Cytec Industries, Inc. Q4 2007 Earnings Call Transcript

| About: Cytec Industries (CYT)

Cytec Industries Inc. (NYSE:CYT)

Q4 FY07 Earnings Call

January 31, 2008, 11:00 AM ET

Executives

Jodie Allen - Director, IR

David Lilley - Chairman, President and CEO

David Lilley - VP and CFO

Analysts

David Begleiter - Deutsche Bank

Robert Koort - Goldman Sachs

Laurence Alexander - Jefferies

Chris Shaw - UBS

Michael Sison - KeyBanc

John McNulty - Credit Suisse

Operator

Good day and welcome to the Cytec Industries Incorporated fourth quarter earnings announcement. Today's call is being recorded.

For opening remarks and introductions, I'd like to turn the conference over to Ms. Jodie Allen. Please go ahead.

Jodie Allen - Director, Investor Relations

Thank you Felicia and good morning everyone. We appreciate your participation in our conference call. For our call today, David Lilley, 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 noted in our press release.

Please be aware that Mr. Lilley's and Mr. Drillock's discussion of operations will be exclusive of any special items as noted in our press release. And Mr. Drillock will review the special items in his discussion. David, will then finish with some commentary on our outlook for 2008.

This call is also being webcast in listen-only mode and it will be archived in audio format on our website for three weeks.

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 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 is available on our Investor Relation's website.

With that, let me turn over the call to David.

David Lilley - Chairman, President and Chief Executive Officer

Thank you Jodie. Good morning, everyone and thank you for joining the Cytec conference call. Overall, we are pleased with our fourth quarter results, which were ahead of our prior expectations. And despite the volatile economic environment, we achieved $0.96 diluted earnings per share, an increase of 26% after excluding special items in both years. On the same basis, our full-year diluted earnings per share were $3.90, which is 13% over 2006. This is the seventh time in the last ten years that we have achieved double-digit earnings per share. And I would like to recognize and thank all my Cytec colleagues for their success in what was a challenging 2007.

Cytec Performance Chemicals sales for the fourth quarter were $192 million, which compared to the same quarter in 2006 represents a 5% volume increase and a 3% benefit from exchange and a 1% benefit from selling price. Mining Chemicals had a very good quarter with strong growth in the alumna sector from our new technologies, such as MacHT. And Polymer Additives had modest growth as we had focused our efforts on differentiated products, given our decision to withdraw commodity products from our portfolio.

Pressure sensitive adhesives had flat quarter-over-quarter sales and especially additives and phosphine derivatives had reduced sales due to some customer timing issues. Our plants run well and earnings were $16.2 million compared to $11.9 million in the same quarter a year-ago. People in this segment should be commended for a strong 2007 performance, particularly in dealing with [inaudible] cost from our water treatment divestiture, achieving nearly a 10% operating margin for the full-year.

Cytec Surface Specialties had sales in the quarter of $403 million compared to $375 million a year-ago period. However, volumes were down 3% compared to the fourth quarter of 2006, and price and exchange benefited sales by 2% and 8% respectively.

Geographically, we saw continued weak underlying demand in North America and a softening in Europe. But, in the developing markets of Asia and Latin America, we had double-digit volume growth. Our recurring volumes were a little weak in Asian, but we have been promoting higher margin products there and avoiding poor margin business. The manufacturing team continued their excellent performance and met customer requirements while improving our cost profile. And the net result was operating earnings of $20 million compared to $17.6 million in quarter four of 2006. This has been another challenging year for our Surface Specialties team with weakening demand and escalating raw material costs adversely impacting the business.

We have a strong resilient team who are implementing a comprehensive earnings improvement program and are focusing on what they can control and one day they will have a tailwind behind them rather over coming headwinds. Combine that tailwind with the good base they are building and the result should be very rewarding.

Building Block Chemicals sales were $129 million in the quarter, with a volume growth of 34% and price increases favorably impacting sales by 23% compared to the same quarter a year-ago. You may recall that we have delayed shipments at the end of 2006 due to fog conditions in the US Gulf Coast and that affects the volume comps, as does the fact a year-ago we had only need just started a market with full capacity of the melamine plant. What’s also changed compared to the same quarter a year ago is the price of propylene, which is about $0.60 per pound for chemical grade is up in price by about 50%.

In this quarter, we saw monthly increases in propylene and as we are typically a month behind in raising prices on our contracted business, this adversely impacted acrylonitrile margins. It also has the impact of carrying forward high cost inventories for sale in 2008. The Fortier [ph] plant maintained its very good reliability performance, and the net result was operating earnings of $7.2 million, up from $3.5 million a year-ago period.

Cytec Engineered Materials continued along its growth trajectory with sales of $178 million, which came from a 9% volume growth and the benefits of a 1% gain from both price improvements and currency exchange. We saw the usual growth pattern in large commercial aircraft demand from increased build rates in the existing fleet and some early business for new generation planes. This resulted in sales growth of over 20% to the large commercial aircraft sector.

In addition, we have now started to improve business on the regional and business jet sector. We had flat sales as expected in the military and in the satellite and launch vehicle sectors. What’s also notable is that our Asia-Pacific sales continued to show high growth rates. The common fiber, adhesive, and prepreg plants ran well and Engineered Materials operating earnings for the quarter was $36.1 million. So, this was a very strong finish to an exceptional year for the business, as earnings improved by over 20% and we simultaneously initiated major growth programs for the future.

Now, let me hand it over to Dave Drillock to give you more details on our overall financial performance.

David M. Drillock - Vice President and Chief Financial Officer

Thank you David and good morning everyone. As David led with an analysis of sales for the quarter, I will begin with the review of our gross margin, followed by an overview of our operating expenses and cash flow.

Our gross margin for the quarter, after adjusting for the special items in both years, improved almost 1%. This improvement came primarily from the benefit of increased selling prices of about 4%, which more than covered higher raw material cost of approximately 3.5%. This is a very good achievement by our commercial teams as we are not only recovering rapidly rising raw material cost, but it also let us continue to make investments in product development for our customers. Combined this with the good progress by our manufacturing folks on the many operational excellence initiatives we have been discussing all year in specialty chemicals, plus the ability of Engineered Materials to deliver the production to meet the higher demand volumes and you get the steady improvement we are showing. We have got the good track record and I would like to take this time to thank everyone for their efforts, which benefit us now and well into the future.

Now, I'll discuss the special items as noted in the press release. Last quarter, we announced two new improvement initiatives. The first was at our Willow Island, West Virginia facility involving the discontinued production of three matured product technologies in Polymer Additives, and the second initiative we announced was restructuring of our Liquid Coating Resins manufacturing facility in Wallingford, Connecticut, which also involved exiting a matured product technology.

As I mentioned back in October, the remaining restructuring expense would be spread over the next three quarters and for the fourth quarter, we recorded a net pre-tax charge of $2 million in Corporate and Unallocated with a little over $3 million yet to come in the first half of 2008. Both initiatives are on schedule and budget.

We also recorded a benefit of $1.2 million in the quarter in Corporate and Unallocated, mostly related to the Dijon, France manufacturing plant shutdown earlier this year. This initiative has gone very well, of course, coming under our expectation, while we have achieved all the expected benefits. The people there have done a fine job completing this initiative. Any remaining cost for this in 2008 are expected to be minimal. We also completed the remaining phase of the divestiture of Water Treatment and acrylamide product lines to Kemira, which resulted in a loss of $2.1 million. This included a working capital adjustment for certain liabilities against the proceeds received and a loss on a sale of our Venezuelan subsidiary. You will recall, we recorded a $75 million gain on the first phase closing in 2006 and a $60 million gain on the second phase closing earlier this year.

Operating expenses are up over 10% year-on-year after adjusting for the special items, but as a percent of sales, are down about 0.25%. Unfavorable exchange rate changes account for about half of the increase in operating expenses, with the remainder of the increase partly due to higher spending in our growth businesses for selling, and research and development efforts. Interest expense was down due to lower debt balances. Our outstanding debt balance is approximately $850 million. For all of 2007, we have reduced our debt by about $100 million. As a reminder, we have $100 million of our outstanding debt due in the first quarter of 2008. This debt carries an interest rate of about 6.75%, and we expect to pay this with a combination of our cash flow and our unused revolver. Our income tax provision for the quarter was 27% of our net before tax earnings, and included in this is a net benefit of $2.7 million, primarily as a result of recently enacted tax legislation that lowered the corporate tax rates in a number of entities beginning in 2008.

Accounting rules are that any deferred taxes be adjusted when a rate change is enacted. As we had net deferred tax liabilities on our balance sheet for these entities, we reduced the liability and recorded a gain. Also similar to last quarter, we did not record any taxes related to the French restructuring and there were minimal taxes recorded for the final phase closing of the Water Treatment and acrylamide divestiture. After excluding these items, the underlying annual effective rate was 30.3%. The equivalent rate for 2006 was 26.8% and this increase in the annual effective tax rate over 2006 is due primarily to the items discussed in previous quarters, namely the divestiture of Water Treatment and acrylamide product lines where the bulk of their earnings were realized in very low tax rate jurisdictions and unfavorable changes in US tax laws regarding manufacturing export incentives.

For 2008, we expect our annual effective tax rate to be in range of 30.25% to 31%. The increase in the tax rate from 2007 is principally due to the expired R&D tax credit in the US, which to date has not been renewed.

That's it for the income statements. So, let me move on to a discussion of our cash flows.

We again at good cash flow and for the quarter cash flow from operations was $76 million. Rolling forward from the third quarter of 2007, our trade accounts receivable dollars declined and days are flat at 59. Other accounts receivables show use of cash primarily to an increase in our product swap balances, which simply means we shift more than we received back, plus increases in VAT tax receivables. These are simply timing issues. Inventory days on hand were about flat at 73, but the value increased from the third quarter primarily due to increases in specialty chemicals due to higher raw material cost and lower demand in December. We are watching this closely and will make the proper adjustments if this trend continues.

Other liabilities are use of cash primarily reflecting an additional $20 million payment as funding for our pension plans. Before moving on, let me add that for the full-year our cash flow from operations is $270 million, a 34% increase over the prior year. Capital spending for the quarter was $49 million and year-to-date we totaled $115 million. Our growth expansion projects in specialty chemicals continue on track and we are continuing the assessment phase of our carbon fiber plant expansion. The capital spending also includes work in a number of smaller capacity expansions and cost improvement initiatives. We have a number of areas where we are working on to improve Cytec and we expect these projects to benefit us now and into the future.

For 2008, we will be significantly ramping up spending. First, we will continue to fund safety and environmental projects to further improve our performance at our plants. In Engineered Materials, we anticipate construction of the carbon fiber plant, a prepreg plant in China, and a number of small, but important projects to meet the future demand for this business.

Specialty Chemicals will be completing the capacity expansions in China and the US where we expect a number of additional...excuse me... we expect a number of additional improvement projects to come up during the year, including the second phase to a waterborne resin capacity in the US and adding additional amino resin capacity in Japan.

The net of all this is that we expect capital spending to be in a range of $180 million to $200 million for 2008. I will close this part of the discussion on capital spending by reminding everyone that we remain disciplined on how we allocate our resources towards all the opportunities to get the most of the each dollar spent, especially in these uncertain times.

During the quarter, we repurchased 448,000 shares of our common stock for about $28 million and year-to-date we have repurchased 1.25 million shares for approximately $77 million. In December, we completed the repurchase authorization we began the year with and we announced a new $100 million repurchase authorization. We have approximately $92 million left on the new authorization and our current expectation is to continue our stock buyback program during 2008.

We are pleased to announce an increase in our annual dividend by 25% to $0.50 per share. This is just another sign of our confidence that we can return cash to our shareholders through stock buyback and dividends, and continue to fund the projects to keep Cytec growing. Lastly in December, we received a ratings upgrade from S&P to BBB from BBB-. As I mentioned earlier in March, we will be paying off the $100 million of those 6.75% notes due, which will be a further strengthening of our balance sheet.

So, in spite of the uncertainties and difficulties of 2007, we completed another successful year for Cytec as reflected on our earnings per share and cash flow growth. As we are all well aware, 2008 has a share of uncertainties and challenges. We have a great team of people at Cytec, a strong balance sheet, and a good long-term outlook for most of our markets. This combination and by remaining focused on what we can control should lead to another good year for Cytec and you our shareholders.

With that, let me turn over the discussion back to David.

David Lilley - Chairman, President and Chief Executive Officer

Thank you Dave. Now, let me talk for a few moments about our expectations for 2008. We continue to be very optimistic about Cytec's future because of the opportunities available to us and the confidence we have in our own capabilities, and we expect to grow earnings per share this year by about 10%. However, we are the first to acknowledge the strong headwinds we face in our chemical businesses, particularly Surface Specialties, but then 2007 was a difficult year and we delivered strong earnings per share growth. So, we enter this year confident in our abilities to continue to enhance shareholder value through improved earnings.

In Cytec Performance Chemicals, we expect volume increases in all product lines, except Polymer Additives. In Mining Chemicals, we anticipate continuing growth in demand from both the alumina and copper sectors. This secular growth plus the benefits from our new technology in both sectors stands us in good stead. We also expect some market penetration from new products to generate sales growth in phosphine derivatives and pressure sensitive adhesives in both existing and new applications.

Polymer Additives sales are expected to be down about 5% as we discontinue the marketing and manufacturing of the mature commodity product line. We expect to continue to grow sales of our differentiated products. We anticipate some increases in raw material costs. We expect to be able to raise product prices to offset these impacts. Overall, in this segment, we expect sales to increase by about 4% and this should give an increase in operating earnings of about 10% compared to 2007.

In Cytec Surface Specialties, we expect continuing improvements leading to operating earnings growth in 2008. We are impacted by the state of the regional economies, which translates into demand from our coating chemical customers. Based on our own observations and inputs from major customers, we expect conditions in United States to be similar in aggregate to 2007 and Europe to have modest growth at about the 2% level. We also anticipate that the Asian economies will continue to grow at the same rates as 2007, and that inflation should remain in check in the industrialized nations. So, basically we expect overall demand to remain weak and get no better or no worse than last year.

We expect sales in Surface Specialties to increase by about 6%, where about a third of that from price. The close of Dijon in early 2007 and the exit of some product lines following our research in the Wellington site would adversely impact sales. We expect to see continuing growth of waterborne and other environmental friendly technologies in Europe and Japan. We will also benefit in the second half of the year as we bring on stream waterborne capacity in the US and more radcure production in China.

We have to expect and plan on continued raw material cost volatility and tightness in supply. Over the last few weeks, we have seen significant swings in the cost of crude oil and this impacts all the propylene derivatives, which we purchase. We remain vigilant on merging the trends and will seek product price increases when necessary to offset the impact of any increases in raw material costs. We expect to maintain the positive momentum in all our productivity and operational excellence programs, which we have discussed with you before and so contribute to the earnings improvement.

Overall, the segment is expected to increase operating earnings by about 10% to 15% compared to 2007. And we remain confident of reaching our mid-term margin and most importantly earnings growth target.

For Cytec Building Block Chemicals, we expect a similar business situation as 2007, that the acrylonitrile market should remain generally snug, although there is some demand disruption due to high acrylic fiber prices compared to alternative fibers, and this impacts our acrylonitrile exports to Asia. We shouldn't have the benefit of selling melamine at improved prices for full year, and we expect all the static production units of Fortier to run at full rate. However, we do have to take a four-week outage in the second quarter for a maintenance turnaround at the acrylonitrile unit. So, this will have an adverse impact this year.

We will continue to focus on our reliability program to maximize plant utilization. The overall expectation is that operating areas will be in a range of $18 million to $20 million for the year.

In Cytec Engineered Materials, we continue to have exciting short and long-term opportunities of growth as our customers increase production in existing models and utilize higher levels of composite in new application. We expect large commercial aircraft build rates of existing planes to increase this year and fair to the 787 program will be higher than 2007, although lower than previous expectations due to the launch delay. We are also expecting some modest growth in the commuter and business jet sectors. On the military side, the FA-22 has reached routine production levels and the F-35 is now starting to ramp up, but major impact will not be felt until 2009.

We do expect continuing growth and demand in the next decade. A lot of attention was paid this year to ensure we have taken the necessary actions to have the capacity to meet our customer requirements. In addition, many of our customers in Engineered Materials are developing new demanding applications using advanced composites. So, 2008 will be a year of significant reinvestment in Cytec’s advanced composite and adhesive capabilities. We expect to invest significantly in our existing plants, not only to improve customer service and cost effectiveness, but also ensure we have the capacity to meet the rapidly increasing demand. This means recruitment of additional engineers, some start-up expenses at the new adhesive and prepreg units, qualification cost, so we can spread the demand amongst the plants, as well as new capital investments.

In carbon fiber, we are fully stuffed with a major expansion project, which is in its final design phase, and we will seek Board approval in the first half of this year. We continue to increase staffing in our research and development organization to ensure we can take advantage of this opportune rich environment. And we continue to have qualification costs as we seek to commercialize the various projects.

Therefore, in 2008, we plan to plough back some more money into the business, to lay a strong foundation for sustained growth. So, in 2008, we would expect both sales and operating earnings to grow by about 10%. The strength of our earnings is expected to leave us with strong cash flow as we maintain our discipline in the working capital areas. And our balance sheet, as Dave reported earlier, is very strong. Our priorities in the use of cash remain unchanged. We have some safety environment projects to complete. We need more capital for our growth projects because of the investments in radcure and advanced composites, the waterborne projects in Connecticut, and a major new carbon fiber production unit in South Carolina. Overall, we expect CapEx to increase from the $115 million in 2007 to $180 million to $200 million this year.

As Dave mentioned, we expect to repay the $100 million notes due in March. We have increased the quarterly dividend to $0.125 per share. And we anticipate continuing the stock buyback program with our goal of maintaining the share count at roughly what it is today. So, with a strong organization and a sound balance sheet, we can focus on growth in our business and our expectation that full-year adjusted earnings per share will be in a range of $4.15 to $4.35 excluding any special items.

We were challenged by difficult business conditions in 2007, but with the dedication of Cytec people, we did improve our business and increased earnings per share by 13%. And we remain committed to enhancing shareholder value with our continuous improvement approach to the business.

Now, let me hand you back to our moderator, Felicia, so that we can respond to any questions you may have.

Question and Answer

Operator

Thank you. [Operator Instructions] We will go to David Begleiter of Deutsche Bank.

David Begleiter - Deutsche Bank

Thank you. Good morning.

David Lilley - Chairman, President and Chief Executive Officer

Good morning, David.

David Begleiter - Deutsche Bank

David, just on Engineered Materials, can you quantify how much you are ploughing back into the business in '08 in terms of increase versus '07 or even '06?

David Lilley - Chairman, President and Chief Executive Officer

Well, I can give you some sort of round numbers David, but [inaudible]. So I think basically in terms of the manufacturing side, we are staffing for volumes and initial plant engineering, perhaps in the order of magnitude of about $5 million, and then in terms of R&D and qualification cost, probably in the order of magnitude $7 million to $8 million.

David Begleiter - Deutsche Bank

And what was those numbers last year, David?

David Lilley - Chairman, President and Chief Executive Officer

I have not those at my fingertips, I would say probably in the Engineering side, modest $1 million to $2 million and on R&D probably get about half of this number, perhaps $3 million to $4 million.

David Begleiter - Deutsche Bank

And David also on the same segment, 787 impacts to you in '08?

David Lilley - Chairman, President and Chief Executive Officer

We haven't quantified those, because we've built the latest estimates on 787 into what we have just spoken to you about. So, I think we will cover that in our dialogue with our customers. And the impact would probably be more felt in '09 in terms of the degree of impact. So we built as I said the launch delay into these numbers here.

David Begleiter - Deutsche Bank

And lastly, propylene and methanol prices are forecasted to decline in '08, are you projecting the same thing in your guidance?

David Lilley - Chairman, President and Chief Executive Officer

I think we're looking for... propylene in the 55 to 60 and… David, we will have this conversation every year, don’t we, and I am trying to be so optimistic about things. So it all depends on what we said in our prepared remarks. If oil is in the 85, 95, then you can expect propylene 55 to 60 time numbers. If it comes down, we will be thrilled… obviously thrilled and perhaps we are planning for the worst and hoping for the best here

David Begleiter - Deutsche Bank

Thank you very much.

David Lilley - Chairman, President and Chief Executive Officer

Thank you.

Operator

We’ll go next to Robert Koort, Goldman Sachs

Robert Koort - Goldman Sachs

Thanks, good morning David and David.

David Lilley - Chairman, President and Chief Executive Officer

Good morning.

Robert Koort - Goldman Sachs

Couple of quick questions, first, David can you talk about the Chinese prepeg plant, what is to customer and end-market profile you are targeting there?

David Lilley - Chairman, President and Chief Executive Officer

The program we are doing is, remember the way our customers operate. They outsourced to prime contractors a lot of the work so a Boeing or Airbus whoever has got work going on in Europe, as well as North America. But we also got work going around the world be it Korea or China. So we are going to be supporting both our large commercial aircraft suppliers and possibly as time goes on an indigenous marketplace in China for things such as their regional jet.

Robert Koort - Goldman Sachs

Okay and then on the Surface Specialties you have given us some pretty specific guidance on profit growth for the other segment, so a much wider birth there. You sort of characterize what would allow you to hit the lower or the higher ends of your profit growth targets there?

David Lilley - Chairman, President and Chief Executive Officer

I think when we look at our portfolio, I wouldn't say we are immune, that’s too stronger word, but if you look at Cytec Performance Chemicals, you look at Engineered Materials and Building Block Chemicals short-term economic issues don’t seem to impact us there so much so we feel pretty, more confident about those numbers. But clearly there’s some uncertainty in the U.S. market and how does GDP growth translate to demand for coating chemicals from our large customers, and how does that translate to us. So let’s put it this way, the largest risk factor is in Surface Specialties. I think we try to reflect that Bob with giving you a range rather than a spot number.

Robert Koort - Goldman Sachs

And, sorry if I might but why a spot number on the revenue base then, it would seem like that would be equally variable?

David Lilley - Chairman, President and Chief Executive Officer

I think it’s is fairly equally variable Bob here. So that's way it's driven, it’s topline driven Bob and so if we have not been precise there, broad enough there I apologize.

Robert Koort - Goldman Sachs

Great thanks so much.

David Lilley - Chairman, President and Chief Executive Officer

Thank you, Bob.

Operator

We’ll go to Frank Judd of Greenwich Consultants.

David Lilley - Chairman, President and Chief Executive Officer

Good morning Mike.

Operator

Mr. Judd, please check your mute button we are unable to hear you, hearing no response, we’ll go to Laurence Alexander of Jefferies.

Laurence Alexander - Jefferies

Good morning.

David Lilley - Chairman, President and Chief Executive Officer

Good morning Lawrence.

Laurence Alexander - Jefferies

I guess, first of all on Surface Specialties, can you just talk about the trends you are seeing in margins specifically for radcure and water-borne in 2008 versus 2007?

David Lilley - Chairman, President and Chief Executive Officer

In 2008 versus 2007, I think in terms of liquid coating resin area I’d say we are going to see continue improvements in margin as we do this bottom slighting approach and we rationalize low-margin business out of the portfolio and improve the water-borne content of the portfolio. So I think that's the positive. On the radcure one, given these propylene swings, I think we are basically going to see some modest improvement in radcure margins as we gain some more volume. So it’s more to do with the leverage I think of volume rather than the variable margin line.

Laurence Alexander - Jefferies

Okay and also with respect to the trends in Europe, the softening that you are seeing, do you think demand will actually contract in the first half on a year-over-year basis or you are just looking forward just more muted growth in Europe?

David Lilley - Chairman, President and Chief Executive Officer

I think we operate muted growth is the way to put it Laurence. So I think that's what we are seeing so we are not seeing negative comparisons, we are seeing slower growth rate.

Laurence Alexander - Jefferies

And then can you discuss the trends in… particularly in the back half of the year for military aircraft, sort of how volumes will compare first half versus second half?

David Lilley - Chairman, President and Chief Executive Officer

For 2007 launch or 2008.

Laurence Alexander - Jefferies

For 2008.

David Lilley - Chairman, President and Chief Executive Officer

I think you will see on a sequential basis steady improvement on a slow ramp up of the F-35 so but we are still talking really about single-digit in terms of number of planes being built and in 2009 that will probably double. That's our expectation. So I think we are going to see really... relatively speaking very low growth rates here, low compared to what is happening elsewhere. So may be low-single digits for Engineered Materials in 2008 for the military sector.

Laurence Alexander - Jefferies

And then lastly on Phosphine the decline that you mentioned in Phosphine, how much of an impact was that and can you give some details as to why that happened?

David Lilley - Chairman, President and Chief Executive Officer

We have some… we have two customers who have very large demands and they tend to take them in slugs. So I can't discuss them specifically and literally the shipments went in January rather than December and we have had this problem before so it is about a $1 million roughly.

Laurence Alexander - Jefferies

Thank you.

David Lilley - Chairman, President and Chief Executive Officer

Thank you very much.

Operator

We will go next to Chris Shaw of UBS.

Chris Shaw - UBS

Hi good morning guys.

David Lilley - Chairman, President and Chief Executive Officer

Good morning.

Chris Shaw - UBS

I was just curious on the CapEx what would be your maintenance CapEx going through 2008?

David Lilley - Chairman, President and Chief Executive Officer

That's a good question. So where is that number. I think the basic thing we would say to you while I'm looking for the number is basically our CapEx maintenance is pretty constant, we have been investing very heavily in… on the safety side. So I'd say if we looked at 2008 I would say rough numbers, about 60% of our CapEx is all to do with growth. Strategic projects, I would then say cost reduction probably about 10%. Our maintenance of business, which is safety, health, and environmental, and pure maintenance probably of the order of 30% of that total number of $180 million to $200 million.

Chris Shaw - UBS

So how do you guys picture that going into 2009, how much is the growth has been, it been continuing or [inaudible] do you expect a straight line or any idea?

David Lilley - Chairman, President and Chief Executive Officer

We still can't give any guidance really on 2009 capital expenditures until we've got a better handle on our carbon fiber expansion and the anticipated cost. Typically you get large costs in the middle of the project so we will have to see, we are definitely seeing some increases in the Cytec Engines materials and in 2009 there might be some offsets in the Chemicals so but we feel confident in what we've got in front at the moment in terms of the overall cash management and the free cash flow and how we use that to invest in the business and also return some cash in dividend and stock buyback to our shareholders.

Chris Shaw - UBS

And then speaking of cash and then also on the acquisition front what you guys looking to do right now, have you seen anything, conditions improving what sort of areas like you guys want to fill in?

David Lilley - Chairman, President and Chief Executive Officer

We continue to want to focus on gaining more access to technology so we continue to look in the Surface Specially space for some appropriate acquisitions there. I think in Engineered Materials clearly we have so many opportunities in front of us from organic growth potential and we want to focus our time and effort there. So that is our approach at the present time.

Chris Shaw - UBS

How is the market, I mean have you seen anything specifically, is it heating up, are you getting closer or do you that’s occured?

David Lilley - Chairman, President and Chief Executive Officer

I think as you know we are looking for diamonds in the rough here and we've done well in the past and frankly we have not seen much in the recent history but doesn't mean that we're not going to continue to dig for them, yes.

Chris Shaw - UBS

Okay. Great, thanks a lot.

David Lilley - Chairman, President and Chief Executive Officer

Thank you.

Operator

We'll go to Mike Sison of KeyBanc.

Michael Sison - KeyBanc

Hi guys great quarter.

David Lilley - Chairman, President and Chief Executive Officer

Thank you, Mike.

Michael Sison - KeyBanc

Just curious on Engineered Materials, you've talked in the past David; this is through the end of the decade, the business as you grow op earnings sort of in the mid teens, you’re a little bit slower this year, I understand that and maybe the 787 delays slow it up again in '09. So, when you think about 2010, 2011 longer term, is there sort of a hockey stick to get back on that mid-teens type rate?

David Lilley - Chairman, President and Chief Executive Officer

I see this consistent growth over the period. Mike you and the other analysts following this have been very good at pointing out that just when the customers gets lots and lots of new orders for plane deliveries, don't get excited because basically it takes a while for them to ramp up and for us to follow. So, we are still at the page that we know, we can deliver on average probably about 15% per annum earnings growth in CEM in Engineered Materials. It's going to going to be a little bit rough... not rough, that’s not the right word I'm looking for lumpy. So, obviously this year 2007 was a fantastic year. We are ploughing back money this year, so it will be modest at 10% and we'll see how things go but we are very, very confident in the potential of the business and our capabilities to exploit that potential.

Michael Sison - KeyBanc

Then on the new product spending that you're doing this year, is it on planes in the future or past to 787, 380 maybe single also so, what are you sort of spending on that you need to increase the cost this year?

David Lilley - Chairman, President and Chief Executive Officer

I think you know, the customers are now looking for fitness for purpose composite. Yes, not one formula fits all. So, we're trying to use our technology across the board to make sure we got those opportunities. In terms of new planes are yet to be designed, fully designed and also on existing planes where there might be some retrofitting or a new dash version comes in. So, I think it's both on the existing aircraft, just small degree but a large degree to do with new aircraft.

Michael Sison - KeyBanc

Okay. And then a quick one on our [inaudible] is, any feel for where profitability is at, have you made some improvements and I guess strategically, if there has been some pretty good improvements, does it look more attractive now to maybe to others versus you guys?

David Lilley - Chairman, President and Chief Executive Officer

Well, it looks attractive to Cytec first of all. So yes we have made some significant improvements, we've done the two restructurings by exiting these commodity product lines in both Europe and also manufacturing with Leyland. So, we've seen a significant profit turnaround here and we're very committed to continue that significant profit growth, now through sales of those high-end differentiated products. So we've got a good plan in place, so it is up to us now to execute to that plan.

Michael Sison - KeyBanc

Okay. And last question, in terms of Surface Specialties, could you just give us a feel what the gap if you will from selling prices and raw materials were at the end of the year. It looks like as you sort of looking in to 2008, you're looking for roughly 2% pricing or $30 million and increases in pricing. So, does that $30 million just offset the gap and what is expected going forward and at the end of the year you'll be sort of even in terms of the raw material pricing?

David Lilley - Chairman, President and Chief Executive Officer

I think that is a fair characterization, obviously in 2007 we came into the year with a bit of a negative and the guy's caught up so by the end of 2007 over that two-year period we are back where we started in terms of prices covering raw materials. So, I think the 2% covers as you said, some propylene derivative increases, some methanol increases that we saw late in 2007 and possibly some more increases as propylene hovers at that $0.60 type level.

Michael Sison - KeyBanc

Great. Thanks guys.

David Lilley - Chairman, President and Chief Executive Officer

Thank you, Mike.

Operator

We’ll go next to John McNulty with Credit Suisse.

John McNulty - Credit Suisse

Yes, good-morning.

David Lilley - Chairman, President and Chief Executive Officer

Good morning, John.

John McNulty - Credit Suisse

Just a few quick questions with regard to the methanol surcharges that you guys announced, I guess towards the end of December, can you give us some color as to first of all how much of your methanol related products that actually covers and also when we might start to see the benefit of that rolling in?

David Lilley - Chairman, President and Chief Executive Officer

I think it covers all our formaldehyde products such particularly the amino resins we make around the world, and you will see it in response like the previous question covering the roads going forward, yes. So, I don't think you are going to see a big shift John, I think you have to see that coverage of price overall.

John McNulty - Credit Suisse

Okay. Great. Second question or second and third combined I guess would be on the A380, have you started to see any pull forward yet on that product line and then with regard to the 787. I know you are anticipating things slow down. Have you actually seen any thing slow down as of yet?

David Lilley - Chairman, President and Chief Executive Officer

On the A380, clearly there is a belief that there is going to some increases in deliveries of this aircraft this year. What is confusing a little bit is what’s the inventory situation of the composite parts. And as you may aware, several major suppliers to Airbus putt in quite a lot of inventory. So, we are unclear as what that will be. So what we have really factored in to our 2008 is some very modest increases due to Airbus demand and we think that’s realistic on that basis, yes. On the 787, I would complement our people being very close to the customers. So, I think we have been factoring in their demand going forward and basically we’re continuing as we previously planned in our sales and operating planning process.

John McNulty - Credit Suisse

Okay, great. Thanks for the color.

David Lilley - Chairman, President and Chief Executive Officer

Thank you.

Operator

And at this time, I will turn the conference back to Allen for any additional remarks.

Jodie Allen - Director, Investor Relations

Thank you for your participation in the call today and if you have any further questions please feel free to call me directly at 973-357-3283. Thank you.

Operator

And that does conclude today's conference call we thank you for your participation.

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