, could that be double the delta in Q1?

Shane Fleming

Are you asking me if the Q1 could be twice that number or half that number?

David Begleiter - Deutsche Bank AG

Yes, twice that number.

Shane Fleming

I would certainly be disappointed if that was the case. We were out today pushing price as we've gotten the recent updates on propylene costs. And 2004 I guess was -- I'm guessing, was the biggest gap we saw during the course of the year. I think we're actually ahead at midyear, down slightly in the third quarter. So the Q4 number would have been the biggest number for the year. And I would expect that to be certainly no greater in the first quarter.

Operator

And we'll take our next question from John McNulty with Credit Suisse.

John McNulty - Crédit Suisse AG

On the Building Block materials business, I know you've owned it for a long time. Can you give us a clue as to how to think about the cost basis and if you have any ability to shield the taxes on that side and maybe other asset sales or issues that you may have had with some of your other assets like, say, in the Resin Coatings business?

Shane Fleming

Let me address kind of the first question. I'll let Dave get to the tax issue. In terms of the corporate and unallocated or expanding costs that's left from that business, it's not an insignificant number. We feel like we've got the capability of offsetting that to a large degree with the savings that will come from our shared services impact in 2011. That full year impact. Dave, maybe you could talk to the tax shield.

David Drillock

Yes. You're right, John. We've had that business a long time. But we've been making -- we've been steady investments in it along the way. It's fairly capital-intensive just on the maintenance capital. So there is a basis, but at this point, I wouldn't want to talk about how much shield we can do. And in terms of other divestitures and things like that, I think it's premature to talk about that kind of stuff.

John McNulty - Crédit Suisse AG

On the Engineered Materials business, I know you were kind of in catch-up mode a little bit in terms of hiring and retraining and that type of thing through the downturn, and it had an impact in the second half on your margins. How should we think about the margin progression through 2011? Are you through the bulk of that? Or will we kind of see an immediate ratchet up to that kind of 15% to 16% range that you're guiding to? Or is that something that gradually kind of flows through throughout the year?

Shane Fleming

Probably a little bit more of the latter case, and I think driven more by volume than by cost increase. We're not fully done staffing up, but I think we're well into that process now. So you're not going to see the incremental quarter-to-quarter increases that you saw in Q3 and Q4. So there will be some additional incremental cost, but I think what will leverage the volume up to our full year guidance is going to be as volume increases. And we expect to see that be kind of a steady progression from Q1 through year end.

Operator

We'll take our next question from Mike Sison of KeyBanc.

Michael Sison - KeyBanc Capital Markets Inc.

When you think about Coating Resins for 2011 in terms of volume, 5% growth is historically not an easy number to get. Can you give us a little color on the components? Do you have some new products out sit there, market share gains, so on and so forth, to give us a feel why 5% is a good number?

Shane Fleming

Yes, I'll try and break it down for you. I think we’re looking at underlying market growth rates in Europe and North America, which is where about 70%, 70% plus of our business sits, out of, say, 2½% to 3%. So we've just got a base business growth there that's probably close to half of the 5%. The balance is penetration with new products. And we've got a pretty positive story to tell on a number of new products where we're expecting some fairly significant traction in those developed markets. And then the final piece that's driving growth is we're expecting high growth in Asia Pacific. So it's a combination of maybe half the growth market just base market demand growth and then maybe a quarter each coming from new products and growth in Asia.

Michael Sison - KeyBanc Capital Markets Inc.

So if you get the 5% volume growth in '11, your guidance for Coating Resins sales is basically up plus $100 million. Is the delta that sort of $30 million the raw material gap you need to close?

Shane Fleming

There is certainly a delta there, and it's very challenging to predict how we're going to do over the course of the full year. There's a late lag issue related to the volatility. So I think we've taken kind of a middle-of-the-road guess based on past performance and what we see happening in the markets. Seeing some demand growth will help as long as we can get the volatility back to kind of reasonable or normal conditions on the raw material side. And it's one thing to deal with what's coming from oil pricing and manage that. And then you layer on top of that the continued structural shortages on some of the derivatives of propylene-like acrylics and Epoxy that makes it even more challenging.

Michael Sison - KeyBanc Capital Markets Inc.

One quick one in Engineered Materials, in terms of your commercial aerospace growth, are you tracking basically what Boeing suggested the build rates would be for the 787?

Shane Fleming

Yes. We actually build up our own estimates. We certainly listen to what Boeing is saying, but we talk to the parts builders, we look at their inventories and we’re so far ahead of the cycle that we’re really building now, we’re making material now based on planes that won't be completed for, say, 18 months or so depending on which products we're talking about. So it's a fairly complicated supply chain, and we've got to take Boeing's guidance and then look forward in trying to understand what that means in terms of the build rates at our customers and their inventory levels to come up with numbers. But as I think we hinted in our press release and in our prepared comments, we have pulled back our numbers a little bit based on the recent news on both the 787 and the Joint Strike Fighter.

Operator

[Operator Instructions] And we'll take our next question from Robert Koort with Goldman Sachs.

Robert Koort - Goldman Sachs Group Inc.

A couple of questions. One, is it reasonable to think -- I know, Dave, you didn't want to give any specifics on taxes, but is $200 million to $250 million of net cash in a ballpark of what you might get out of the Building Block sale?

David Drillock

Bob, because we're in advanced discussions, I don't want to talk about that type of stuff at this point.

Robert Koort - Goldman Sachs Group Inc.

It seems to me at least in the 15 or 16 years that you guys have been a company, there's always been the potential or desire maybe to get out of that commodity business. So I'm just curious what finally allowed you to pull the trigger? Did somebody come approach you, or have you been working on something like this for a while?

Shane Fleming

We've been working kind of quietly in the background for some time, waiting for the right opportunity. And I think we just got to the point that we felt that the time was now to do that.

Robert Koort - Goldman Sachs Group Inc.

In the Coating Resins business, when I look at that inflation you talked about on a raw material basis of $40 million and take some stabs at what the actual raw material component might be in your cost of goods, does that suggest that year-on-year, your raw materials were up 20% or 25%? Does that seem the ballpark?

David Drillock

No, that would be high. I think raw materials in total were up about $50 million, Bob, for the year. I think it was $10 million through Q3 and another $40 million in Q4.

Robert Koort - Goldman Sachs Group Inc.

I guess I was isolating it just to the fourth quarter increase.

David Drillock

Well, let's see, I can kind of do the math for you. It still would on the high side. I think it would be more like in the 15% to 20% range. But significant, it was probably the most significant raw material cost increase we've seen in a quarter in a long, long time.

Robert Koort - Goldman Sachs Group Inc.

And I think, Shane, you gave some, I guess, level of comfort that you can get there with pricing to cover the raws as we go through '11 with some kind of lag. But we've seen some exceptional propylene spikes here recently. Is it your expectation that, that will truly just be a spike, and so you'll have better cost as you go forward? Or is it that your pricing can be aggressive enough to accommodate whatever spike we've seen so far?

Shane Fleming

I think it's more of the latter. I think we feel like we can ultimately get there. If propylene spikes and stays up, we'll adjust raw materials in line with that new reality. The challenge, of course, is when you see the quick movements. We actually did a pretty reasonable job in 2010 covering raw materials in Coating Resins. I think we were pretty much flat cost versus price through the third quarter. And most of the ground that we lost over the year was in the fourth quarter, and it was due to that run-up that we've talked about already. We do expect, as I've said earlier, raw material cost to be high through the first quarter. If we see any relief at all on oil and I expect some help as well as some of our large suppliers get their plants back up to full capacity. On the supply side, I would hope and expect we'd see some moderation in raw material cost over the last two to three quarters of the year.

Robert Koort - Goldman Sachs Group Inc.

And lastly, In Process Separation I think I heard you say you were capacity constrained. Was that a source of why your volumes weren’t a little better? I would have thought maybe your customer base still had some positive year-on-year trends there.

Shane Fleming

No. The constraint on the capacity was in Additive Technologies, specifically in our Polymer Additives product line. And I'll take advantage of your question just to add a little bit more color there. We are bringing some new capacity online, as I mentioned. We've actually got two separate investments. One, a small investment in China as well as a larger investment in an existing plant here in the U.S. And we should see that capacity come online late this year and hopefully, if things stay on schedule and move out a little ahead of schedule, we could even see some benefit in the fourth quarter but certainly see a lot of growth opportunity in that product line going forward as that new capacity comes online. But to your question on In Process Separation, the primary reason we saw a fallback in revenue in Q4 versus last year was the large-scale order we had at a customer for one of our solvent extracting products that was shipped in the fourth quarter last year, that didn't repeat this year, but we’ve continued to show modest growth.

Operator

And we'll take our next question from Peter Grondin from Surveyor Capital.

Peter Grondin - OSS Capital

Just a quick question on the propylene side, Shane. My understanding is propylene is the feedstock for acrylonitrile as well? Is that correct?

Shane Fleming

Yes, it is.

Peter Grondin - OSS Capital

So it doesn't seem to me that you had as much problem in terms of that part of the chain in terms of pricing on the Engineered Material side because my understanding is that acrylonitrile is the raw material for prepreg. Is that correct?

Shane Fleming

That's correct. Two points. One, in our Building Blocks business, we've had capacity contracts so our acrylo pricing was linked very much to propylene, in the U.S., not so much for the global business. But in the U.S. we had direct linkage. And then secondly, just to add some color around your question on the Engineered Materials business, yes, acrylonitrile is a component of raw material used in carbon fiber production, but maybe to put some concerns at rest is a relatively small cost driver for carbon fiber. So volatility there is not a big impact, does not have a big impact on our Engineered Materials business.

Peter Grondin - OSS Capital

So it's both sides, and I was wondering if there was some different dynamic with the contracts or something like that. It doesn't sound like that's the case though.

Shane Fleming

No. Big volatility in terms of raw material costs to Building Blocks but it has little impact on margin because of the way we pass through.

Operator

It appears we have no further questions at this time. I would now like to turn the conference back over to you for any closing or additional remarks.

Jodi Allen

Thank you, all, for your participation in today's call. And if you have further questions, please contact me directly at (973) 357-3283. Thank you.

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