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Executives

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

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

Jodi Allen - Investor Relations

Analysts

P.J. Juvekar - Citigroup Inc, Research Division

David L. Begleiter - Deutsche Bank AG, Research Division

Robert Koort - Goldman Sachs Group Inc., Research Division

Laurence Alexander - Jefferies & Company, Inc., Research Division

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

John P. McNulty - Crédit Suisse AG, Research Division

Cytec Industries (CYT) Q3 2011 Earnings Call October 21, 2011 11:00 AM ET

Operator

Good day, and welcome to the Cytec Industries Third Quarter 2011 Earnings Conference Call. Today's call is being recorded. For opening remarks and introduction, I would like to turn the call over to Ms. Jodi Allen. Please go ahead.

Jodi Allen

Thank you, Tequila, 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 the 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 updated outlook for 2011.

This call is being webcast in listen-only mode and it will be archived in audio format on our website for 3 weeks. Throughout the call, we will be referencing the supporting materials, which can be downloaded from our Investor Relations website under Calendar of Events, or you may follow the slides accompanying today's webcast, which are available through the 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 for press release is available on our Investor Relations website.

Now let me turn over the call to Shane.

Shane D. Fleming

Thank you, Jodi, and good morning, everyone. I appreciate you taking the time to join our third quarter earnings call. I'll begin on Slide 3.

Overall sales in the quarter were $778 million, an 11% increase over the prior-year quarter. The year-on-year sales growth was driven by 8% selling price increases across all of our business segments with additional support from foreign exchange. Volumes versus the prior-year quarter were down by 1%, attributal primarily to declines in Coating Resins and, to a lesser degree, in Additives Technologies and largely offset by strong volume growth in the Engineered Materials and In Process Separation segments which I'll describe in more detail in the following slides.

I continue to be pleased with the pricing execution, particularly given the softening demand environment. In the quarter, we delivered $59 million in price versus $47 million in raw material increases, and year-to-date, the company achieved approximately $180 million in price, which more than offset cost increases of $157 million.

Net earnings from operations in the third quarter of this year were $53.9 million or $1.10 per diluted share, excluding the special items that Dave will explain later. This represents a 72% improvement over the prior quarter's -- prior-year quarter's EPS.

Beginning in Slide 4. Coating Resins delivered sales of $387 million, a 6% increase versus the third quarter of 2010. The increase was driven by 10% higher selling prices and favorable currency exchange impact of 6%. We continue to maintain good pricing discipline and have achieved $39 million of selling price increases in the quarter, more than covering the raw material cost escalation. This was partially offset by the 10% volume decline due to weaker demand across a number of global industrial markets, with the greatest drops seen in Europe.

The slowdown has impacted all of the Coating Resins product lines, with the waterborne products down the least at 1% versus the prior quarter. We are also seeing very tight inventory control measures being implemented broadly by our customers. Visibility is becoming more limited and we are now operating at more of a made-to-order basis as a result of short lead times and altered buying patterns.

The chart on Slide 5 displays monthly sales revenue for the business. Although revenue dollars are relatively flat for each months of the quarter, volumes in September were 13% below September last year, most of which was offset by price.

Coating Resins operating earnings of $18 million for the quarter were down about 8% versus earnings of $19.5 million in the third quarter of 2010.

Moving to Additives Technology. Slide 6 shows sales in the segment of $71 million, an increase of 7% versus the third quarter 2010. Once again, increased selling price was the primary driver of growth, achieving 10% versus the prior-year period with an additional 4% benefit from exchange rates.

Selling volumes were down by 7% due primarily to the softening demand environment that has impacted many of our global markets. Order visibility in this segment, however, remains good and we are still getting healthy forecast from customers for our specialty product lines, which remain in tight supply as we are nearing the completion of our expansion work.

The overall result in the additives segment was operating earnings of $11.5 million, which was a 26% increase over the $9.1 million earned in the prior-year period. This also shows the demand for our value-added technologies is helping to drive profitability improvements in the segment despite the slight softening in our end markets.

Slide 7 highlights results for the In Process Separation segment, which delivered sales of $90 million in the third quarter, a 19% increase versus the third quarter 2010. Selling volumes increased by 10% versus the prior-year quarter as a result of continued high production rates in our primary copper and aluminum based metal markets. In addition, we continue to secure new business from both market penetration and in emerging regions, as well as commercializing some of our new value-added technologies at new and existing customers.

Selling prices in the quarter were increased by 8% to cover raw material cost escalation, while exchange rates increased sales by 1%. The segment delivered $17.3 million of operating earnings in the quarter, a 35% increase versus operating earnings of $12.8 million in the prior-year quarter.

I'm very pleased with the business' ability to innovate, execute their strategy and continue to drive profitable growth in this segment.

Slide 8 shows a summary of results in the Engineered Materials segment with sales of $230 million, an increase of 18% versus the prior-year quarter. Selling volumes were up by 14% versus Q3 last year, driven by new program ramp-ups and legacy civil aircraft program build rate increases.

The new programs' driving growth include Boeing 747-8, 787, the Airbus A380, and the legacy programs include the Boeing 777, 737, Airbus A320 and certain business jet and helicopter programs.

Selling prices increased sales by 3% as we continue to make progress, offsetting the higher cost of raw materials that began to impact the segment earlier in the year. Exchange rates had a 1% favorable impact on sales.

Operating earnings of $33.1 million were up 19% over the third quarter 2010 earnings as a result of the higher volumes and increased selling prices.

We have begun to transition volumes to our new plant in China and our new line in Germany and we will continue to increase production in these lines over the next few quarters.

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

David Drillock

Thank you, Shane, and good morning, everyone. Let's go right to Slide 9.

During the quarter, we had a special item net pretax charge of $9 million for restructuring activities principally related to the shutdown of our manufacturing facility in Brazil for powder coating resins. Approximately $3 million of this is a noncash charge for the write-down of the remaining net book value of the site. This product line in Brazil was operating at a loss, and with a poor outlook for improvement, the decision to close the site was made. Annual savings from this action is approximately $6 million to [ph] approximately 20% will be reflected in the Q4 results.

Now let me review our operating results for the quarter. And just a reminder: that all amounts and percentages I discuss will exclude any special items unless specifically mentioned otherwise. I'll start with analysis of our gross profit.

Our gross profit dollars increased almost 11% to $189 million, while our gross margin percentage of 24% is essentially flat with the prior-year period. Total selling price increases of $59 million more than offset raw material cost increases of $47 million. This had the impact of increasing our gross profit percentage by about 1.5%. And this was offset by the increase in period manufacturing cost mostly in the Engineered Materials segment as we continue to add people to meet the production needs of our growing backlog in Engineered Materials.

Looking at raw materials for a moment. Propylene, a key input for many of the raw materials we purchase, was relatively flat in the third quarter but did have a large decline in October. We'll see what occurs for the rest of the quarter. As I have noted before, as propylene moves we generally see it 60 to 90 days later in the cost of many of our coating resin raw materials. And before moving on, let me thank all of our commercial teams who have done a great job in covering the higher raw material cost we have been experiencing this year.

Going on to the Corporate and Unallocated segment. Expenses are down about $10 million mostly due to a benefit of $2.1 million related to the reduction in the accrual for long-term incentive compensation and reduced consulting fees of about $2.5 million. Also in 2010, we had about $2 million of previously allocated cost to our former Building Block Chemical segment.

Operating expenses were down approximately $3 million, and as a percent of sales, they are down 2%. The decline is primarily related to administrative cost due to the lower consulting costs I just mentioned and the benefit of lower incentive compensation accruals of $4.5 million. That $4.5 million includes a 2.5 -- the $2.1 million benefit from the long-term incentive compensation accruals that I covered as part of the Corporate and Unallocated discussion.

We had other income in the quarter mostly from transaction foreign currency gains and a gain from a sale of real estate of about $1 million. We always have a number of activities going on, and in the third quarter, we had a number of those activities come to a favorable conclusion.

In general, other income expense is lumpy and a typical range for this category is a gain or loss of $2.5 million. Interest expense net is up $800,000, with the majority of this due to a credit associated with amortizing mark-to-market gains from a 5-year cross-currency swap, which expired in October 1 of last year.

Tax expense includes a benefit of $3.8 million related to the reversal of tax contingencies as a result of the completion of a multiyear tax audit in Europe. We are very pleased with this result, and excluding this benefit, the underlying effective tax rate is 31.8%, which compares favorably to the 32.6% effective rate in the third quarter of 2010.

Operating cash flows were $54 million for the third quarter of 2011, up from the prior-year quarter cash flow from continuing operations of $44 million.

During the quarter, our average net working capital days of 71 is up 11 days versus the second quarter of 2011. Trade accounts receivable average days sales outstanding is up 3 to 51 days, although we saw sequential improvement during the quarter. Average inventory days on hand of approximately 74 is flat with the second quarter of 2011. Accounts payable days of 55 is down 7 days for the second quarter of 2011 and this decline reflects lower production levels and raw material purchases in line with our view of weaker fourth quarter demand mostly in Coating Resins.

Similar to last quarter, our capital spending was $27 million, with approximately half of this spending attributal to our growth businesses. Speaking of the growth businesses, during the quarter, we approved spending on several expansion projects in the Engineered Materials and In Process Separation segments. More details will be coming forward on these projects during the current quarter, but these are capacity expansion projects which will be in operation in 2014 to meet the projected growth in each segments.

Our outlook for full year capital spending of a range of $120 million to $130 million is unchanged, although some of the cash spend in the fourth quarter of may move into 2012.

Also during the quarter, we purchased 1,975,000 shares of our common stock for $84 million. This brings our year-to-date shares purchased to 2,830,000 for approximately $131 million. The remaining amount on the current share repurchase authorization is approximately $63 million.

This is a good point for me to reiterate our use of cash going forward. It is maintenance of business capital, expansion capital on our growth product lines, if available, bolt-on acquisitions in our growth product lines and then returning excess cash to shareholders. Clearly, with our valuation compared to our peers at the lower end of the range, we felt our stock buyback in the third quarter was a good use of our cash.

Lastly, on September 30, we sold the research and development facility located in Stamford, Connecticut, for $11 million cash. The facility had a carrying value of $32.5 million at the time of sale. The transaction includes the leaseback of certain portions of the facility for a 7-year period. As part of the agreement, we are responsible for the remediation of certain environmental matters at the site, and therefore, as a result of the environmental remediation obligation, we are precluded from recognizing the sale of the -- until the remediation is completed.

The forecasted cost of the remediation is about $1 million, and we expect to complete that well before the end of the lease period. The carrying value of the facility exceeds proceeds received by $21.5 million, and due to the continuing remediation involvement, we cannot take the charge at this time. We will adjust the estimated remaining useful life of the facility to the 7-year initial lease period and accelerate the depreciation over that period. We will disclose this amount of additional depreciation each quarter. And upon completion of the remediation work, the sale of the facility will be recognized at that time, including the recognition of any loss for any remaining excess carrying value.

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

Shane D. Fleming

Thanks, Dave. I would now like to review our outlook for 2011, which we've summarized on Slide 12.

Based on the increasing uncertainty in the global economic environment as seen in the fall-off in demand in the Coating Resins segment in later half of the third quarter, we believe we are facing a period of continued slowdown in demand in the industrial markets particularly in Europe, which is the largest region for coatings through at least the end of this year.

The fourth quarter is historically a seasonally weak period in the coatings segment and recent order pattern indicates this will likely be the case again this year. Automotive OEM is the only market showing some stability. But overall, we are seeing a slowdown across most of our product lines in all regions relative to Coating Resins demand.

Based on this view, our updated guidance assumes a 10% volume decline in Coating Resins for the fourth quarter of 2011 versus 2010.

While our key raw material purchase prices are just now beginning to decline, we are assuming no benefit from reduced material cost to offset lower demand in the fourth quarter as we will be working off a higher-value raw materials and finished product inventories through the remainder of the year.

Our updated guidance for Coating Resins full year sales is estimated to be between $1.55 billion and $1.58 billion, with full year operating earnings for the segment in the range of $57 million to $60 million, down from the prior projection of $78 million to $80 million. The fourth quarter will be particularly challenging for this segment with an operating loss of $5 million to $8 million.

We intend to continue on our path of making structural changes to improve the profitability of this business. As Dave just mentioned, we announced closure of a powder coatings manufacturing site in Brazil. While Brazil remains an important growth area for our company overall, we're not gaining any benefits from having local production in the region. This step is in direct alignment with our business simplification actions in order to better manage our capital structure and cost to today's demand environment.

We are making progress reducing our SKUs in the commodity portion of this portfolio and we will continue to use pricing in the market to test value and exit certain underperforming product families.

I'm also pleased to report that, following our portfolio changes announced earlier this year, we have made real progress strengthening our product development pipeline for the Waterborne and Radcure Specialty product lines. However, given the potential for a protractive slowdown in demand in a number of our major coating markets, we are not confident that these ongoing initiatives will be sufficient to yield the sustained improvements in profitability that we require from this business.

We are committed to maximizing value creation in this segment and we will take the decisions necessary to do so. We are currently reviewing all options for this business and we will provide a further update on our plans no later than our 2012 earnings guidance on our fourth quarter conference call.

In Additives Technologies, we are facing some of the same macroeconomic headwinds affecting Coating Resins albeit at a much lesser impact. Demand for our differentiated technologies remain strong and we continue to have a solid order book despite some recent softening.

In Polymer Additives, the slowdown was specific to the automotive and fiber markets in China, while North America and Europe were relatively stable. Specialty Additives demand was also good across the globe. Over the next several months, we will complete capacity expansions that will enable us to grow our value-added products as many of these products remain in tight supply. However, we are facing some raw material availability issues, which will impact our volumes in the fourth quarter. We are projecting full year sales for Additives Technologies in the range of $260 million to $280 million and the operating earnings outlook is reduced to a range of $34 million to $36 million versus a prior range of $37 million to $40 million.

The In Process Separation business has delivered strong performance throughout this year and we expect demand to remain steady through the fourth quarter. Production estimates in the base metal markets we serve are expected to remain at current levels driven by infrastructure growth in China, India and Latin America.

We are also making great progress advancing our newer higher-performing technologies globally. We are, therefore, increasing our full year sales estimate to be in the range of $330 million to $350 million versus our prior range of $320 million to $330 million, and we've tightened up operating earnings guidance to be in a range of $63 million to $67 million versus the prior range of $60 million to $70 million.

In Engineered Materials, we expect the improving demand trends to continue as our customers ramp up for the build rate increases in key several aircraft programs. The large commercial aircraft backlog has increased to over 8,000 planes, marking a record number and providing the strong foundation for sustained growth in the aerospace market.

We are making good progress with our price increase actions but have not yet achieved our goal of fully recovering the impact of higher raw material cost on a margin dilution basis. We will continue to implement increases throughout the end of the year and into 2012 to realize this objective.

Now that our newest production lines are fully qualified, we begin to move volume from our legacy sites to our new capacity in China and Germany in the third quarter. This transition continues and will allow us to expand overall output to keep pace with the growing demand. We have been and will continue to add manufacturing personnel to support the strong demand in our legacy sites, and as these new personnel are trained and output from our plants increases over the next few quarters, we expect to realize manufacturing cost leverage.

Each quarter this year, we have made progress towards our margin expansion goals albeit at a slower pace than we've projected earlier in the year. In fact, operating profit margins for the legacy Engineered Materials portion of the segment reached 15% for the third quarter and are projected to improve further in Q4.

The engineered adhesives portion of the segment, comprised of the pressure-sensitive adhesives and formulated resins product lines, is subject to similar macroeconomic market pressures that are impacting Coating Resins. And this is adding some headwind to our improvements in overall segment margins.

Given that these dynamics are forecasted to continue through the fourth quarter, we expect the segment to achieve operating margins in Q4 closer to a 15% rate rather than the 16% rate targeted earlier.

We are projecting full year 2011 sales for Engineered Materials to be in a range of $880 million to $900 million and adjusted our full year operating earnings to be in the range of $123 million to $127 million versus the prior range of $125 million to $135 million.

I remain very encouraged by the progress we are making in this segment and expect to continue to deliver earnings improvement in 2012 as we gain leverage from increased volumes.

On a consolidated level, the guidance for Corporate and Unallocated is now $14 million to $15 million, down from the prior projection of $16 million to $18 million as a result of the incentive compensation accrual adjustment that Dave just explained.

Guidance for other expense and net interest expense also remains unchanged at $4 million and $37 million to $39 million, respectively. The forecast for underlying annual tax for ongoing operations continues to be in the range of 30.5% to 32.5%.

Finally, our revised 2011 continuing full year adjusted diluted earnings per share is now in the range of $3.20 to $3.40 on sales of $3 billion to $3.2 billion versus the prior projection of $3.25 to $3.50.

Overall, we achieved solid performance in the third quarter despite the weakening demand environment impacting our Coating Resins segment. We delivered strong sales and earnings growth in our Engineered Materials and In Process Separation segments and demonstrated excellent pricing discipline across the portfolio. We advanced our product rationalization in coatings, and we are successful capturing new business with the value-added technologies in Additives, In Process Separation and Engineered Materials.

While we're taking a more aggressive position on the options for Coating Resins, 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, Tequila, so we can respond to your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Laurence Alexander with Jefferies.

Laurence Alexander - Jefferies & Company, Inc., Research Division

So 2 quick questions. One is, are you looking to undertake a campaign to reduce your working capital days? And if so, would that be any sort of drag on -- and is that part of what's happening in Q4? And second, have -- are you getting any indication from customers yet on the expected length for year-end shutdowns?

Shane D. Fleming

Let me -- Laurence, this is Shane. I'll let David address the working capital question, and I'll get come back on the demand.

David Drillock

Lawrence, on the working capital, I wouldn't say we have a campaign to lower this normal process that we see demand weakening. We're going to take -- we will bring plants down and align production with demand. So I wouldn't say it's a special program. It's something we're just doing as part of our normal course of business. And that's reflected in the estimates you have for the quarter. Shane, you want to...

Shane D. Fleming

Yes. On the length of shutdown, I don't think we've gotten any specific information. One thing that we do see though, and I referenced it in my comments, was somewhat different order patterns or buying patterns will go through the first 2 or 3 weeks of the month with very, very light order books and then we'll get significant sales in the last week to 10 days. So our customers are basically telling us they're not placing orders on us until they have orders on-hand from their customers. In that environment, I don't think any of us have a lot of visibility. That's probably the primary reason we're not getting a lot of input right now from our customers about year end. We'll stay close to those folks. But the projections that we based our earnings estimate on were based on what we're seeing in terms of our order book, what we're seeing in terms of global demand trends and also what we're seeing in terms of the raw material pricing impact on the business.

Operator

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

John P. McNulty - Crédit Suisse AG, Research Division

A couple of quick questions. First, in the Resin Coatings business, it sounds like you're taking maybe a little bit more of an aggressive approach. I know you've been trying to fix it and analyze what to do with the business for a while, but it does seem like you're taking a bit more aggressive approach. So in terms of how we should think about that and maybe what you can do or what would prevent you from maybe selling the asset off, what -- like, what would have to happen for you to get more confident that this business is a keeper?

Shane D. Fleming

I'm not sure that I'm going to be able to pinpoint a specific issue that would make me feel differently about the business. I think we recognize we have some challenges with the increasing commoditization. We recognize also that this is a business that gets sweep-side by changes in macroeconomic demand. And particularly, it's an early-cycle business and that is, I think, part of the nature of the business, the products we serve, the markets that we serve. Let me just say, John, I think I can't add a lot of color around potential divestiture at this point in time. It wouldn't be appropriate. I just would reinforce that you're right, we are being more aggressive. We are looking at really all options. And I believe that, by the end of this year, early next year, we'll be able to come back with more clarity in terms of what those plans entail.

John P. McNulty - Crédit Suisse AG, Research Division

Okay, great. And just as a bit of a follow-up to that. I believe you paid about $1.8 billion for the asset when it was originally purchased. How much has it been written down? Or what's the actual book value of the assets right now?

Shane D. Fleming

I think we've had one impairment charge. It was about $380 million. Dave, is that right?

David Drillock

$385 million, John. $385 million. And obviously, we've shut down some small plants, but I think you would take those, take that $385 million off the book value for now and I think that's close enough.

John P. McNulty - Crédit Suisse AG, Research Division

Okay, fair enough. And then on the additives guidance that you gave, it looks like you're basically calling for about a 50% drop in profits sequentially. And I know there's a little bit of seasonality but it seems like a pretty significant drop especially given the strength that you saw in the third quarter. So I guess I'm wondering, what's driving that? Is it just macro concerns, or there are other issues behind that?

Shane D. Fleming

Two things. I think the macro concerns maybe is roughly half of the impact. We have seen the order books soften a little bit, as we noted, not as drastically as what we've seen in the coatings area, but we have seen some demand softening again, primarily in Europe and, to a lesser degree, North America. But the other fairly major impact on this business is we have a key raw material that forms the basis for a number of the products within our Polymer Additives line. And we've been told by our supplier that they've got a turnaround, a maintenance turnaround that they've got to do that they can't delay that's put supply at risk for as much as a month of the quarter. So there's going to be a significant shortfall coming from that as well.

John P. McNulty - Crédit Suisse AG, Research Division

So is that something we should just kind of view as somewhat of a onetime issue, or can this drag into next year as well? How should we think about that?

Shane D. Fleming

No, I'd definitely would look at it as a onetime issue. I mean, if there's any drag in the next year, it would be the earlier part of January, but we expect it to be mostly behind us by the end of the year.

John P. McNulty - Crédit Suisse AG, Research Division

Okay, great. And then just one last question. Your -- the composite business, you had guided to some pretty aggressive improvements for the second half, looking for a margin of 16% to 16.5% on your second quarter call. It looks your -- for the full year, it looks like you've dialed that back a bit. What happened? What changed relative to what you were expecting?

Shane D. Fleming

Yes, I think 2 things. And we are, as I again said in the comments, expecting to see further margin expansion in Q4, and we have made progress. But you're absolutely right, we haven't delivered what we had hoped to. The 2 things that have impacted the business: The first and foremost has been we have continued to add people at a higher rate than we expected, given the order backlog. Our order backlog, it continues to increase everyday. We're seeing significant increase from the existing legacy programs with the ramp-ups as well as new programs. So that's the good news, the order book looks stronger now than it's ever looked, but we're trying to meet customer's demand. We're trying to invest ahead of that, where we can. So the cost side has hit us, and as Dave referenced a little bit, our fixed cost, period cost in our Engineered Materials is up quite a bit from what we expected. That's the primary driver. A secondary driver, which I referenced in my comments as well, is that, that segment now includes our engineered adhesives business, our PSA and our formulated resins business. And they've been hit with some headwinds, as well. We always saw those businesses being slight margin diluters. They're more around 10% operating profit businesses, but they've fallen off from that level over the last quarter or so due to the demand softening. And that's also tempered our guidance a little bit for the full year. The bigger issue was cost related to hiring -- and sorry, there was a third point I should've made, as well. And that's, we have now reached the point where we've covered our raw material cost increases on an absolute basis but we are seeing some margin dilution and that we're not maintaining the contribution margin percentage, which is what our goal is in this business. And we expect to be there by the end of this year or early next year.

Operator

Your next question comes from the line of Robert Koort with Goldman Sachs.

Robert Koort - Goldman Sachs Group Inc., Research Division

Okay, maybe extending that question to a little more broad timeframe. Shane, I was wondering if you could talk about what's happened on the longer-term basis in Engineered Materials? I know, back in '06, '07, you were generating similar profit levels, but revenues today are about 1/3 larger. Is this a transitory issue? Or is there something about the product mix over the last 5 or 6 years that means you're structurally lower level? Or should we start to get excited maybe in the go-forward about some powerful incremental margin expansion as you start to leverage those fixed costs against even higher revenues?

Shane D. Fleming

Yes, I would definitely put it more in your second category than the first. I mean, there have not been any structural changes. I just want to caution you that part of the reason that it looks like the revenues are so much higher than they would have been at this point in the previous cycle is because of the addition of over $100 million of engineered adhesives business. So you have to kind of take that away when you look at an apples-to-apples comparison versus previous cycles. That said, with the price increases that we've got planned through the end of this year and into early next year, we expect to get contribution margin back to historical levels. So no change from a product mix standpoint in terms of contribution margin. We have seen a dilution at the gross profit level but that's because we've been trying to invest ahead of all this expansion. It's going to take some additional volume to fully leverage those fixed cost, but once we get there -- and I'm aloof right now to give you a day, we're not going to give 2012 guidance. I expect to see margin expansion -- continual margin expansion over 2012 into 2013 as the volumes and the outlook from our plants increase.

Robert Koort - Goldman Sachs Group Inc., Research Division

And then you mentioned being more aggressive on Coating Resins. When you sort of game-plan what the outcomes are, are there --- do you have representative examples -- were you to pursue divestiture where companies get re-ratings? Because it seems like the chemical patches is still to a lot of companies that don't like their multiple trying to get out of their lowest margin, lowest value businesses and then subsequently don't ever get that re-rating. So if you were to pursue a divestiture, do you have some confidence in the past to a higher value?

Shane D. Fleming

Well, yes. You raised a good question about whether we'll give an automatic multiple increase from the divestiture. I don't think we're counting on that. I think we look at this more as a way to create value. We've got a portion of our Coating Resins product line right now that's just not meeting our return on capital, not meeting our internal metrics. And that's our first goal: It's to get the business to a point that it's doing that. From there, I think we'll get better cash flow, better earnings and, hopefully, earn a better earnings multiple. But no, I can't say that I can point to a specific case or to where a change in the portfolio shape had a big impact on PD multiple. I would think it's more related to the performance -- the ongoing performance we're going to deliver.

Operator

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

David L. Begleiter - Deutsche Bank AG, Research Division

Shane, back on Coating Resins. You mentioned some of the products there don't make their cost capital. But I know also that these are largely now mixed use or multi-use manufacturing facilities. Is it possible to sell or shut down the bad businesses, amine or solvent, while keeping Radcure and Waterborne operating? Is that possible?

Shane D. Fleming

It's a very good question, David, and that's part of the work that we've been doing for some weeks, looking at how do we rationalize or how do we best structure the business going forward. And we've got some challenges there where you're sharing common equipment. It's -- I'm going to just -- I don't want to add any more at this point in time, given where we're at with developing our plans. But trying to disentangle those assets is really a challenge for us, and that might, to some degree, dictate the direction we take.

David L. Begleiter - Deutsche Bank AG, Research Division

So is it optional to re-segment the segment to good and bad business as well?

Shane D. Fleming

Yes. You certainly can do that. I mean, you can identify the product areas where you're covering cost of capital and generating reasonable earnings. But the pragmatic question is, can you pull those apart and operate them separately, given the level of entanglement with the asset base?

David L. Begleiter - Deutsche Bank AG, Research Division

And just on to Engineered Materials. Can you talk about the -- you mentioned the order book is as strong as it has ever been. Could you actually quantify or give some further color around that comment?

Shane D. Fleming

Yes. I guess, when I say that I'm looking at just the value of the ongoing order book as well as the backlog that we have, this is a business that normally operates with a fairly extensive backlog, sometimes uncomfortably long as we get significant ramp-ups in demand. But when I look at the days of backlog right now, that is in, at least in my history of the company, reaching an all-time high.

David L. Begleiter - Deutsche Bank AG, Research Division

Lastly, have you seen 787 impact yet on your order book for -- going forward?

Shane D. Fleming

Yes, we're starting to see -- definitely starting to see some impact from the increased rates on 787 and more confidence in the market.

Operator

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

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

In terms of Coating Resins, what's it going to take to get earnings back on a quarterly basis to the positive? There's certain sales level that you need to hit to get back there sort of on a mix level. At the midpoint of your guidance, you've made money at this 350 level in the past, so I'm just curious why -- what's going to take to get back to breakeven?

Shane D. Fleming

Yes, I think it's a combination of, obviously, your margin, your price versus raw material cost as well as volume. My expectations are that we would be profitable in Q1 of next year at this point, given just the normal recovery in volumes. We're seeing softness in the order book, I think, really being driven by 2 things: macro economic issues, particularly the sovereign debt concerns in Europe impacting demand in the markets, but also the typical seasonality that we see, just the way that our customers operate again primarily in Europe with holiday shutdowns. So it's a combination of volume and the fact that we believe, and we guided, I think, somewhat conservatively around the impact of the reducing raw material cost. We -- you've seen what's going on with propylene right now. We're at least 30 to 60 days behind the propylene movements in terms of the impact that has on our raw material purchases, and then we've got to work through inventory of materials that already have been produced or that have been purchased based on a higher cost. So the fact that we're seeing some of the key raw material drivers come down in a weak demand environment means it's going to be difficult for us to hold volumes and price. So we've, in the fourth quarter, as we've again looked at it in I think a somewhat conservative view, we may have to give some price up to hold volume in certain cases, given the fact that we do see demand falling off. But again, if you go back to a normal quarter, normal sort of margins for this business just as we demonstrated in Q1 through Q3, we'll be making money. But the longer-term question, the more important question for me is, is it sufficient, the level of profitability? Is it sustainable? Can we grow on that? And that's the basis at which we are looking at some of these new options that we're considering.

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

Okay. Then when you think about Engineered Materials, you had a very good year on the volume front in '11, but given sort of good backlog that you've noted, wouldn't -- would the growth potential in '12 be better than you experienced in '11?

Shane D. Fleming

I would think that the potential is there to be as strong as 2011, potentially even a little bit stronger. There's nothing right now that I see in terms of demand, based on our customer mix, that says we shouldn't see impressionable increase in volume 2011 to 2012.

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

Got it. And then the leverage should start to improve to what you want to see it, at the sort of that normal 30-ish or 25%, 30%, as I recall. That should be the right leverage on the volume next year, given you've done a lot of the investments this year and got the pricing you need?

Shane D. Fleming

Yes, I'm not going to be able to give you a specific number or incremental margin number. But I absolutely believe that we will see leverage and see improved margins over the course of next year quarter-to-quarter.

Operator

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

P.J. Juvekar - Citigroup Inc, Research Division

In Process Separation, sales have held up well so far but copper prices have corrected significantly this year. Is that a leading indicator for volumes in that segment? And is that factored into your forecast?

Shane D. Fleming

Yes, we don't look at copper pricing per se as a very good leading indicator. I think that's more an indicator of the amount of inventory. Even at the pricing we're at now, which is down over $1 a pound from them highest early in the year, it's still very high if you'll look at relative copper pricing over the last 5 years or 10 years. Any of the large global copper producers are making a lot of money at $3 a pound. So if that price was to drop to a point where you're getting close to the cash cost to some of that margin producers, then it starts to be more of a leading indicator, then you'd be concerned about seeing volume drop. But given the projections that we use, the market indicators that we follow, we believe the outlook remains strong for our base metal demand over at least the next 12 months. Again, short of some kind of a global economic meltdown similar to what we saw in 2007, 2008, our view is that copper and aluminum production will stay high through 2012.

P.J. Juvekar - Citigroup Inc, Research Division

And can you talk about your raw material position in carbon fiber, in terms of both the propylene, acrylo-based raw materials as well as carbon fiber that you buy from different users?

Shane D. Fleming

Yes, we're not buying propylene, right? So we did purchase acrylonitrile to manufacture our own carbon fiber. So I don't know if I can give you a lot of color other than that we pay effectively on market price for that product. But the cost of acrylon is a relatively small component of the total cost of carbon fiber. Carbon fiber pricing is much more driven by supply/demand. On the carbon fiber side, we buy primarily -- or the bulk of our volume comes from 3 large global suppliers. I believe we've secured longer-term contracts, 2 to 3 year contracts with 2 of those 3 and we're working, I think, now on the fourth, aside the third of those 3. So the big impact that hit us on raw material cost escalations was the price that you saw carbon fiber increase from the later part of 2010 until the early part of 2011. We then locked up some of that on long-term pricing. So if you are looking at spot movements in carbon fiber pricing right now, that's not impacting us as much as you might think because we have been able to secure, under a long-term agreement, a firm pricing on some of our purchases. Again, I think there's still 1 of the 3 contracts out there we're trying to finalize.

P.J. Juvekar - Citigroup Inc, Research Division

And just lastly, can you give us an update on your -- on the timing of your South Carolina plant?

Shane D. Fleming

Yes. We're -- we still haven't made a final decision on the restart date, but I will -- I suspect that this is an issue that we review in our quarterly Board meetings. And I think that either in the next quarter or possibly in the next 6 months, it's likely that we'll announce our plans to restart the construction there.

Operator

And there are no further questions at this time. I will now turn the call back over to the leaders.

Jodi Allen

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

Operator

Thank you for your participation. This does conclude today's conference call. You may now disconnect.

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