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Executives

Jodi Allen -

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

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

Analysts

P.J. Juvekar - Citigroup Inc, Research Division

David L. Begleiter - Deutsche Bank AG, Research Division

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

Lucy Watson - Jefferies & Company, Inc., Research Division

John P. McNulty - Crédit Suisse AG, Research Division

Robert Koort - Goldman Sachs Group Inc., Research Division

Dmitry Silversteyn - Longbow Research LLC

Cytec Industries (CYT) Q1 2012 Earnings Call April 20, 2012 11:00 AM ET

Operator

Good day, and welcome to the Cytec Industries First Quarter 2012 Earnings Conference Call. Today's call is being recorded. For opening remarks and introductions, I would like to turn the conference over to Ms. Jodi Allen. Please go ahead.

Jodi Allen

Thank you, Katrina, and good morning, everyone. We appreciate your participation in our conference call. On 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 2012.

Let me remind you that we also announced a change in our business reporting structure in a separate press release yesterday. The product lines within the scope of the Coating Resins separation evaluation are now under common management and grouped into one financial reporting segment. All results shared with you today are representative of the new structure.

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 material, 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 material 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.

Now let me turn the call over to Shane.

Shane D. Fleming

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

I'll begin on Slide 3. Overall sales in the quarter for continuing operations were $783 million versus $766 million in the prior year quarter. The year-on-year sales growth was driven by sizable volume increases in our 2 growth platforms: Engineered Materials and In Process Separation, as well as price increases across each of our businesses.

First quarter net earnings were $59.8 million or $1.28 per diluted share, excluding special items, which represents a 64% increase versus $0.78 per diluted share in the first quarter of 2011. The earnings growth in the quarter was primarily a result of higher selling volumes in the Engineered Materials and In Process Separation segments, as well as higher selling prices in Coating Resins and In Process Separation.

The significant earnings improvement is further indication of our progress to leverage sales growth into strong earnings for the company.

Slide 4 provides more detail about the Engineered Materials results.

Sales in the segment increased substantially by 17% to $219 million, as we continue to benefit from solid demand across the entire aircraft sector. Selling volumes increased 14% versus the prior year quarter as a result of higher build rates in large commercial transport, with both legacy and new programs contributing to the increase with added growth from the business and regional jet sectors.

Selling volumes from military and civil rotorcraft markets were also higher than the prior year period. So robust demand from each sector of the aerospace market is contributing to our growth in the quarter.

Selling prices also increased by 3%, and the combined top line performance, along with the higher plant operating rates, led to operating earnings of $45 million in Q1, significantly above Q1 2011 earnings of $25 million.

Moving on to Slide 5. The In Process Separation segment delivered sales of $92 million, a 17% increase versus the first quarter of 2011. This was driven by 8% higher selling volumes and a 9% increase in selling price. The selling volume increase was primarily attributable to strong demand for our advanced technologies sold into the aluminum processing industry. Increased pricing in the quarter was also a significant contributor to the improved business performance, with increases across our mining and phosphine product lines.

Earnings in this segment were $22.9 million versus $16.4 million in the prior year period, mainly as a result of higher sales on newer technologies and the positive selling price impact. These favorable impacts were partially offset by higher manufacturing cost of sales and operating expenses of $5 million as we expand and invest in growth in developing markets.

Now on to Slide 6. Additive Technologies had sales of $68 million in the quarter, down about 4% from the first quarter last year. The sales decline was driven by selling volume decreases of 8% in the segment with the largest decrease in Specialty Additives due largely to weak demand in European industrial markets. On the positive side, selling prices in the segment increased by 5%, largely as a result of the increases implemented in the prior year to cover rising raw material cost.

Slide 7 shows Coating Resin results. The segment delivered sales of $405 million, a 6% decrease versus the first quarter of 2011. Selling volumes declined by 9%, as a result of the weak demand across all product lines particularly in Europe and the Asia Pacific markets, where customers continue to closely manage their inventories. In addition, the impact of exchange rates decreased sales by 2%. The lower volume and unfavorable exchange was partially offset by higher selling prices of 5% in the quarter. Despite the lower sales, operating earnings in the segment increased to $28.8 million as a result of both the selling price initiative and the restructuring actions taken in 2011.

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

David M. Drillock

Thank you, Shane, and good morning, everyone.

Let's go right to Slide #8 and review our operating results for the quarter. Just a reminder that all amounts and percentages I discuss will exclude any special items unless specifically mentioned otherwise.

Overall, our sales increased by 2%, with selling prices up about 5%. Volume is down 1.5% and exchange rate changes decreasing sales 1%. As Shane just covered, it is a different story by segment with our growth businesses showing excellent increases in volume and selling prices, while the cash businesses were able to hold selling price increases, although had much lower selling volumes.

Looking at our gross profit. It increased 17.5% to $212 million, while our gross margin percentage of 27% is 3.5% above the prior year period. Total raw material costs were essentially flat with the prior year period, although propylene is increasing, so we expect to see increased raw materials as the year progresses with a more immediate impact in Coating Resins.

Sticking with the growth topic, our order intake in Engineered Materials continues to grow, and we will continue to add production personnel throughout the year to meet the higher demand levels.

Corporate and Unallocated expenses, excluding special items, were up slightly. The special item charges in Corporate and Unallocated were for a net restructuring charge of $3.3 million related to efficiency improvements underway in our Coating Resins segment. In addition, we also incurred $6.2 million of consulting cost, mostly related to the ongoing investigation into the separation of the Coating Resins business as we bring this to a decision point in this -- the second quarter.

Finally, similar to my comment in the fourth quarter call, we completed a sale leaseback agreement for our research and development facility in Stamford, Connecticut, and the accounting for that transaction led to accelerated depreciation over a 7-year lease of the term -- 7 year -- the term of the lease. The accelerated depreciation for the quarter was $700,000.

Operating expenses were down slightly from the prior year in terms of dollars and percent of sales as lower operating expenses in the Coating Resins segment were partially offset by the higher spending in Engineered Materials and In Process Separations to execute their growth initiatives.

Interest expense net is down about $0.5 million, mostly due to higher interest income. Our underlying tax rate for the quarter was 32.5% compared to the prior year's 27%. Recall that last year's underlying rate benefited from certain tax benefits of $2.3 million, which lowered the effective tax rate by about 4%. The remainder of the change in tax rate is due mostly to earnings mix and the expiration of certain U.S. tax benefits.

The net result of all of the above plus our lower share count resulted in adjusted diluted earnings per share from continuing operations, 64% above the prior year period, a great start to the year.

Moving to Slide 9. Operating cash flows from continuing operations were $32.3 million for the quarter, up from the $21.5 million of the prior year period. For the first quarter, our average net working capital days were flat at 66 compared with the fourth quarter of 2011. Average days, inventory days of 73, were up about 5 as we built inventories to keep up with the volumes in our growth businesses and a typical seasonal build in Coating Resins. The average accounts receivable days outstanding were flat at 49. And offsetting the higher inventory days, average accounts payable days increased by 5 to 56.

Turning to Slide 10. Our capital spending for the quarter was $24 million. Although we expect this to increase significantly over the rest of the year as we are ramping up spending on capital projects in Engineered Materials and In Process Separation. This capital is mostly for capacity expansions for existing won business, a very good position to be in. Our outlook for 2012's full year capital spending is about $200 million. We have a lot of work to do, but it is all about profitable revenue growth. We are fortunate to have a balance sheet that we can fund the projected expansion capital and continue to look at bolt-on acquisitions.

Along this subject, in the first quarter, we purchased the manufacturing assets of Star Orechem International in India for $36 million. Approximately $7.5 million of the purchase price was deferred at closing to be paid upon the achievement of certain capacity expansion and other milestones, resulting in net cash paid in the first quarter of 2012 of $28.6 million. The capacity expansion work and related product qualifications are proceeding well, and we expect to pay most of the withheld purchase price later this year. Once qualified, we will ramp up and manufacture our solvent extracting products to support the growth in our In Process Separation segment.

We had no stock buybacks in the quarter. Last week, we announced our intention to purchase all the outstanding shares of Umeco plc, an advanced composites producer, for approximately GBP 274 million or USD $439 million. As part of our planning for this transaction, we have suspended all stock repurchases. We expect to fund this acquisition using some of our cash balances on hand, and we recently drew down $210 million from our previously unused $400 million credit facility.

Our responsibilities include effectively restricting the use of the funds required to satisfy the sterling amount of the consideration payable until the earlier of the offer completion or termination. We believe this is a great use of our cash as we build upon our high-quality growth businesses.

This is right in line with what we have said about our use of cash, which is spending the necessary amounts to maintain our businesses, expansion capital, bolt-on acquisitions, debt repayments and return of excess cash to shareholders through stock buybacks and dividends. We are committed to remain investment-grade rated and believe the steps we have and are taking will benefit all of Cytec's stakeholders.

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

Shane D. Fleming

Thanks, Dave.

I'd now like to update you on our full year outlook for 2012, which we have summarized on Slide 11. I remain very excited about the growth opportunities in our Engineered Materials and In Process Separation segments. The past few quarters should provide good insight into our ability to deliver our growth strategy in these segments while executing our portfolio transformation. I'll now provide a bit more information on our outlook for each of these segments.

In Engineered Materials, strong demand for dense composite materials continues to be a primary driver for our growth in the aerospace market. The large commercial transport sector is expected to continue to drive steady growth, as the OEMs announce build rate increases and legacy programs continue to ramp up and new program build rates increase. We also expect that the business jet, civil rotorcraft and military sectors will continue to see gradual demand improvement. So our outlook for the global aerospace market remains very positive.

We have therefore increased our full year 2012 sales forecast in a range of $880 million to $920 million versus 2011 full year sales of $789 million.

Operating earnings are projected to be in a range of $170 million to $180 million, up from $125 million in 2011. Please note that this estimate excludes the sales and earnings from the pressure sensitive adhesives product line, which is now being reported within Coating Resins as part of the separation process that was announced last quarter.

The increased sales volume, higher operating rates and resegmentation without PSA, all contribute to the increased operating margins that we project for full year 2012.

We continue to make progress pursuing business and new programs. I am excited to report that we have recently signed a 10-year contract to supply the majority of the structural composite materials for COMAC's 919 single aisle commercial aircraft. While this will not have a short term impact on our volumes, it does support our longer-term growth and is further evidence of a strong and growing position as a supplier of primary structure composite materials and adhesives to the global commercial aerospace market.

I'm also very excited about last week's announcement of our intent to acquire the outstanding shares of Umeco plc, an international supplier of advanced composite materials. This is a perfect example of our acquisition strategy to leverage our technology leadership position in our advanced composites and materials into adjacent markets, while strengthening our position in aerospace.

I see tremendous potential for value creation in targeted industrial markets and look forward to incorporating this business into Cytec's portfolio.

Please note that sales and earnings estimates I just shared for the Engineered Materials segment do not include this acquisition.

Demand in the In Process Separation segment also remains strong, as production volumes for base metals are anticipated to remain at current levels to support infrastructure growth in emerging markets. We continue to penetrate new geographies with our mining technologies, and our latest asset purchase of Star Orechem International in Central India expands our manufacturing footprint in Asia and provides us with a more direct supply chain to service new projects our customers are bringing online in Africa and the Asia Pacific region.

The site increases the capacity of our metal extraction product line by approximately 25% and allows us to meet the growing global demand for this technology. Our full year sales estimate for In Process Separation is between $375 million and $385 million and operating earnings for the segment are estimated to be between $78 million and $83 million.

In Additives Technologies, we had a slower start to the year given the macroeconomic environment in Europe and the Asia Pacific regions. However, we still expect to see improved demand for our specialty products. In addition, we recently completed some capacity expansion work that began last year, which will relieve product availability issues in our differentiated technologies.

Our estimate for full year sales is in a range of $290 million to $300 million and operating earnings are estimated to be between $40 million and $45 million.

In Coating Resins, we maintain our conservative view of the global industrial market demand growth, especially related to Europe and Asia Pacific. One exception is in the automotive market, particularly in Western Europe, as demand for our specialty resin product remains steady. In addition, we have factored into our estimates the normal seasonality of the coatings business, which is generally stronger in the first half and weaker in the second half. Therefore, our sales estimate for this segment is in a range of $1.64 billion to $1.66 billion, approximately flat with last year's sales.

We maintained our pricing discipline in the face of rising raw material cost, although we had only minimal raw material cost increases in the first quarter P&L since we were producing with lower cost inventory purchased in Q4 last year. This resulted in a significant benefit in the quarter, and we anticipate the higher cost of goods to begin impacting us in the second quarter and have considered this in our estimates.

We are also benefiting from the various restructuring activities from 2011, which includes manufacturing cost reductions to align our manufacturing footprint and cost base to market demand. These actions have resulted in slightly improved operating margins on the business. And considering all of these factors, we estimate our operating earnings in Coating Resins to be in a range of $70 million to $75 million.

The guidance for Corporate and Unallocated expenses is approximately $18 million to $20 million for the year. Other expenses is forecasted to be $2 million, and interest expense net is expected to be between $36 million and $38 million.

Our forecast for the underlying annual tax rate is expected to be in a range of 31.5% to 33.5%. This translates to full year 2012 adjusted diluted earnings per share between $4.35 and $4.65 on sales of $3.19 billion to $3.27 billion. This EPS estimate does not include the $0.20 per share accretion related to the announced plan to acquire Umeco plc.

Finally, we continue to make good progress with our evaluation of strategic options for the Coating Resins business and remain on schedule to announce a decision regarding the separation of that business later this quarter. We are targeting completion of this transaction by year end.

Overall, I'm extremely pleased with our first quarter results. We are growing the top line with our value-added technologies, as we continue to make significant steps forward in reshaping the portfolio to achieve a greater portion of our sales and earnings from our strategic growth platforms. I remain confident in our ability and committed to deliver a 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, Katrina, so we can proceed to your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of P.J. Juvekar with Citi.

P.J. Juvekar - Citigroup Inc, Research Division

You mentioned the FIFO impact or FIFO benefit in the coating segment, I was wondering if you could quantify that for us.

Shane D. Fleming

P.J., I'm not going to be able to give you an exact number. It was relatively substantial, but I do want to point out that we expect to see that benefit go away through the second quarter into Q3. So I'm sorry I'm not going to be able to quantify the number, but it was a significant impact on the business.

P.J. Juvekar - Citigroup Inc, Research Division

Okay. And then your coatings volumes were down 9%, some of your coating customers are reporting good results. I was wondering, what kind of lag effect do you see before your volumes begin to improve.

Shane D. Fleming

It's a relatively short supply chain between our production and supply to the end users. Coatings companies don't tend to carry a lot of inventory of finished products. So 30 to 45 days, say, 60 at the outside, depending on how far we are located from the customer. So we should see our business pick up a little bit as we see some of the coating customers increase their volumes. But a couple of points, our businesses are more heavily exposed to Europe, and the European market isn't bouncing back quite as much as what we're seeing elsewhere in the world. And then my second point is, we are seeing a pretty decent volume recovery in North America, and we expect that trend to continue.

P.J. Juvekar - Citigroup Inc, Research Division

And just lastly, on the last call, you mentioned -- there was a discussion about Umeco's margin versus your margins and how their margins are lower. And just a follow-up question on that is, if you think industrial and other applications structurally carry a lower margin than aerospace in Engineering Materials.

Shane D. Fleming

Yes. I think the short answer to that is, yes. I think there's ample opportunity for us to improve those operating margins as we both move forward with the synergies that we've announced and also look to bring some of our new higher performing technologies into that business and also leverage fixed cost as we grow the top line. So I clearly believe there is ample room for margin expansion, and that would be our expectation to deliver that. At the same time, we don't expect the operating profit levels in the industrial sectors to be as quite as high as they are in aerospace.

Operator

Your next question comes from David Begleiter with Deutsche Bank.

David L. Begleiter - Deutsche Bank AG, Research Division

Shane, in Engineered Materials, sequentially, sales fell $20 million, but earnings increased $3 million. Can you provide some color on those 2 trends?

Shane D. Fleming

Can you repeat that, David? I didn't hear the first piece of your question.

David L. Begleiter - Deutsche Bank AG, Research Division

Yes. In Engineered Materials, sales declined by $20 million sequentially, but earnings increased by $3 million sequentially, can you provide some color as to why that occurred?

Shane D. Fleming

Yes. So what you're saying is, if you looked at annualizing the first quarter sales rate...

David M. Drillock

Q4.

David L. Begleiter - Deutsche Bank AG, Research Division

Q4 to Q1.

Shane D. Fleming

Got you. David, can you take a shot at that? I'm not sure I've got the number on top of my head here.

David M. Drillock

Yes. A couple of things that have -- on the sales line, or just explaining that difference is that, we did have a good price performance in this quarter, and we're still expecting some higher raws as the year progresses. So I think we saw some of that benefit. And the plants ran very well during the quarter also because they got to stay ramped up so we've been adding -- we've talked about adding all these people, you're seeing a better ramp-up from the plants. I think also you're seeing in the first quarter that we did not have much in the way of [indiscernible] this qualification materials for the growth programs and some of the testing and materials that would go on, and all those contributed to the effect of what you noticed on a run rate from Q4 to Q1.

David L. Begleiter - Deutsche Bank AG, Research Division

Okay. That's helpful. And Shane, just on the coating volumes, can you break out in terms of the product lines where the volume decline were the greatest?

Shane D. Fleming

I'm not sure I can give you a tremendous amount of detail. Regionally, I can help. We saw the greatest declines in Europe and in Asia Pacific. From a product line standpoint, probably pretty broad across most of the areas. I don't think we had any real stars or any real dogs, if you will, I think it was just related to general market demand.

David L. Begleiter - Deutsche Bank AG, Research Division

Okay. And just lastly on Coating Resins, if the decision is to sell, how confident are you that you can get a price that you're satisfied with?

Shane D. Fleming

We remain quite confident. If that's the path we go down. We still think the environment's good to do a transaction right now. We feel like the business is performing at a reasonable level. The actions that we've been taking to improve the quality of the business are giving us some traction. So nothing has changed in our view. I think we remain quite confident and positive about our ability to sell the business if that indeed is the route that we pursue.

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, first quarter at $29 million and you're breakeven in the fourth quarter. Could you just help us bridge the gap between the different components that helped to that improvement, cost savings, you talked about pricing, volume improvements maybe sequentially?

Shane D. Fleming

Yes. I think typically in this business, Q4 is the weakest quarter -- demand quarter, so we do see, we have seen volume pick up Q4 versus Q1. So that's part of the story, and we have done a good job of getting ahead of the raw material cost as we noted. So we've got quite a lot of pricing in the quarter and didn't see our raw materials move up dramatically as we were producing product from raw materials that were purchased in the fourth quarter last year. And we got some benefits from some of the restructuring actions that we've taken. So I'd say, it's a combination of all 3.

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

Then when you take a look at the second, third and fourth quarter, the guidance would imply on a quarterly basis -- the $29 million goes down a lot to some degree. Is the sequential decline largely the FIFO gain going away?

Shane D. Fleming

It's multiple components again. It would be partially that benefit going away as we move into the second quarter as I mentioned earlier. But it's also the normal seasonality that we see in this business with the volumes being more heavily front-end loaded, and that's more an issue for us for the reason I referenced earlier as well that our business is bigger in Europe and because Europe has the summer shutdowns, as well as the year-end shutdowns, it has quite an impact on our first half versus second half. So those are the major factors, the raw material cost, accounting and the demand in the second half.

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

Got it. And then just so I understand what the update will be once your review with JPMorgan is done. When you do come out with this, is it simply we're going to sell Coating Resins, we're going to spin it out. Is there going to be a pretty distinct update on what you're going to do? And then over the last month or so can you share with us maybe some of the positive things or negative things you've learned from that process so far?

Shane D. Fleming

Well, the work to date has been mostly on just creating the separated financials, doing the carve out, so we're in a position to actually make that separation. I'm not sure I would characterize too much of what we've learned as positive or negative. I think we've made a lot of progress, and we're getting closer to the point that we can affect that separation process. And the first part of your question, Mike, was?

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

It was just -- when you give us an update, will it basically just be pretty clear what you're going to do? We're going to sell...

Shane D. Fleming

Yes. I think we're going to try and give good clarity in terms of what form that separation process will actually take, and we'll give you, I think, pretty good indication of the timing we expect for that process to run.

Operator

Your next question comes from Laurence Alexander with Jefferies.

Lucy Watson - Jefferies & Company, Inc., Research Division

This is Lucy Watson on for Laurence today. How much free cash flow did the coating segment generate over the last 12 months?

Shane D. Fleming

You have that number, Dave?

David M. Drillock

It's approximately -- I'm just going to give you a range, Lucy, I don't have the exact number, but I'd say sort of a 70-ish to 90 number, $90 million.

Lucy Watson - Jefferies & Company, Inc., Research Division

Okay. And how do you look at the longer-term margin targets, or I guess, how do you expect longer margins to trend longer-term in Engineered Materials for the consolidated segment once you layer in Umeco, maybe 3 to 5 years out after you've accomplished the synergies and the integration?

Shane D. Fleming

Well, that's a long ways out to try and put together a very tight range. I mean, I can give you a broad range. I'm not sure it's going to be all that helpful. We certainly expect to see strong growth in the aerospace side, and as we get that growth, we should still get some leverage in operating profit improvement there. And we expect to get the same on the industrial side. So you know what the starting point is based on Umeco's current operating profit levels and the synergies that we've announced. So we expect to move those margins up going forward. The aerospace side will stay higher, and the aerospace side will be the larger piece of the segment. So I'm not going to be able to give you an exact number. What I can say is, we're going to be very transparent in terms of reporting results. So you'll be able to see the results for both the aerospace side and the industrial side separately.

Lucy Watson - Jefferies & Company, Inc., Research Division

Okay, and one last one. How do you think about your -- or I guess how are your capital spending plans lining up over the next, again, a long time line here, 5 years, if you layer in Umeco and Star Orechem, but exclude the coatings business?

Shane D. Fleming

I'm not sure they're going to be that different than what we've said about the next 3 years, which is in the $150 million to $250 million range. We've got several large projects that we're working on now that will be the bulk of the capacity capital over the next couple of years. But I suspect as we continue to see growth in the In Process Separation and in particularly in the Engineered Materials segment, that we're going to have to continue to fund additional significant capacity expansions there as well. So $200 million as kind of a center point is probably not a bad guess for the next 5 years.

Operator

Your next question comes from John McNulty with Crédit Suisse.

John P. McNulty - Crédit Suisse AG, Research Division

Just a few questions. If we take a look in your Engineered Materials business at the run rate that you started the year at, you're already at the high end of the range that you gave, so I guess at this point we're looking at the 787 still kind of in the process of ramping up. So I guess, is it just that you've got some conservative assumptions out there or are there some takeaways that we should be thinking about later on in the year?

Shane D. Fleming

John, we haven't really identified any specific takeaways. I think, 2 points, one, there probably is some upside if some of the growth programs do ramp up at high rates, so we may have taken kind of a center point in terms of some of those projections. If the Joint Strike Fighter and the 787 surprise us with build rates, there's likely some upsides to our numbers. I think the only cautionary side of this is, have we seen any inventory build in the subcontractor sector? I don't think there's a lot of risk there, and that's factored into our estimates. But if -- just to try and identify one area where there could be a little bit of a downside would be a little bit of inventory build. I don't think it's a general issue, but there may be a few of the parts manufacturers that have gotten ahead of the build rates in a couple of areas.

John P. McNulty - Crédit Suisse AG, Research Division

Okay, great. And then with regard to the margins in this business. Just because you've rejiggered the segments, you put up a 20% margin in this, in the quarter, is that kind of the right type of range we should be thinking about or should it be dipping a little bit or pushing higher? How should we think about what normal...

Shane D. Fleming

Well, I think we guided for the full year at 19% if you look at the numbers. And the segment impact was about 1%. As we've been saying with PSA in that business, it's been about a 1 percentage point dilution. So the last couple of years, we've been questioned as to why those margins aren't higher, well, you can see the impact of PSA in this quarter's results. So that's about 1%. But I would think that, that 19% number is the right number for this year. Looking forward, I still think we're going to see significant top line growth, and we should be able to leverage some of that into improved operating profits going forward.

John P. McNulty - Crédit Suisse AG, Research Division

Okay, great. And then on the new aerospace contract that you had mentioned, can you quantify that in terms of either dollars per plane or kind of the full size of the contract over the 10-year period you're talking. Like, what numbers can you put around that?

Shane D. Fleming

Yes. Unfortunately, at this point in time, we asked, but we have not been given permission to quantify either the ship-set or the annual value of that contract. All I can say is that it's substantial, and we're not going to see much of an impact in the next year or 2, but it bodes very well for the future. It will be a very important program for us, and hopefully it won't be too far down the road, we'll be able to share some numbers with you on that.

John P. McNulty - Crédit Suisse AG, Research Division

Great. And then maybe just one last question if I might. On the coatings business, while you haven't officially announced whether you're selling it or spinning it off or which option you're going to pick, I would imagine you've probably seen some interest. Can you just give us some color as to the type of interest you're seeing? Whether it's financial buyers or strategics or both?

Shane D. Fleming

Yes. I mean, I would just say there is interest, general interest, but I don't think it would be appropriate for me to get into any more detail than that. We remain confident in our ability to effect a transaction if it is a sell, but I don't think it's probably appropriate to say much more than that at this time.

Operator

Your next question comes from Rob Koort with Goldman Sachs.

Robert Koort - Goldman Sachs Group Inc., Research Division

Shane or maybe David, I noticed on the re-class, if I did the math right, it would say that PSA business was around $100 million run rate of sales and lost a little bit of money at the EBIT line last year. So I guess I had a couple of questions. One is, is that math right? Two, are the assets separate from Coating Resins, separate from Engineering Materials or are there some assets in both camps? So how easy is it to separate those? And then three, if it is a loss-making business or just a modestly profitable business, what is it about the business that puts it in that position?

Shane D. Fleming

Okay. Let me just get back to your numbers. First of all, you had the revenue right. It's about $100 million in revenue. But the earnings, operating profit in the business was more mid-single digits. The asset question, it's completely clean from a CEM standpoint, but there are some common assets, or at least common sites with the coatings business. And that's one of the reasons that we announced that we are pulling this business out of CEM and putting it into the potential separation because it's easier to separate from Engineered Materials, not quite as easy to separate from the coatings business. As for your last question -- go ahead.

Robert Koort - Goldman Sachs Group Inc., Research Division

No, no, I think you were about to answer it, sorry.

Shane D. Fleming

Yes, to your last question, in terms of what's wrong with this business. We did see the earnings drop a little last year. This is typically been more of a high-single digit to even low-double digit earnings business. The biggest challenge we had last year was keeping up with the highly volatile raw material cost.

Robert Koort - Goldman Sachs Group Inc., Research Division

And is this used in labels and consumer packaging? Is it used in industrial goods? What are the end markets for your business?

Shane D. Fleming

A little bit into labels, not a whole lot in packaging. It's pretty broad array of markets. I would call it more of an industrial business. Automotive is a decent segment for us. On the label side, it tends to be more high-performance labels, some high-performance tapes. A pretty broad base of customers in industries, more industrial, less commercial.

Robert Koort - Goldman Sachs Group Inc., Research Division

And is it acrylic or other chemistries?

Shane D. Fleming

Most of the chemistries are acrylic, either waterborne or solvent-borne acrylics. We also have a new technology, a radiation-cure PSA product, which makes this business quite attractive in terms of where some of the growth is going in the future.

Operator

Your next question comes from Dmitry Silversteyn with Longbow Research.

Dmitry Silversteyn - Longbow Research LLC

Yes. I just had a couple of questions. You talked about the raw material benefit that the resin business enjoyed in the first quarter, can you take us through the raw material environment that you're seeing in your other businesses, whether there's anything for us to get excited about or concerned about as we look for towards the balance of the year?

Shane D. Fleming

Yes. Well, the raw material benefit that we talked about was just the fact that we saw raw materials move up during the quarter, and we didn't see the impact of that in our P&Ls. So we were able to get ahead of that raw material impact in our P&Ls because we got pricing before the raw material impact hit our P&Ls. So as you go forward, given our days of inventory, that higher raw material cost that we saw come up through Q1 will start to move through the P&Ls. We believe we've got pricing actions in place to offset that, but that's the environment through Q1. As we look out through the rest of the year, right now, our view is that raw materials will stay relatively flat at the end of Q1 run rate levels. And that's pretty much across all the business. If you look at the primary input cost, propylene being the major one for us, it seems to have flattened out right now.

Dmitry Silversteyn - Longbow Research LLC

Okay. So this is not of some things going up, some things going down or the raw material basket overall staying flat, you just expect less inflation from these levels going forward across the board?

Shane D. Fleming

Yes. I think I would say it this way. We've seen the impact now of most of the raw material increases that took place over the first quarter, we've been buying raw materials at those higher prices. We're putting pricing actions in place to be able to offset those higher impacts as they come through our P&L. So don't really see a significant impact from raw material cost through the rest of the year, and that was really the basis for our guidance.

Dmitry Silversteyn - Longbow Research LLC

Got it. Got it. And then second question, you've seen volume declines in your cash businesses, if you will, and volume growth obviously in your growth businesses. Is there a different market expectation or dynamic in terms of getting pricing in these markets based on the ones that are growing versus the ones that are not? Or is the mentality of your customers is such that they pretty much understand that they're going to be seeing higher pricing as long as raw materials go up and there's not much of a pushback?

Shane D. Fleming

Yes. I'm not sure I would say there is not much of a pushback because that's always part of the dance with customers, but there is an expectation that price moves with raw materials much more so in the cash businesses. And we've really taken quite a disciplined approach to being and remaining the market leader in these sectors. So whether it be coatings or additives areas, as we see raw materials move up, we try to be first to market as market leaders to make sure that we're getting cover. Now it's always a battle with customers to be able to get through all the pricing that you want. But if you look at our track record over the last several years in the cash businesses, I think we've done quite a good job getting price as required as raw materials move.

Dmitry Silversteyn - Longbow Research LLC

So you've got about 5% in pricing in your additives and resins business, is that the run rate that we should expect for the year or is there more pricing to come as you gain traction with the announcements you've made at the beginning of the year?

Shane D. Fleming

Well, you got to look at that 5% comparison as against the first quarter of last year. So we got pricing over the second half of 2011, so the comps are going to be harder as we go forward. So I'm not sure I would say that we expect to get 5% increase each quarter over the course of the year. What we do expect to do is to get sufficient pricing to cover the raw material increases.

Operator

Your next question is from Mike Sison with KeyBanc.

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

Just a couple of quick follow-ups. In terms of Coating Resins, what are your operating rates now, and relative to the fourth quarter, how much was the improvement there and just trying to get a feel of how much leverage there is as we look forward?

Shane D. Fleming

Yes. They'll be quite different depending on the business and the region. So I would say, in North America and in the powders business, our operating rates are pretty high. But if you look at Asia Pacific in general and particularly Europe, our operating rates are not so high. So we've got lots of operating capacity available particularly in those 2 important regions and would hope as we see volumes pick up that we'll get some operating leverage from that.

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

And in terms of the cost savings you noted, do you have the business pretty much where it could be in terms of cost? Is there a lot to do or is it pretty much -- you've done a lot of cost savings over the years, sort of give us an update on that.

Shane D. Fleming

Yes. I don't think there’s any major savings, meaning a site shutdown in the future, but we're continuing to look for ways to drive efficiency, utilize our Shared Service Center more, find ways that we can do things more effectively, more efficiently. So yes, on the margin, there are still some cost savings opportunities, and we're continuing to pursue those. There's still some cost saving opportunities on our plants where we can use more automation or better processing technology to improve throughput or reduce cost. So yes, on the margin, there's still cost savings there, but it's not likely you're going to see a large site shutdown or a major restructuring.

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

Okay. And the last one, I'm not sure if I missed this, but could you give us an update on how space, defense, military, aerospace is doing and the outlook there?

Shane D. Fleming

Yes. I think, in general, we're going to see some improvement over the course of this year, although that business hadn't been growing much in the last couple of years. The legacy programs like the F-22 and the C-17 have kind of hit bottom and so we're not going to see much in terms of a year-to-year impact there, up or down, but we do see some favorable impact coming now. The Joint Strike Fighter is starting to ramp up a little bit. So that will drive increases for us across that military sector.

Operator

And there is a follow-up question from John McNulty with Crédit Suisse.

John P. McNulty - Crédit Suisse AG, Research Division

One last question. With regard to the share repurchases or lack of them in the quarter, you had said it was because of the Umeco transaction. Was that because you weren't going to be comfortable with the debt level post the transaction or was it an issue of you knew you were making the acquisition and so you had essentially information that the rest of the market didn't see, you couldn't buy back the stock. Just a little clarity on that just so we know how to think about share repurchases going forward this year would be great.

David M. Drillock

Yes. John, this is Dave. It's more of the latter. We knew we were proceeding along with this acquisition. We've said we'd always keep our powder dry if we're going to do some bolt-on acquisitions. So it's nothing more than that. And if we weren't doing that like we said, if we don't have other uses for cash, we would be doing stock buybacks. So I don't think anything has fundamentally changed in how we think.

John P. McNulty - Crédit Suisse AG, Research Division

So you're comfortable with your debt level at this point?

David M. Drillock

Yes, we are, yes.

Operator

And there are no further questions at the time.

Jodi Allen

Thank you for your participation in today's call. And if you have any follow-up questions, please don't hesitate to call me directly at (973) 357-3283. Thanks, and have a great day.

Operator

This concludes today's conference call, you may now disconnect.

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